Seawalls are Not Enough: Climate Change and U.S. Interests

by Andrew Guzman

For too many years American climate change debates were political contests in which scientific evidence took a back seat to political posturing, obfuscation, and ultimately, inaction. Today, the science demonstrating that our world is warming and that humans are a primary cause of this warming is unambiguous. Though there remain a few public voices willing to deny the evidence, the credibility of their objections fades with each new development and the ever-mounting evidence.

Now that the public discourse has accepted the reality of climate change, the discussions have turned to focus on possible responses to the problem and the costs of those responses. Even where there is consensus on the existence of climate change, there is often disagreement about what should be done. The most common objections to action point to the costs that would be involved. For example, critics of the Waxman-Markey cap-and-trade climate change bill have claimed that it would cost the average American household $1,870 per year. There is little evidence to support this figure, but it has entered the political discourse nonetheless. On the other side of the debate, proponents of the bill point to a Congressional Budget Office report suggesting that the bill will cost the average family less than one-tenth of that – just $160 per year.

This debate over the costs of action is critical, but it cannot guide policy by itself. We also have to understand the costs that climate change will impose. What will it cost the United States if the Earth warms?

Professor Jody Freeman and I investigated this question in our recent article, Climate Change and U.S. Interests, published in the Columbia Law Review. We sought to estimate the full cost of climate change on the United States. The article is in part a response to the view, advanced in some fora, that the United States can afford to be passive with respect to emissions reductions. The idea is that the U.S. will suffer very modest economic harms as a result of climate change – indeed, some suggest that the country may enjoy small economic gains – and so has little incentive to bear any costs to reduce global warming.

We dispute this conclusion, which emerges from “integrated assessment models” (IAMs) of the economy. We do not challenge the models themselves or the economists who use them, but we object to how the results of these economic studies have been used in policy debates. The translation of IAMs from academic research to policy-relevant evidence too often overlooks two main points. First, IAMs are systematically biased downward in their estimates because they omit a range of economic harms that will be felt as the earth warms. Second, the assumptions used in the IAMs are often forgotten when the results are considered in policy debates, and results are simplified in ways which aggravate the downward bias of estimates.

To get a better estimate of the likely impact of climate change, our article examines several ways in which the standard IAMs omit important costs or have their results misinterpreted in policy discussions. It explains that existing estimates systematically understate the likely economic impact of climate change, and provides rough estimates of what a more complete accounting would reveal.

Among the impacts that are ignored in most IAMs are economic spillover effects from foreign countries, national security impacts, increased migration (both legal and illegal), and a higher incidence of disease. The IAMs themselves or, in some cases, the ways in which the studies are used in policy discussions, also ignore non-market costs, catastrophic events, and more.

We consider several of these omitted costs, and conclude that the likely cost of climate change is dramatically higher than the 0-2% reduction in GDP that many debates assume. We are able to identify and quantify six specific ways in which existing estimates are biased downward. First, IAMs and those who cite them in policy debates tend to make overly optimistic estimates about the extent of warming. This is in part because some of the relevant studies rely on estimates of climatic change that have since been revised upwards. Second, there is insufficient recognition of the fact that the economic impact is not symmetric around a given change in temperature. The costs associated with higher temperatures rise at a faster and faster rate as temperature increases. One consequence is that calculating the economic costs associated with a point estimate of future temperature understates the expected increase in economic costs (which is calculated by weighting the economic costs of all possible outcomes by the probability that they will occur). Furthermore, overlooking the impact of catastrophic events, non-market costs, and export losses due to disruptions in other countries contributes to the downward bias in the estimate of economic costs. Finally, because the time horizons are very long, a failure to consider how growth rates might be harmed omits an important source of costs.

