The Economic Effects of Climate Change (2024)

Richard Tol's recent article, "The Economic Effects of Climate Change" (JEP vol. 23, no. 2) presents itself as a comprehensive survey of economic research on climate change, but in fact restricts its coverage to a subset of the economists writing on the subject. As he notes (p.30), most of the work he surveys comes from two groups, one centered at Yale and the other at University College in London; in honor of their most prominent living members, they could be called the Nordhaus and Tol groups, respectively (since David Pearce, the original leader of the London group, is deceased).

What's missing? The Stern Review, a paradigm-shifting new look at the economics of climate change which is now central to global debate on climate policy, gets barely a mention. The AEA invited Nicholas Stern to give the Ely Lecture in 2008, hardly a sign that he is a marginal figure in the profession; that thoughtful lecture, now available as an article in the AER, didn't make it into Tol's review. Work by Simon Dietz and other economists who have collaborated with Stern is badly underrepresented. Stern's challenge to standard assumptions about discount rates, and the extensive peer-reviewed literature he cites on that subject in the Review, might have been worth discussing in a truly comprehensive literature review.

Martin Weitzman's recent work on uncertainty and climate change, one of the most important new theoretical insights in the field, suggests that the detailed cost calculations discussed by Tol may be irrelevant to policy. This, too, got only a passing mention, which falls far short of taking Weitzman's message seriously.

Totally omitted is the extensive work by several other European groups, including Ottmar Edenhofer and his colleagues at the Potsdam Institute for Climate Impact Research (PIK), Claudia Kemfert at the German Institute for Economic Research (DIW), and Terry Barker at the Cambridge Centre for Climate Change Mitigation Research (4CMR). US economists writing about climate change, outside the Nordhaus-Tol school, include Stephen DeCanio at the University of California, Richard Howarth at Dartmouth, and my colleague Frank Ackerman at Tufts. They, too, are absent from Tol's bibliography.

What's included? Tol's survey identifies 14 estimates of the global economic impact of climate change (Table 1 and Figure 1); five of these are by Nordhaus, presenting similar estimates from successive vintages of the same model. Two more are by Tol, and most of the others are by their colleagues and collaborators. (One of these estimates, from Hope 2006, is described in Tol's footnotes as the estimate used in the Stern Review; however, there must be a mistake here: the projection of significant economic gains at 2.5 degrees of warming, shown for that study, is clearly at odds with Stern's message and conclusions.) The fact that the Nordhaus-Tol school often projects economic gains from the early stages of warming is visible in Figure 1; the explanation of this odd "finding", however, is quite incomplete. Early versions of Nordhaus' DICE model projected large gains based on a thinly documented estimate of huge willingness to pay for warmer weather in cold, rich countries (Ackerman and Finlayson 2006). Tol's own estimate of huge health benefits from moderate warming is based on a series of empirical mistakes (Ackerman and Stanton 2008). Agricultural benefits from longer growing seasons and CO2 fertilization are the strongest argument for benefits from near-term warming, but recent research is shifting toward projections of agricultural losses rather gains from warming; the projected increase in the number of extremely hot summer days is bad for virtually all crops (e.g., Schlenker et al. 2006).

Tol also discusses 232 estimates of the marginal cost of carbon emissions. In his most recent publication analyzing these estimates (Tol 2008), which included 211 of them, he also provided data on authorship, showing that more than half - 112 of the 211 - were authored or coauthored by Tol himself. Thus to an extent which is unusual for literature surveys and meta-analyses, he is re-analyzing his own work. He did not, of course, do 112 unique studies; rather, he identified separate scenarios within his studies as yielding separate estimates. In contrast, the Stern Review, which included several widely discussed scenarios, was counted as a single estimate. That article (Tol 2008) seemed focused on demonstrating that Stern was an extreme outlier relative to the rest of "the literature" - meaning, it seems, the literature written by the Nordhaus-Tol school.

In the end, the crucial question is one of boundaries and definitions. Is the economics of climate change a gated community, where it is important to police the perimeters against intruders? Or is it an open public space for free-wheeling intellectual debate, welcoming new voices with something different to say? I hope that JEP, and the economics profession, will embrace the latter view in the future.

Frank Ackerman and Ian Finlayson, "The Economics of Inaction on Climate Change: A Sensitivity Analysis," Climate Policy, vol. 6 no. 5, 2006, 509-526.
Frank Ackerman and Elizabeth A. Stanton, "A Comment on 'Economy-wide Estimates of the Implications of Climate Change: Human Health'," Ecological Economics vol. 66 no. 1, 2008, 8-13.
Wolfram Schlenker, W. Michael Hanemann, and Anthony C. Fisher, "The Impact of Global Warming on U.S. Agriculture: An Economietric Analysis of Optimal Growing Conditions," Review of Economics and Statistics, vo. 88 no. 1, 2006, 113-125.
Richard S.J. Tol (2008). The Social Cost of Carbon: Trends, Outliers and Catastrophes. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 2, 2008-25. http://www.economics-ejournal.org/economics/journalarticles/2008-25

Julie Nelson raises a number of issues with my paper.

First, she argues that the literature review on the total impact of climate change is incomplete. While it is true that many scholars have commented on the economic impact of climate change, few have published comprehensive estimates. I tried my best to synthesise the many concerns that people have raised in the caveats and interpretation of the numerical results. I did not, however, include a comprehensive list of every paper that has remarked on the subject, as that list would contain hundreds of papers.

