Climate Change

The fact of near term, catastrophic climate change is both illustration and proof of the dysfunction of orthodox Neoclassical economics, but also any other economics which does not have an institutional component.

Environmental Protection Agency

For forecasting, nothing is easier to read than the chart of the rise in CO2 emissions over the past quarter century. The loss of Arctic Sea ice, the growth of the average temperature, the increasing frequency of violent weather, all are charts as easy to read as they are alarming.

Wikipedia

The science behind climate change predictions is long established and solid. All major scientific organizations have asserted its validity. Its predictions have proven out over time.

Yet climate change has earned nary a whisper in the economic discussion. It is the health of the banking system, the recovery of housing, the size of the federal deficit that are presumed to be the drivers of economic well-being. This is not withstanding the enormous toll of violent weather, drought, flood we have seen so for and the potential for the effects to become hundreds of times worse. The loss of resources and natural systems are invisible to the economics as practiced in 2013. Repairing and rebuilding from damage is a positive thing in GDP, the measure used for health.

This is partly because the orthodoxy is entirely distracted with readings on the dials and how they relate to their hypothetical or replica of the economy. Federal deficits are a monetary phenomenon that has history. They can be seen in this replica. The certain collapse of the ecosystem cannot. There is no monetary trend line for it.

The other major part is not the invisibility of climate change in measurement or model, but the active denial of the science by major sectors of the existing corporate economy, and the active promotion of climate-damaging technologies by these and others. This is the institutional side: The failure to put a price on carbon, the manipulation of the political system to avoid addressing needed changes, and the simple distortion of the science for public consumption.

The challenge for the forecaster is not so much to anticipate the gradually worsening effects of climate change, but to capture these effects in numerical terms that can be tracked over time and used for policy purposes. An additional challenge is to make these numbers comparable to those of other forecasters so as to provide a base for evaluation.

These are impossible with the current tools. Efforts to create indexes which calculate the depletion of resources and the destruction of natural systems are in their infancy. Some of them are general equilibrium models. These did not work well in the Great Financial Crisis, nor do we expect them to work well in the case of unrecoverable changes to natural systems. The Stern Report made some assertions which we take seriously as the best case scenario. Noting we have already done nothing for the nearly ten of the 10-20 years mentioned.

Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.

In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.

The investment that takes place in the next 10-20 years will have a profound effect on the climate in the second half of this century and in the next. Our actions now and over the coming decades could create risks of major disruption to economic and social activity, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th Century.

The economic modeling of climate change through Integrated Assessment Models (IAMs) is treated here in that report.


GDP, as noted, the main metric of economic health that is used to compare forecasts, actually improves with some catastrophes as rebuilding is measured well while destruction of property and wealth and productive capacity is not, at least initially. Employment and incomes may rise or fall similarly, so an economic forecast focused on the short term may miss the obvious trend entirely.

Over time we will be developing a metric for output which simply adjusts GDP for health care outcomes, public investment, and depreciation and destruction of resources and natural systems as if they were privately held capital. That project has not yet begun.

The general outline of the future, our baseline for climate change, is not a mystery. Increasing incidence of flood,wildfire, drought, violent storms, pest infestations, and the rest of the litany of outcomes are not in doubt.

Note:

Adapting to climate change can be the World War II that brings the economy back to full employment and paves the way for prosperity beyond. Investments that prolong the habitable life of the planet plainly create value that can be tapped to repay investors. If this needs to be -- as much of it certainly does -- a public investment, so much the better.

World War II entailed spending on arms and munitions and operations that created great destruction. Immense progress was made in spite of this. The technologies of aviation, communication, transportation and others were greatly enhanced by wartime research and development and deployment. After the War the U.S. grew and prospered as never before, partly because of the absence of industrial competition from Europe and Japan, and partly because of the economics of the New Deal and Keynes that put jobs first and did not fear big government.

Climate change is a looming disaster larger than World II. It is replete with tragic possibilities, determined adversaries, and those who would pacify the enemy and compromise away a livable future. It does not have to be that way.