Economic models buckle under strain of climate reality

FE Team | Published: November 22, 2023 23:56:50

Ahead of international climate talks in Dubai this month, economists are updating estimates of the impact of global warming on the world economy, sometimes calculating down to a decimal place the hit to output in decades to come, reports Reuters.
But detractors say those numbers are the product of economic models that are not fit to capture the full extent of climate damage. As such, they can provide an alibi for policy inaction.
Record temperatures, droughts, floods and wildfires this year have caUSed billions of dollars of damage, even before emissions take warming beyond the 2015 Paris Agreement cap of 2 degrees CelsiUS (3.6 Fahrenheit) above pre-indUStrial levels.
Still, some economist models conclude - implaUSibly, say the critics - that by the turn of the century, warming will caUSe less harm to the world economy than COVID-19 has, or hit global shares by less than in the 2007-2009 financial crisis.
Nobel-winning U.S. economist William NordhaUS sparked controversy in 2018 with a model that found the climate policies that best balanced the costs and benefits from an economic point of view would result in warming of more than 3C by 2100.
A year earlier, the Trump administration cited similar models to jUStify replacing the Obama-era Clean Power Plan with one allowing higher emissions from coal-burning plants.
Many policymakers acknowledge the modelling's limitations: European Central Bank executive board member Isabel Schnabel said in September it could understate the impact. Others go further, saying the whole approach is flawed.
At issue are the "integrated assessment models" (IAMs) economists USe to draw conclUSions on anything from output losses to financial risk or the pricing of carbon markets.
They rely on a theory of how demand, supply and prices interact throughout an economy to find a new balance after an outside shock - the so-called "general equilibrium" model developed by 19th century French economist Leon Walras.
"But climate change is fundamentally different to other shocks becaUSe once it has hit, it doesn't go away," said Thierry Philipponnat, author of a report by Finance Watch, a BrUSsels-based public interest NGO on financial issues.