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23 May 2024

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Could the global cost of climate change really be six times worse than thought?

A paper by the National Bureau of Economic Research suggests that each degree of global heating could reduce global GDP by 12%.

Isaac Hanson

A new paper written for the National Bureau of Economic Research (NBER) suggests that the global economic cost of climate change could be around six times higher than previous estimations.

The paper, written by Northwestern economics professor Diego Känzig and Harvard economics professor Adrien Bilal, suggests that every one degree of atmospheric warming reduces global GDP by 12%.

It uses global heating data cross-referenced against aggregated national GDPs to come to a higher figure. The authors believe that this model provides a more complete picture, as many of the shocks, including extreme wind and precipitation, are affected by global conditions rather than localised heating.

It also places the social cost of carbon (SCC) at over $1,000/tCO2. This global measure estimates the economic damage caused by every tonne of carbon emitted and has historically been set far lower. According to the authors, their own calculations would only place the SCC at $151/tCO2 if evaluating local rather than global temperature shocks.

What does this mean for global economies?

The findings of this paper are clearly worrying as they suggest the threat to markets posed by climate change is significantly higher than previously quantifiable. The authors of the paper describe the impacts of a 1°C as “of the same magnitude as the growth impacts that typically occur after severe banking or financial crises,” and the long-term impacts of climate change as “comparable to the economic damage caused by fighting a war domestically and permanently [italics theirs].”

However, they also lead the authors to a conclusion that will likely be championed among environmental campaigners. By placing the SCC so high, the paper also ends up with a Domestic Cost of Carbon (DCC) high enough to justify unilateral decarbonisation in states like the US.

DCC is the cost per tonne of CO2 to an individual country and is commonly used when calculating the cost/benefit of decarbonisation measures. A typical analysis, the paper states, places the US DCC at around $30/tCO2, higher than the average cost of decarbonisation programmes that range from $27 to $95 per tonne. With a massively higher SCC, though, the domestic cost sits at $211/tCO2, meaning decarbonisation efforts are worthwhile even if other countries do not do the same.

The Breakthrough Institute controversy

The study has generated some controversy on X, where members of the market-focused environmental research centre The Breakthrough Institute (BTI) and associated ‘ecomodernists’ have questioned its methodology.

Co-director of climate and energy at the BTI Dr. Patrick Brown responded to the paper in a long post detailing his own findings using a different methodology, which he says “indicates to me that the signal supposedly identified is very difficult to see and, at best, is ‘not large’.”

https://twitter.com/PatrickTBrown31/status/1791896842239631853

This in turn prompted responses from academics including professor Marshall Burke, Stanford, who described Brown’s analysis as “akin to testing whether an analytical result is robust to a much worse way of running the analysis.”

https://twitter.com/MarshallBBurke/status/1792635884661071887

The Breakthrough Institute is not without its own controversies. Its founder’s ecomodernist philosophy has been critiqued by journalists and academics, with climate scientist Michael E. Mann describing the organisation in his 2016 book The Madhouse Effect as appearing to be “opposed to anything – be it a price on carbon or incentives for renewable energy – that would have a meaningful impact,” while remaining “curiously preoccupied with opposing advocates for meaningful climate action and [being] coincidentally linked to natural gas interests.”

Industry response

The report may not have an immediate impact on the green finance sector, according to Philippe Pernstich, Founding Footprinting Lead at carbon accounting firm Minimum. He tells Energy Monitor: “The private sector does not directly apply the social cost of carbon or even the domestic cost of carbon.

“However, if countries incorporate the findings from this research, they will likely adjust their carbon pricing accordingly. Before this happens, financial institutions and the private sector more broadly should take note of these figures in their risk assessments. While this may not affect the physical risk estimates from climate change, it will impact the adaptation risks related to future carbon pricing.

“As a further knock-on effect, this could improve the business case for more expensive abatement options and increase the number of opportunities for meeting net-zero targets."

Of the paper’s methodology and findings, Pernstich comments: “The significant discrepancy of the results from the report compared to a relatively extensive body of previous research certainly warrants some pause for thought. The reason for this difference is well argued, but I would like to see a wider response to these findings. This is one of the strengths of the Intergovernmental Panel on Climate Change, as it periodically reviews all the literature published over a period of time to establish a consensus view.

“One of the really interesting implications of these findings, however, is that at this cost level, countries can justify their typical abatement costs purely on their own domestic costs of avoided climate change, rather than having to consider and internalise global costs. In effect, this could counteract the ‘tragedy of the commons’ where no individual actor is motivated to change their behaviour, leading to everyone suffering collectively from the lack of action.

“The methodology is well defined, building on previous research and directly addressing the differences to previous studies that explain the significant difference in results. As is common with scientific research, I would expect the real worth of this study to be demonstrated by further work in this area that responds to this research."

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