Tue Feb 25

Calculating the economic cost of climate change is tricky, even futile – it’s also a distraction

Written by: Dennis Wesselbaum, Associate Professor, Department of Economics, University of Otago

Climate change is no longer a distant threat. It’s here, it’s real and it increasingly affects us all.

But predicting climate change and its associated costs, particularly over long periods of time, is inherently uncertain. And based on the best available evidence from organisations such as the United Nations’ Intergovernmental Panel on Climate Change ^[1], the economic costs of climate change appear to be small – making this a relatively weak argument for environmental action.

At its most basic, climate is the long-term average of the weather we experience. Or, as former president of the American Meteorological Society, Marshall Shepherd, famously put it ^[2], “weather is your mood, and climate is your personality”.

It’s widely accepted that climate change refers to a shift in long-term weather patterns, typically driven by human activities.

But the impact of climate change, ranging from rising temperatures and extreme weather events to health impacts and disruptions to food and water supply, varies greatly. Some areas experience more extreme impacts than others, exacerbating social and economic disparities.

There also appears to be a false sense about our state of knowledge. For example, many believe climate change already causes more frequent and intense storms, but the evidence for this is inconclusive ^[3].

Trying to predict the unpredictable

To understand the economic costs ^[4] of climate change, we must first grasp how climate affects socioeconomic outcomes.

The relationship between temperature and socioeconomic outcomes can be modelled using a “dose-response” function, which shows how much a given change in temperature (the “dose”) influences the outcome (for example, temperature-related mortality).

A key challenge is to understand the shape of the dose-response function. Is the relationship between temperature and mortality linear or is it more complex? Does it have thresholds beyond which the effects substantially change? Is there only one function or are there different ones for different populations?

As climate change shifts the distribution of weather variables, it alters the outcomes as well. Yet, predicting how these distributions will evolve is difficult.

The further into the future we look, the harder it is to make reliable predictions about both weather and the associated economic costs.

If you were asked in 1925 to predict the economy in 2000, for example, how accurate would you have been? In 1925 you drove a Ford Model T, used coal-fired steam trains and passenger ships for travel, and a trip from London to Auckland took up to eight weeks by sea. You used a telegraph for long-distance communication and a radio for entertainment.

Compare that with the globalised, interconnected economy of the year 2000. Given the technological advancements, would your prediction have been even close?

The Triborough Bridge along the East River in New York City with Massive Air Pollution from Wildfires

Rather than focusing on the uncertain future economic costs of climate change, we should be addressing how it is affecting human life now. James Andrews1/Shutterstock ^[5]

Cost estimates

There are a wide range of estimates on the economic costs of climate change. But one of the most reliable has come from the UN’s Intergovernmental Panel on Climate Change.

The panel’s latest assessment report avoids quantifying the economic costs of climate change. So, to understand the economic costs of climate change, we can use the best estimate based on the previous report ^[6] and the insights from meta studies ^[7]. These analyses posit a temperature rise of 3.7°C will reduce global gross domestic product (GDP) by about 2.6% (ranging from 0.5 to 8.2%) by 2100.

For New Zealand, this is equivalent to about NZ$11 billion, or twice the cost of Auckland’s City Rail Link ^[8].

However, this comparison is extremely misleading. The value of 2.6% today will differ substantially from 2.6% in 75 years.

The New Zealand economy grew at a compound annual rate of 1.4% between 1960 and 2000. Using this same average growth rate, New Zealanders will have a 184% higher standard of living in 2100. If nothing is done to address climate change, and given the best cost estimate, our standard of living would still be 176% higher than it is now.

Reporting costs

There are also issues with how some people report costs. For instance, while the total damage caused by floods and hurricanes ^[9] in the United States has gone up in dollar amounts, it has not actually increased as a percentage of peoples’ incomes.

In this context, it is crucial to distinguish between the damage caused by climate change and that resulting from human activities – such as the construction of more houses, higher property prices and river management practices.

The economic costs of climate change based on the best available evidence appear to be small and highly uncertain.

Shifting the focus

Even if we accept our best estimates, economic costs are not the issue, but saving the environment is.

Instead of focusing the debate of climate change around economic costs ^[10], we need to refocus the debate on tangible impacts happening right now: retreating glaciers, species extinction, shifting seasons and coastal erosion, to name a few.

Addressing these issues is costly, but action will be needed to save the environment and ensure a liveable world into the future.