Common economic models of Climate Change

Apparently the Economic models used to predict the damage of climate change are totally unreal. They essentially do not even start to recognise that economies depend upon working ecologies and fairly stable weather patterns. They do not realise that modes of production can be modes of destruction, or that the (dis)information systems cultivated by business can also disrupt understanding of the economy, leading to booms, busts and bailouts. Any model which assumes economic stability, and lack of self-disruption, is not an accurate model of an economy.

William Nordhaus apparently put together the basic types of climate economy models which are used by financial organisations, the US EPA and the IPCC. These are known as ‘Dynamic Integrated Climate Economy’ (DICE) models. The IPCC calls its similar models ‘Integrated Assesment Models’ (IAM).

The prime conclusion from these models is that social and economic adaptation to climate change is pretty cheap. Nordhaus predicted “damage of 2.1 percent of income at 3◦C, and 7.9 percent of global income at a global temperature rise of 6◦C”.

At this price, it may be so cheap that it is not really worth cutting back emissions, or doing anything that could potentially harm profits. He apparently even suggests that the global economy reaches an “optimal” adaptation with a temperature rise between 2.7 and 3.5 degrees Celsius. So that is what we should aim for…. much higher than climate scientists generally think is reasonable.

Apparent assumptions of the models

Nordhaus and others can only argue the lack of both severe costs and serious disruption at even 6 degrees, by assuming that:

  • Frictionless market adaptation can occur easily and that companies which are profitting from damage, will not try and delay change through political connections and information distortion so that people (in power and elsewhere) will not want to change. Resistance to change can accumulate and block change, until only violent and unpredictable change can occur,
  • Global temperature increases have no significant or disruptive outcomes, and that increases in temperatures produce smooth and linear changes in weather and ecology, as if the temperature increase only produced warming and did not have ‘side effects’ like increased storm damage, change in rainfall, increased frequency of fires, activation of trigger points, increased death rates in some parts of the world, and change in agricultural conditions.
  • Pollution and destructive extraction have no effect on the economy, are external to it, or can easily be avoided,
  • Energy supply can continue to grow and will not slow down the economy, and that,
  • GDP can continue to increase in an economy that is hitting planetary boundaries.

He also assumes that thereare no bad consequences from ‘just-in-time’ production and distribution which cuts down on storage costs, and has the capacity to reduce resilience in a disruption (supermarket shelves emptying in times of panic etc). If just-in-time can be abandoned, long term storage set up or local production engineered again, then maybe this would be a lesser problem, but it would drastically change patterns of cost.

Trivialising Damage from Climate Change

As Keen et al put it in their abstract:

Such relatively trivial estimates of economic damages—when these economists otherwise assume that human economic productivity will be an order of magnitude higher than today—contrast strongly with predictions made by scientists of significantly reduced human habitability from climate change.

Nonetheless, the coupled economic and climate models used to make such predictions have been influential in the international climate change debate and policy prescriptions

Keen et al 2021 Economists’ erroneous estimates of damages from climate change IDEAS Working Paper Series from RePEcrg

They continue. arguing that the models:

severely underestimate.. damages from climate change by committing several methodological errors, including neglecting tipping points, and assuming that economic sectors not exposed to the weather are insulated from climate change. Most fundamentally, the influential Integrated Assessment Model DICE is shown to be incapable of generating an economic collapse, regardless of the level of damages

ibid

Tipping points should be part of the models

Tipping points are part of current climate models and cannot be ignored in economic models of climate change. There is almost no likelihood of a completely smooth transition, and current predictions are that several tipping points will get started long before the end of the century and before the average temperature increases are greater than 2 degrees. It may be necessary to point out that completion of a tipping point may take years but will continue after it starts, so tipping points can start before they are noticed.

Keen et al point to the:

concept of “tipping cascades”, whereby passing a threshold for one system—say, a temperature above which the Greenland ice sheet irreversibly shrinks—triggers causal interactions that increase the likelihood that other tipping elements undergo qualitative transitions—in this example, freshwater input to the North Atlantic increases the risk of a collapse of the Atlantic Meridional Overturning Circulation (AMOC—also referred to as the ’thermohaline circulation’).

Such causal interactions can also be mediated by global temperature changes whereby tipping one system—e.g. the loss of Arctic summer sea-ice—amplifies global warming, increasing the likelihood that other other elements undergo a qualitative transition

ibid

The intial work by Nordhaus setting up the DICE denies the possibility of tipping points and cascades completely. According to Keen et al, Lenton et al:

calculated that including tipping points in Nordhaus’s own DICE model can increase the “Social Cost of Carbon” (by which optimal carbon pricing is calculated) by a factor of greater than eight [8], and proposed 2◦C as a critical level past which “tipping cascades” could occur [9,10,15]….

inclusion of tipping point likelihoods in DICE…. leads to much higher damages [8]

ibid

The economy is safe when indoors?

Using similar models to DICE, the 2014 IPCC report stated that “Estimates agree on the size of the impact (small relative to economic growth)” with a 2.3% increase in global income for a 1 degree C increase in global temperature over pre-industrial levels.

