Calculating damages: How much will climate change cost?
Today’s Financial Times features professor Richard Tol’s take on what a new UN report says about how much climate change could cost the world. But examining the report’s summary reveals a list of reasons why the IPCC believes the costs are likely to be a lot higher.
With the launch of the latest IPCC report, a fair amount of attention has focused on what it says about how much climate change could cost in terms of GDP as temperatures rise.
In part, that’s because a lead author of the economics chapter became quite vocal in his opinion that the IPCC’s Summary for Policymakers ( SPM) is too “alarmist”.
In interviews for BBC and Sky News yesterday, Richard Tol – an economics professor at Sussex University – argued the SPM takes too much of a “four horseman of the apocalypse” tone.
Today, Tol has an opinion piece in the Financial Times, headlined “Bogus prophecies of doom will not fix the climate”.
Image - Richard Tol _FT (note)
Tol’s take is that while climate change requires a response, reducing emissions has been over-prioritised. To make his case, he refers to a figure from the IPCC report for the cost of two degrees warming:
“According to Monday’s report by the Intergovernmental Panel on Climate Change, a further warming of two degrees could cause losses equivalent to 0.2 to two per cent of world gross domestic product.”
In other words, Tol says,
“[H]alf a century of climate change is about as bad as losing one year of economic growth.”
Missing pieces
In the SPM, the 0.2 to two per cent figure is provided alongside a list of caveats that make it clear it probably won’t be the total cost of climate change. Those explanations are absent from the FT piece.
The first caveat is that the models used to estimate climate costs are incomplete. Working out climate change costs means putting a monetary value on everything from reduced crop yields to worsening air quality. Economic models don’t yet do a good job of including everything needed to give a full picture, the SPM says:
“Economic impact estimates completed over the past 20 years vary in their coverage of subsets of economic sectors and depend on a large number of assumptions, many of which are disputable”.
There are a number of other impacts which are hard to put a price on or are poorly understood, such as loss of biodiversity and declining health of the oceans. For example, Chapter 10 says:
“Ocean acidification has a range of impacts on the biological systems, but the studies on the economic impacts of ocean acidification are rare.”
Reef-building corals support local livelihoods but are particularly vulnerable to ocean acidification. Source: IPCC Working Group 2 Summary for Policymakers ( SPM)
Last year, during the report’s review stage, the UK government reportedly raised concerns that the 0.2 to 2 per cent figure underestimated the likely costs of two degrees warming. The Guardian said British officials concluded:
“It seems reasonable to conclude that the quoted figures of 0.2 to two percent are at best an underestimate, and at worst completely meaningless”
More than two degrees warming
It’s also important to not lose sight of the wider point – that the 0.2 to two per cent estimate is based on a scenario where the global surface temperature rises by only two degrees. But, the IPCC says, without “substantial and sustained” emissions cuts, the world is already well on its way to that passing that point.
The IPCC flags that very little is known about the cost of greater amounts of warming – other than the risks increase at higher temperatures. The SPM says:
“Aggregate economic damages accelerate with increasing temperature â?¦ but few quantitative estimates have been completed for additional warming around 3°C or above.”
Because of unknowns in the climate system, it’s not as simple as just scaling the costs up. As the SPM explains, the risk of triggering abrupt changes in the climate system – such as the collapse of the Greenland ice sheet and consequences for sea level rise – become high above one of two degrees warming.
The SPM says economic models “do not account for catastrophic changes, tipping points, and many other factors.” For those reasons, it concludes:
“Losses are more likely than not to be greater, rather than smaller, than [the 0.2 to 2 per cent GDP] range”.
Interestingly, Tol’s own work appears to come to similar conclusions. A paper by Tol from 2009 appears to provide the original basis for the 0.2 to two per cent figure, and concludes:
“[T]he chance of [extreme climate scenarios] happening seems low. But they do have the potential to happen relatively quickly, and if they did, the costs could be substantial â?¦ In short, the level of uncertainty here is large, and probably understated – especially in terms of failing to capture downside risks.”
Economic caution
Others have cautioned against over-interpreting economics models of climate damages. For example, UK economist Nicholas Stern, who completed a review of the economics of climate change for the UK government, says:
“There are very strong grounds for arguing that [models] grossly underestimate the risks of climate change â?¦ [They] come close to assuming directly that the impacts and costs will be modest, and close to excluding the possibility of catastrophic outcomes.”
Professor Chris Field, co-chair of the group of scientists who wrote the new IPCC report, told journalists on Sunday:
“When you really look at where we are with the modern science, I think those 0.2 to 2 per cent numbers at 2.5 degrees are really old fashioned â?¦ I think it was a little bit on the misleading side to think that [those] numbers … were actually telling you something that was useful and correct.”
Limits to adaptation
The argument that we should focus on driving economic growth instead of trying to bring down emissions is not a new one. If we do so, its proponents argue, we’ll be able to afford to adapt as much as we need to. In his op-ed, Tol says:
“Cutting emissions is not the only way to reduce the impacts of climate change. Adaptation and development are alternatives.”
Image - Thames _Barrier _03 (note)
Tol gives replacing the Thames Barrier as an example of how London will adapt to rising seas, saying it “is expensive but it will be done”.
The IPCC stresses that with past emissions making some impacts unavoidable, adaptation will have to happen at the same time as mitigation. But the report also warns it’s not realistic to think we can adapt indefinitely. At some point, the damages will become unaffordable, the SPM warns:
“Greater rates and magnitude of climate change increase the likelihood of exceeding adaptation limits”.
Thinking in terms of global GDP masks the fact that climate damages vary across different regions. Damage costs in developing countries will be much higher than the global average. And counting GDP is only one way of measuring the effect that climate change will have on our planet and our society.
So the assessments of the cost of climate damages are heavily caveated in the new report. And when citing them, we should take note of the IPCC’s explanations for why caution is needed.