What economists get wrong about climate

Whether or not you believe that the dangerously foolish advice issued by climate economists will in fact kill billions of people this century, there is little doubt that we have been poorly served and grievously misled on the true costs and risks associated with climate change by the economics profession, as I discussed in the Irish Examiner in November.

WHILE NOT YET over, 2023 has already delivered some of the most extreme weather conditions in human history. This year is virtually certain to be the hottest since records began. In all probability, 2023 is the hottest year on Earth in about 125,000 years.

While the deterioration in global weather conditions is in line with scientific projections, what is now becoming apparent is that our societies and ecosystems are more vulnerable to even small changes than expected previously, and so the damages are worse.  That’s according to climate attribution specialist Dr Friederike Otto.

Given this unremitting torrent of bad news from the scientific community, you may be surprised to hear that, in fact, everything is fine, and that economic growth means humanity as a whole will be wealthier, healthier and no doubt happier by the end of the 21st century.

This news came via an article on the website of Chartered Accountants Ireland. Author Cormac Lucey, a finance lecturer and former political adviser to Progressive Democrat leader Michael McDowell, decrying the “public hysteria” surrounding the climate debate.

As Lucey recently explained, scenarios set out by the Intergovernmental Panel on Climate Change (IPCC) show human welfare will likely increase to 450% of today’s welfare over the 21st century. Climate damages will reduce this to 434%.

In other words, climate change is no more than a slight bump on the road towards our ever-improving golden era of human prosperity.

On the one hand, climate scientists warn we face a near-term future of deadly heatwaves, droughts, wildfires, extreme flooding, coastal inundation, mass migration, freshwater shortages, more dangerous storms and major threats to global food production.

Climate economics

On the other hand, climate economists insist there is essentially nothing to worry about, and economic growth will continue even as the world burns, ecosystems fail, the ice shelves collapse, and the global weather system goes haywire.

The fact politicians, media and corporations are far more likely to take their advice from economists than scientists means the dominant messaging being listened to is that yes, climate is an issue, but no, it’s absolutely not a crisis.

Either the scientists or the economists have got this horribly wrong, and no less than the fate of human civilisation is at stake.

The field of climate economics has long been dominated by Prof William Nordhaus and his integrated assessment models have been largely incorporated into the IPCC’s reports, and his influence reaches into universities, financial institutions and boardrooms around the world. His glittering career was capped off with the Nobel prize in economic sciences in 2018.

Yet, in a nutshell, Nordhaus is dead wrong. About almost everything, in fact. According to the IPCC, the world should aim to keep global warming to well below 2C, ideally close to 1.5C, to avoid the most dangerous impacts of climate change, including multiple irreversible tipping points.

Ignoring the physical sciences, Nordhaus argues the global economy reaches what he calls “optimal adaptation” at between 2.7C and 3.5C, an  argument that it does not make economic sense to try to prevent climate change until it has reached these near-apocalyptic levels.

Any first-year science undergrad will understand that if Nordhaus optimal world of temperatures rising 3C and more versus pre-industrial comes to pass, it would mean global immiseration, with dying oceans and runaway sea level rise, while famines, conflict and disease sweep away countless millions.

If this is so plainly obvious, how can an eminent climate economist and his many professional acolytes not see it too? As far back as over 30 years ago, a report on graduate education in economics in the US warned the system was turning out “too many idiot savants economists, skilled in technique but innocent of real economic issues”.

Put simply, they are mathematically gifted but know or care almost nothing about how the world beyond their spreadsheets actually functions.

Bizarre assumptions

The model that Nordhaus developed is known as DICE, and it makes some truly bizarre assumptions. It completely excludes climate impacts from 87% of all economic activity on the grounds that it takes place in “carefully controlled environments”, i.e. indoors.

Vast sectors of economic activity, from manufacturing to transport, real estate, communications and services are therefore assumed to be completely untouched by climate impacts.

To illustrate how grossly mistaken this is, consider that the Panama Canal, one of the world’s most important trade routes, is sharply cutting down the number of ships it can carry, due to record low water levels in Gatun Lake, which is vital for its operation.

While acknowledging that agriculture is highly vulnerable to climate change, Nordhaus argues that since it ‘only’ accounts for 3% of US economic output, a collapse in food production would not be a major crisis. The fact that without adequate food supplies, societies quickly degenerate into economic and social collapse and political chaos did not seem to have occurred to him.

Another key error involves calculating the GDP of a particular location based on its temperature; this fundamentally confuses weather with climate. This is, according to journalist Christopher Ketcham, in The Intercept, “foolishness on a grand scale, and yet it’s central to the Nordhaus model”.

There are other, equally egregious failings in this DICE model, leading Nordhaus’s feted climate projections to be “wildly wrong” according to former World Bank chief economist Joseph Stiglitz.

He co-authored a recent paper with Nicholas Stern, author of the famous Stern Report for the UK government, which concluded that the models Nordhaus uses are “inadequate to capture deep uncertainty and extreme risk”.

Bizarrely, the way Nordhaus calculates the relationship between rising temperatures and GDP is calculated using a quadratic, which means the relationship is smooth, whereas in reality, at certain temperature thresholds, tipping points can be crossed with devastating non-linear consequences.

Pollyanna future

These risks are nowhere to be found in the modelling that economists, financial journalists, pension fund managers and actuaries depend on to calculate the likely costs of climate change. This explains how commentators are able to confidently project a Pollyanna future of endless economic growth and prosperity, and dismiss “climate hysteria” even as the conditions for life on Earth are rapidly unravelling.

Prof Steve Keen of University College London has long been a critic of neoclassical climate economics. The gross negligence of economic modelling by influential figures like Nordhaus “will end up killing billions of people”, he told The Intercept.

Meanwhile, there were renewed warnings from scientists this week that the Amoc, the vast marine current that gives Ireland and north-west Europe its mild climate, may be approaching collapse. Such a scenario would be unimaginably disruptive and dangerous.

Yet, unbelievably, as recently as 2016, a study by three economists pitched the positive benefits of such a catastrophe for the European economy. One of the authors, Richard Tol, was formerly an ESRI economist and is a protege of Nordhaus. Tol argued in a 2009 paper still available on the ESRI website that “Ireland has little to fear from climate change”.

There are some climate economists who truly grasp the gravity of our situation, but their voices have been largely drowned out by the Panglossian chorus of experts who, as Oscar Wilde once put it, know the price of everything and the value of nothing.

ThinkOrSwim is a blog by journalist John Gibbons focusing on the inter-related crises involving climate change, sustainability, resource depletion, energy and biodiversity loss
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