The quantitative results are summarized in the following table. The middle column reflects a conventional view of the economic costs of climate change. The IAM forecasts themselves predict an economic loss due to climate change of about 0.5% of GDP (some are a little higher, some a little lower). Some IAMs do take into account the various factors that we discuss, but do so as extensions of their baseline models and these extensions do not seem to penetrate the policy discourse. The column on the right presents our own estimates.

Factors Considered Conventional Estimates of Reduction in U.S. GDP (%) Marginal Impact on Annual GDP (%)
Conventional IAM Forecasts 0.5 0.5
Optimism About Temp. Rise 0 1
Accelerating Costs as Temp. Rises 0 0.5
Catastrophic Events 0 0.5-3
Non-Market Costs 0 1.4-3.5
Export Losses 0 1.5
SUB TOTAL 0.5 5.4-10
Growth and Productivity 0 Double Above Impacts
TOTAL 0.5 10.8-20

As the above table indicates, we arrive at estimates that are twenty to forty times larger than the conventional estimate of 0.5% of GDP. There is no doubt that our own estimates are very rough, and we do not attempt to hide this fact. The critical point, however, is that our estimates are surely more accurate than the standard approach, which assumes that the best estimate of each of these factors is zero.

Furthermore, there is every reason to think that even our estimates understate the economic consequences of climate change. Though we were able to quantify the impact of the six factors presented in the above table, there are several other important ways in which climate change will negatively affect the economy but that we were not able to quantify. These are reflected in the following table.

Factors Considered Impacts
Cross-Sectoral Effects E.g., If climate change affects energy prices, what will impact be on agriculture?
Supply Shocks from Abroad E.g., Impact on fuel prices
Global Financial Markets E.g., Impact on U.S. investment abroad; challenges funding U.S. current account deficits
National Security E.g., Estimated economic cost of Iraq War is $3 Trillion (Stiglitz); what national security challenges will climate change bring?
Migration E.g., Racial and ethnic tensions, undocumented immigration, human trafficking
Disease U.S. cannot insulate itself from increased incidence of disease due to climate change

Though we are not able to estimate the impact of these factors, it is clear that each will impose costs on the U.S. economic system.

In light of our results, it is clear to us that the United States has a strong interest in seeing international mitigation efforts succeed. This interest does not rely on some obligation the United States has toward the rest of the world. Instead, it reflects the fact that this country will suffer economic harm if the world does not find a way to slow and, ultimately, stop, the warming of the Earth.

It is fair to ask how the likely costs of climate change compare to the likely costs of mitigation. One estimate of the costs of mitigation is provided by the Stern Review, according to which the cost of stabilizing greenhouse gasses (GHGs) at 500-550ppm CO2 would be about 1% of global GDP. This is equivalent to about 4% of U.S. GDP. This 4% can be compared to the 10-20% of GDP that climate change is likely to cost the United States.

In other words, the total global cost of mitigation is dramatically less than the economic harm that would otherwise be felt by the United States alone. In fact, even if the Stern Review understates the cost of mitigation by half, and even if the United States were required to underwrite the full cost of global mitigation efforts, the benefits to the United States would still outweigh the costs.

All of this means that the United States should embrace efforts to reduce global emissions of GHGs. The country obviously cannot and should not pay the full cost of such reductions, but it should at a minimum be willing to act aggressively against its own considerable contribution to climate change.

There remain important questions about how to get other large emitters to participate in an international mitigation effort, and what such an effort should look like. Our study demonstrates that it is time for the United States to acknowledge that it is not somehow immune from the economic consequences of climate change. It cannot afford to sit back and wait and hope for others to act. The United States should move aggressively to reduce global GHG emissions.

One Response

  1. Perhaps I’m being a bit harsh, but it seems you’re objecting to their mostly-arbitrary damage constants, and substituting your own mostly-arbitrary damage constants, on the basis of “anything is more realistic than zero?”

    I realize it doesn’t exactly lend itself to writing papers but isn’t a conclusion of “margin of error is too wide to meaningfully reach a conclusion” a legitimate finding?

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