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New economic model may radically boost the social cost of carbon

If climate change has a long-term impact on GDP, then costs go way up.

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If you read some of the projections about what could happen if carbon emissions are allowed to continue unabated, they sound pretty grim: a meter of sea level rise, average temperatures in some regions rising by 9 degrees Celsius, and changes continuing on into the next century. But if you look at most economic analyses of climate change, the costs don't seem to really reflect those sorts of changes.

A new paper in Nature Climate Change explains why that's the case, and it tries to suggest alternative ways of looking at the challenges. The study shows that, if the right corrections are applied to these models, then the cost of carbon set by the US government may be off by as much as a factor of 10.

The impacts of future climate change are usually estimated using what are called integrated assessment models. In these models, temperature changes have an immediate impact on economic activity, accounting for things like lost crops, increased demand for cooling, and the cost of infrastructure improvements. These models, however, assume there's no permanent damage to the GDP; worker productivity and capital available for investments remains just as it was before any climate upset, as does what economists term the total factor productivity. In fact, one of the leading integrated assessment models simply allows labor and total factor productivity to be specified separately from anything that happens within the economy, while capital availability is only influenced by investment decisions made within the model.

That's not entirely unrealistic in a developed economy—post-Sandy, New York City rapidly returned to its normal business activity, even as infrastructure repair and upgrades have continued. But it's not uniformly true there either, as many smaller shore communities could testify. In the developing world, it's nearly uniformly not true. In developing economies, economic growth tends to drop as average temperature increases.

In general, the authors (Stanford's Frances Moore and Delavane Diaz) conclude there are a variety of ways that climate shocks could take a permanent chunk out of the GDP growth rate. These include things like damage to available capital due to extreme events, as money spent to rebuild isn't available for investment. Shifts in the climate could also eliminate some returns on investment, like money spent to develop agricultural infrastructure on areas that become unsuitable for most crops. Adaptation measures may also put an extended drain on the money available for investment.

They ultimately modify an existing model so that the short-term costs of climate change reduce the GDP until a certain amount of money is spent adapting to them; they peg the adaptation rate as removing 10 percent of the impact each year. Under this scenario, developed economies see a hit from the climate (about 12 percent a year by the end of the century), but not one that's dramatically different from that seen in existing integrated assessment models. But for developing economies, the cost of adaptation takes a huge chunk out of their economic growth. "The average annual growth rate in poor regions is cut from 3.2 percent to 2.6 percent," the authors write, "which means that by 2100 per-capita GDP is 40 percent below reference."

This makes an enormous difference. The authors used the models to calculate an economically optimized emissions scenario. In its original form, it suggested that we could stabilize emissions now before beginning to drop them in 2070. When the cost of adaptation is figured in, we'd need to drop emissions to near zero by 2030. Rather than the $21 figure used by the US government, their model places the social cost of carbon at over $200 and suggests it will rise to nearly $1,000 late in the century. (The social cost of carbon is an estimate of the economic impact everyone suffers from each metric ton of emissions.)

The authors then engage in a bit of criticism of their own model. It's possible that poor countries have been hit hard by high temperatures because their economies tend to be focused on resource extraction and agriculture, both of which are going to be sensitive to the local climate. But it's also possible that their problems come because they can't afford the infrastructure to adapt (by air conditioning more facilities and building water systems that can hold up to droughts better, for example).

If the latter is the case, then a growing GDP would allow developing countries to spend more on adaptation efforts. And that, they find, changes everything. Plugging this "optimistic adaptation" into their revised model returns it to a trajectory much like the original one. In it, the social cost of carbon declines to near $0 by the middle of the century, and it remains economically viable to continue allowing emissions to grow throughout the century.

Of course, the truth is probably somewhere in between the two—some economic activities can probably readily be adapted to a changed climate, while others won't. But because the two sets of assumptions produce such radically different results—the social cost of a ton of carbon emissions is either zero or $800 in 2075—figuring out where, precisely, reality lies becomes rather critical.

While the authors haven't been able to identify how adaptable economies are, they have highlighted how crucial it is to find out. This will hopefully trigger more detailed analysis of this issue.

Nature Climate Change, 2015. DOI: 10.1038/NCLIMATE2481  (About DOIs).

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