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The high cost of climate change inaction: two new studies

Laurie Johnson

Posted June 27, 2014

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Two important studies recently released on the economic costs of climate change show us the very high costs of continuing on our current carbon pollution trajectory.

The first, commissioned by the prominent bipartisan Risky Business Project, finds significant economic losses for the US from only 6 climate damages. Average expected costs across the US are high for all of these, with some states taking especially hard hits. And lower probability high impact scenarios are alarming at every level.

The second study, by two top climate economists (Simon Dietz and Nicholas Stern), suggests that the Federal government’s benefits calculation for reducing carbon pollution is significantly underestimated, because worse-case outcomes are insufficiently accounted for in its model.

Below I provide some calculations and information illustrating these results, based on reported findings in each analysis.

Risky Business

Risky Business summarizes the combined economic losses of 6 climate impacts as a percentage of US GDP and GSPs (Gross State Products) (see Figure 13.25 of the extended version of the report; calculations here are derived from the underlying data in this figure, provided by one of the authors).

These impacts include lost agricultural production for four main crops, increased coastal storm damage assuming historic levels of hurricane activity, heat-related mortality costs, reduced labor productivity, increase crime, and net increases in electricity expenditures (see table titles for more detail).

As we will see, if the climate impacts scientists expect are most likely to occur happen, Risky Business projects high total US costs across all 6 sectors combined, toward the end of this century. As bad as these costs are, however, they are only national averages: some states will suffer much more overall, and more in particular sectors. If one looks at lower probability high impact scenarios that have a 1 in 20 chance of occurring, the picture is much more alarming.

Here’s just a sampling of what things look like:

Table 1 below summarizes calculations for all 6 impacts combined for the nation as a whole, and the hardest hit state, Florida.

Risky business table 1.bmp 

Assuming current wealth and population levels, the US will suffer an annual loss of almost 2% of GDP from these impacts toward the end of the century. If such damages were to occur in today’s economy, that amounts to $1,000 for the average American (2012$), or almost $4,000 for a household of four. Under the lower probability high impact scenario, these figures rise to $2,700 and $10,800, respectively.

Florida suffers the greatest risk and losses, with comparable figures of $2,500 and $10,000 for expected damages, and $5,500 and $22,000 for the lower probability high impact scenario. Florida’s deviation stems from its high vulnerabilities to sea level rise, increased need for air conditioning, and high heat-related mortality.

Turning to specific sectors Americans are probably the most familiar with, agriculture, coastal storms, electricity expenditures, and heat mortality, Nebraska, Florida, Arizona, and Mississippi lead the pack, with losses up to $7,200, $4,800, $2,900, and $10,800 (Tables 2, 3, 4 and 5, low probability high impact 1 in 20 chance scenarios), respectively in these sectors.

Rixky busines tables 2-5.bmp

Dietz and Stern

The Risky Business report looks at costs for specific sectors in the US resulting from a business-as-usual global emissions trajectory. In contrast, Dietz and Stern, look at damages caused by one additional ton of CO2, for a broader set of impacts. They focus on improving a widely used climate economic model, DICE, so that worse-case outcomes are better accounted for when estimating overall expected damages from climate change.

Dietz and Stern use the DICE model to estimate an “optimal” carbon tax per ton of CO2, a carbon price corresponding to an emissions reduction where net benefits reach their maximum.

For reasons we don’t need to expound upon here, if regulatory limits are used rather than a carbon tax to reduce pollution, government analysts should use the same value as the optimal carbon tax to estimate climate benefits from proposed standards.

The authors find that, assuming a high discount rate of 4.5% (the higher the discount rate, the lower the optimal tax and corresponding emissions reduction), the optimal carbon price in 2015 would be $32 to $103 per ton of CO2.

How does this compare to the government’s estimated benefit (i.e. avoided climate cost) per ton of CO2 reduced, referred to as the “social cost of carbon (SCC)?” The government doesn’t estimate its model using a 4.5% discount rate. However, a rough calculation (interpolating between the government’s SCC estimates at 3% and 5% discount rates) yields roughly $19. Dietz and Stern’s estimates are 1.7 to 5.3 times higher than this value. Or, put another way, the US government is underestimating the benefits of proposed carbon pollution standards.

The underestimate is significant, but we should note that it is still very conservative: climate economic models leave out an enormous amount of damages, because economists have not yet quantified many impacts, and because some of the worst impacts are too difficult to monetize. An exhaustive review of the three models used by the US government to estimate the SCC, one of which was DICE, summarizes these missing damages. (You might not want to look).

How should we think of these studies’ results?

The Risky Business estimates are scary, and the government’s low-balled SCC model is troubling. But what I find most disturbing about this story is that both studies cover only a very limited set of damages. This means that the cost of inaction is much higher than these analyses suggest.

We needn’t end on a hopeless note, though. Yes, the costs of inaction are terrifying. And, yes, estimating climate change damages is a nightmare. But the costs of actually doing something to reduce risks from climate change are well within reach: aggressively hastening the clean energy transition already underway is entirely feasible. Every year, costs are coming down dramatically for renewables. Wind is now competitive with natural gas and, according to a recent Department of Energy report, solar is rapidly becoming competitive with wind. Markets are moving in a direction of favoring clean energy over fossil fuels. Economics is not the problem: the only thing stopping us are politicians denying the devastating consequences of climate change, and the fossil fuel interests that fund their campaigns (click here and here). If we counter their messages with powerful results from studies like these, and work hard to promote clean energy, we can win this fight. 

[1] The study also reports (higher) coastal storm damages using projections of increased hurricane activity.

[2] This is net of fewer cold related deaths. The study also reports additional heat related mortality costs based upon the amount individuals are willing to pay to reduce heat mortality risk.

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