Why the Cost of Climate Change Mitigation Can’t Be Reduced to an Exact Figure, Despite Some Economists’ Best Attempts

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Matthew E. Kahn, USC Dornsife College of Letters, Arts and Sciences

(THE CONVERSATION) In November 2019, before the pandemic started, would you have guessed how important video conferencing like Zoom would be in people’s lives a few months later?

This is the kind of challenge economists face when trying to put a single number on the long-term cost of mitigating climate change or the cost of allowing the global temperature to continue to rise. Human behaviors change as public policies change and new technologies arrive and evolve.

I am a microeconomist who studies the causes and consequences of climate change. When I think about the challenge of climate change in 2040 and beyond, I anticipate many “known unknowns” about our future. Thus, I am amazed to read accurate estimates of climate costs like those recently published by economic consultants McKinsey & Co.

McKinsey pegs the global cost of transitioning energy and other sectors to net-zero emissions by 2050 at US$9.2 trillion per year. Insurer Swiss Re has estimated that doing nothing will reduce global GDP by 14%, or about $23 trillion, by 2050.

Figures like these are widely used to encourage action by governments, companies and individuals. Economists agree that climate change, if left unchecked, will harm economies. But these estimates are produced using formal models that have many assumptions, any of which could significantly disrupt the accounting, leaving the estimates extremely high or low.

While people might think they want “accuracy”, accurate predictions increase the risk of conveying too much certainty in an ever-changing world. Here’s what’s going on in climate economic models and why certainty isn’t an option for future cost projections.

The challenge of prediction

Climate economic models seek to answer several prediction questions, such as:

“How will the performance of the global economy be affected if we enact a carbon dioxide tax today?” The answer to this question helps us understand the “cost of action”.

“If the whole world adopts this carbon tax, how much will greenhouse gas emissions decrease each year? »

“What are we going to gain economically by reducing our greenhouse gas emissions?

“What will be the economic and quality of life impact if we do nothing and just let greenhouse gas emissions increase as ‘business as usual’?”

To answer these complex questions, climate economists make a series of assumptions that are “built into” their mathematical models.

Known unknowns

First, economists need to predict the average global income per person for each coming year.

Macroeconomists have struggled to predict the timing and duration of recessions. Predicting future economic growth over 30 or 40 years requires forecasting how the quantity and quality of the global workforce and our technology will change over time. Predicting global population growth is also a difficult exercise, as increased urbanization, women’s access to education, and improved birth control are all associated with reductions in fertility.

Second, they need to make an educated guess about what technologies will exist in the future regarding our sources of electricity generation and the energy we use in transportation. If they can estimate the future level of world population, income level, and technology, then they can measure how much additional greenhouse gas emissions the world produces each year.

Third, they use a climate science model to estimate the additional risk of climate change caused by producing greenhouse gas emissions. This is usually measured by the increase in global mean surface temperature.

Fourth, they must take a position on how the output of our future economy will be affected by the growing risk of climate change. Ideally, these models also tell us how releasing more greenhouse gas emissions increases the likelihood of disaster scenarios.

By combining all of these equations with their own respective assumptions, a research team generates a single number such as: The world will face $23 trillion in damages from climate change if we do not take serious action to mitigate emissions.

The “art” of predicting future emissions

Economists estimate future global greenhouse gas emissions by multiplying the projected global gross national product – the total value of goods and services – by the average emissions per dollar of gross national product.

If the world succeeds in ending the use of fossil fuels, this last figure could be close to zero. Innovation and deployment of low-carbon technologies — think electric vehicles and solar farms — can dramatically alter the costs and benefits that economists try to quantify.

Many factors determine this trajectory of technological advance, including investment in research and development. International politics does not always take climate economic models into account either. For example, if China chooses to become more insular, will it increase its coal consumption because the nation is endowed with coal? Conversely, could China choose to use its powerful state to push the green technology sector to create a booming future export market that would green the global economy?

Prediction of future impacts of climate change

Mathematical economic models summarize the impact of climate change into a single algebraic equation called a “climate damage function”. In my book “Adaptation to climate change”, I give several examples explaining why this function changes continuously and is therefore very difficult to predict.

For example, many companies are developing climate risk rating systems to inform property buyers of the various future climate risks that specific properties will face, such as wildfires or floods.

Suppose this emerging industry of climate risk assessment makes progress in identifying less risky areas to live in, and zoning codes are changed to allow more people to live in these safer areas. The damage Americans suffer from climate change would lessen as people “literally move to higher ground.”

The confident climate modeler cannot capture this dynamic with inflexible algebra.

Prediction under uncertainty

Climate economics models can play a “Paul Revere” role in informing policy makers and the public about the likely risks ahead. When economists construct these models, they must be honest about their limitations. A model that generates “the answer” can lead decision-makers astray.

Although everyone would like a concrete answer to the cost of climate change and the fight against climate change, we will have to live with uncertainty.

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This article is republished from The Conversation under a Creative Commons license. Read the original article here: https://theconversation.com/why-the-cost-of-mitigating-climate-change-cant-be-boiled-down-to-one-right-number-despite-some-economists – best-attempts-176432.

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