The numerical results shown in the paper exclude derivative studies (Ayres and Walter, derived from Nordhaus; Berz, derived from Fankhauser; Kemfert, derived from Tol) and exclude partisan studies (Hohmeyer and Gaertner, funded by Greenpeace; Ackermann and Stanton, funded by Friends of the Earth). The Stern Review was excluded for both reasons. Stern's estimates are based on Hope's work. When writing his Review, Nick Stern was a civil servant. He is now a member of the House of Lords. The Stern Review was not reviewed by independent peers prior to its publication, while a published lecture does not substitute for peer review. The post-publication reviews (by, e.g., Dasgupta, Mendelsohn, Nordhaus, Weitzman, Yohe) raise many objections.

Second, she argues that the meta-analysis of the social cost of carbon contains a disproportionate amount of my own work. This is true. For that reason, I hesitated before writing my 2005 paper in Energy Policy. However, there was a clear demand for a paper like that, and no one was interested in writing it. I did do sensitivity analyses excluding one of the three dominant authors (Hope, Nordhaus, Tol), which showed that there is no overdue influence by any author. Still, there is a whiff of subjectivity around this piece of research. All the data are on my website, so that anyone can replicate what I did or do what they think is best.

Third, she argues that I ignore the Dismal Theorem of Martin Weitzman. Page limits meant that I could not pay more attention. I think the result is important, and I indeed published a mini-version of the Dismal Theorem in 2003. The Dismal Theorem is incomplete, however, as it excludes the costs of emission abatement. Until it is phrased in a proper decision analytic framework, I do not think one can draw many conclusions from the Dismal Theorem -- except that one should be very careful in interpreting the estimates of the economic impact of climate change. That message, I believe, is the main message of my paper.

Given that people are quoting Professor Weitzman's work on risks of a very dismal outcome, there may be some interest in this letter (I don't seem to have a reply). It seems there are some logical problems with all of this costing of "unknown or unknowable" risks and that we risk just imposing costs on people for no good purpose (other than to feel good about doing so).

Dear Professor Weitzman

I was interested in the article in the latest Colloquy and wondered whether you had seen some of the criticisms of the science by Professor Bob Carter and others?

I attach a couple of articles. If you can explain to me why the critics are wrong I should be enlightened. I have not seen critiques of these articles or of other critics such as Professor Carter or Professor Pilmer.

It seems to me that that there are serious questions about –

1.the scientific facts (extrapolating back to find data thousands of years back is hard enough);
2.the scientific modelling (all models are subject to the GIGO principle and are abstractions from reality);
3.the economic modelling of costs and benefits (of doing nothing but adapt versus attempted mitigation);
4.the philosophical basis of weighing up the welfare of future generations (as I note below, democratic societies seem schizoid when it comes to future generations – Muslims and ultra-Orthodox Jews seem to want them but Western birth rates indicate we don’t really want them anyway)

In relation to low risk but possibly catastrophic impacts and your model, on the logic of your model, why would I not stay indoors today and be safe (but die of starvation) rather than hopping into a car to do the shopping (and risk being killed by some crazed Christmas driver)? Isn’t that a risk of greater importance to me which I deal with every day and take that risk? Why should I or anyone else alive today take a more precautionary approach to far more remote risks that may or may not affect other people hundreds of years away?

Meanwhile, I attach a Swiftian letter I sent to Scientific American.

The Editors
Scientific American

Dear Sirs

Leaving aside the cynical suspicion that “Climate Change” is the greatest money spinner for some people since the Y2K scare, John Broome’s “The Ethics of Climate Change” (Scientific American June 2008) raises some interesting questions. Why apply any discount rate at all? Why isn’t Stern’s 1.4% arbitrary? But if we do treat future generations equally in a utilitarian ethical calculus and apply a zero discount rate, doesn’t a strictly logical utilitarian philosopher find himself out of a job? Assuming generations go on forever, with no discount rate, mankind’s total utility is already infinite and it does not matter what this generation does about climate change or anything else. (That may be, by the way, a true reflection of the modern democratic process – if people really do care so much about future generations, it is hard to see why abortion has been legalized on a massive scale.)

Utilitarianism raises even more strange questions. Should people commit euthanasia to eliminate greenhouse gas emitting creatures called human beings (for the sake of unborn human beings)? Is a utilitarian ethic logically able to deal with these issues? (As a matter of law, utilitarianism was rejected by the House of Lords in the 19th century when it convicted some shipwrecked seamen of murdering a weak cabin boy whom they killed to eat and ensure survival of the rest.)

Perhaps the ethics of natural resources is better viewed as a question of natural rights and the Lockean proviso. If I have a right to do something, like breathe air while trapped in a coal mine even though it means less for all of us trapped down below, can anyone stop me? If I am on this planet by the grace of God who is to tell me I cannot breathe the air or make a fire to stay warm?

I would therefore be interested to see Mr Broome reformulate the question of the ethics of climate change in terms of “equal rights” to the Earth’s resources between generations. This issue was a live one in the 19th century when Henry George and Herbert Spencer debated the ethics of land ownership. That debate seems relevant today.