The Report summarised that:

For most economic sectors, the impact of climate change will be small relative to the impacts
of other drivers (medium evidence, high agreement). Changes in population, age, income,
technology, relative prices, lifestyle, regulation, governance, and many other aspects of
socioeconomic development will have an impact on the supply and demand of economic
goods and services that is large relative to the impact of climate change

Chapter 10 Key Economic Sectors and Services, p 662 In Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change

This unlikely assumption appears to be based on another bad assumption that:

  • by far the majority of economc action is independent of ‘weather’ events, ecological destruction and resources depletion.

That is, again, that this climate economics does not consider the world the economy occurs within. It also appears to assume that air cooling technology and energy supplies will be able to cope with the extra loads. Again the models ignore the economic consequences of “potential loss of lives and livelihoods on immense scale and fundamental transformation and destruction of our natural environment” (Stern et al 2022). Not to mention agricultural collapse. While Economists apparently don’t eat, most people would recognise that the total economy is errected upon food supplies, no matter how much else goes on. Stern writes that 6 degrees increase is unlikely to give losses of 8.5% of GDP, but:

we could see deaths on a huge scale, migration of billions of people, and severe conflicts around the world, as large areas, many densely populated currently, became more or less uninhabitable as a result of submersion, desertification, storm surge and extreme weather events, or because the heat was so intense for extended periods that humans could not survive outdoors. It is profoundly implausible that numbers around 10 percent of GDP offer a sensible description of the kind of disruption and catastrophe that 6 C of warming could cause.

Stern 2022 A Time for Action on Climate Change and a Time for Change in Economics , The Economic Journal, 132, 644: 1259–1289

Likewise:

Climate change (either regional or global) has played a role in the collapse or transformation of numerous previous societies (37) and in each of the five mass extinction events in Phanerozoic Earth history (38). The current carbon pulse is occurring at an unprecedented geological speed and, by the end of the century, may surpass thresholds that triggered previous mass extinctions (39, 40).

Kemp et al 2022 Climate Endgame: Exploring catastrophic climate change scenarios PNAS

Even if you could allocate calculated risk and danger factors for events that could completely change the system, that still does not mean that an estimate of a 1% chance of collapse means collapse cannot occur.

The orthodox economists, their models and the politicians who use them, seem completely unaware that complex systems can collapse, or change very rapidly, and they depend upon the idea that free markets can always beneficially adapt to almost anything without much cost.

Importance of noting extremes, disorder and uncertainty

Kemp et al 2022 suggest that investigating the “bad-to-worst cases is vital” for improving resilience, and informing policy and emergency responses. “

First, risk management and robust decision-making under uncertainty requires knowledge of extremes. For example, the minimax criterion ranks policies by their worst outcomes (28). Such an approach is particularly appropriate for areas characterized by high uncertainties and tail risks….. Climate damages lie within the realm of “deep uncertainty”: We don’t know the probabilities attached to different outcomes, the exact chain of cause and effect that will lead to outcomes, or even the range, timing, or desirability of outcomes, (30). Uncertainty, deep or not, should motivate precaution and vigilance, not complacency

They propose 4 main questions: all of which point to the importance of considering disorder and the production of lack of resilience.

  • 1) What is the potential for climate change to drive mass extinction events?
  • 2) What are the mechanisms that could result in human mass mortality and morbidity?
  • 3) What are human societies’ vulnerabilities to climate-triggered risk cascades, such as from conflict, political instability, and systemic financial risk?
  • 4) How can these multiple strands of evidence—together with other global dangers—be usefully synthesized into an “integrated catastrophe assessment”?

“even simpler ‘compound hazard’ analyses of interacting climate hazards and drivers are underused. Yet this is how risk[/danger] unfolds in the real world. For example, a cyclone destroys electrical infrastructure, leaving a population vulnerable to an ensuing deadly heat wave”. They further suggest that IPCC reports do not spend large amounts of space analysing what will happen at 3 degrees or above warming, and have indeed shifted over time to considering 2 degrees or less which might be fine if there was evidence we will reach that target. However, the culture of climate science tends “to ‘err on the side of least drama’ (7), to not to be alarmists, which can be compounded by the consensus building processes of the IPCC.

Political and economic instability, feeds into the dangers, as does a teetering energy system, heavy illth production, technological lock-in, failure to face challenges, and a harmful (dis)information system. These are all observable current problems.

What do the models do?

The Optimism of these models, and their framing of easy social change within an unstable environment, without political opposition from anyone, is absurd.

The models seem out of touch with what we know about earth systems and social systems, they can only be seen in terms of being a defense mechanism, ideologies useful for protecting the business and political system as it is now and which actively halt adaptation and prevention measures. They help convince people that doing nothing is ok, and nothing bad can happen.

However, eco-and-climate system change changes will almost certainly spill through other systems and change almost everything, including the current market’s ability to function, and the powerful people who use these models will not be prepared for it…. and hence neither will we. They are part of a collective suicide and refusal to face challenges, which might cost some people profit.