NewsJanuary 27, 2011

Revised Figures Show Federal Economists Understate the Cost of Climate Impacts

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By Douglas Fischer, andNicole Heller, Climate Central

What's the real cost of climate change? Credit: iStock.

Preliminary analysis suggests impacts from climate change could run twice as high as previous estimates, potentially giving regulators more firepower to justify emissions-cutting regulations.

The cost of climate change impacts runs twice as high as previously estimated, according to revised data from a key economic model used by federal agencies.

The preliminary analysis suggests that the number used by federal agencies to help justify emissions reductions is too low — making the cuts appear disproportionately expensive under the cost-benefit analysis required of federal rules.

The revised numbers, say scientists and economists familiar with the research, are a sign that climate impacts likely will be more expensive than previous assumptions. Models used to generate current cost impacts contain gaps and, in some cases, outdated assumptions. As those models are refined and updated, they show greater economic harm as global temperatures rise in response to greenhouse gas emissions.

“The big question is how accurate are those models,” said Martin Weitzman, a Harvard University economics professor. “There's a lot of fuzziness to them.”

Current models, he added, “don't tend to give robust results.”

Not all economists agree. But a lot is hanging on the outcome.

Last year the Obama Administration pegged the average impact of greenhouse gas emissions at $21 per ton of carbon dioxide (CO2) emitted, based on its analysis of three widely used models. (For more on how the costs of C02 are calculated, and for a visualization of climate change cost estimates, see this related blog.)

At the time, few paid attention: A cap-and-trade proposal was before Congress, and the market was expected to set the price for carbon dioxide emissions.

But with climate legislation dead for the foreseeable future and the administration turning to regulations to trim emissions, the $21 figure — known as the social cost of carbon — has gained importance. The Department of Energy has used the figure to assess the economic impact of tighter air conditioner efficiency standards; the U.S. Environmental Protection Agency cites the value in its analysis of greenhouse gas emissions limits for light trucks.

Some economists fear that if the federal government underestimates the economic impact of climate change, expensive, paradigm shifting climate policy becomes difficult, if not impossible, to justify.

“You have people who believe the bottom line of cost-benefit analysis has scriptural status,” said Frank Ackerman, an economist with the Stockholm Environment Institute who also teaches at Tufts University. “It's divining for us whether (a given regulation) is a good or bad thing.”

How to value the impact of climate change has proven to be a contentious political issue. William Nordhaus, an influential economics professor at Yale University and author of one of the models, has studied the issue for 20 years and is responsible for a sizable chunk of the peer-reviewed literature on the topic.

The price coming out of economic models, he said, has been largely stable and appears unlikely to change significantly, even with the latest science fed into the models. “I think it unlikely that anything in the geophysical sphere will change the number by more than a factor of two one way or the other over the next few years,” he wrote in an email.

An analysis by Laurie Johnson, chief climate economist at the Natural Resources Defense Council, an environmental advocacy group, suggests current figures are low. And it's not clear that the Obama Administration adequately assessed the economic impacts of climate change: Viewed across a wider spectrum of studies, the $21 value identified by government economists falls near the low range of damage estimates (See histogram and accompanying story).

Johnson derived her data from an updated version of the “Policy Analysis of Greenhouse Effect,” or PAGE, model, one of three widely used models known for their ability to blend physical and economic projections.

Whether or not the bread bowls of Europe and North America will become too dry to support agriculture is too remote and uncertain for many models to consider. Credit: Magical Nature/flickr

Federal economists used a 2002 version of PAGE.

The older version assumes a one percent chance of catastrophe — such as the melting of a major ice sheet — should global temperatures rise above 2ºC (3.6ºF) compared to preindustrial levels, Johnson said.

The newer version, based on recent observations and science, assumes a 10 percent chance of catastrophe for the same threshold, among other refinements, she said.

The result: While the federal economists pegged a mid-range value of climate damages at $30 per ton of emissions using the 2002 version of PAGE, the revised version suggests the number is closer to $63, Johnson found.

That's $2 shy of the $65 estimate the federal Interagency Working Group on the Social Cost of Carbon identified last year as the “worst-case” impact of carbon emissions.

And even that may be low.

Even with recent updates, PAGE and its ilk contain many worrisome gaps, scientists say. One example is their blindness to the potential of catastrophic events: PAGE is one of the few integrated models to factor paradigm-shifting events into its equations. For most others, the possibility that an ice-sheet may collapse in 200 or 300 years or the bread bowls of Europe and North America will become too dry to support agriculture is too remote and uncertain to consider.

So they ignore it.

The science behind ice-flow dynamics is highly contentious. The odds of a major ice sheet melting may be extraordinarily remote. But scientists are increasingly uncertain about the stability of West Antarctic and Greenland ice. If either goes, the world faces a 20-foot surge in sea-levels, a dire situation for billions around the globe.

Weitzman, the Harvard economist, cautions that the extreme costs of such an event overwhelm any economic model of the future. Assessments that ignore catastrophe, he wrote in a 2007 study, “suppress what economic-statistical decision theory is telling us here loudly and clearly is potentially the most important part of the analysis.”

The economic models also tend to underestimate the compounding effect of multiple stresses, such as repeated cycles of flooding and drought. And they ignore the costs of transition and adaptation, assuming adjustment to a changed climate will be fairly straightforward.

Some models also rely on older findings – since questioned – that plant growth and agricultural productivity will increase as CO2 levels and average temperatures rise.

They struggle to value the loss of cultural activities, such as curtailing a northern community's cross-country ski season due to lack of snow. And no model accounts for so-called “non-market impacts” such as ocean acidification, species loss or habitat destruction.

The bottom line?

The federal government does not yet have a dollar value that accurately reflects the full cost of climate change's impacts, said Michael MacCracken, chief scientist for climate change programs at the Climate Institute.

Federal economists promised to update the social cost of carbon as better science becomes available, and this week the U.S. Environmental Protection Agency is hosting the second of two invitation-only meetings to examine that science.

But the whole exercise has some economists wondering why the debate is focusing on future costs instead of the need to make cuts now.

After all, said Yale's Nordhaus, abundant evidence justifies action now. “While there is debate about whether the 'right' number for a carbon price is $10, $20 or $100, the global average today is close to $1 and moving nowhere,” he said. “So we have a long, long way to go before we even enter the range of debate.”

Enough is known about the impacts of climate change to warrant a precautionary approach no matter where economic impact lands, added Daniel Cole, a law professor at Indiana University who studies environmental policy.

“There seems little chance of rolling the ball too far — the risk of spending too much in the near term on climate change seems remote,” he said.

After all, he noted, when the federal government first started regulating conventional air pollutants in the 1970s, policy makers had little information on the cost of pollution's impact.

“But we had a strong sense they were costing us too much, and we needed to do something,” Cole added.

“So why do we have to know, with precision, the social cost of carbon before starting to regulate greenhouse gas emissions?”

Douglas Fischer is editor of, a nonprofit news service covering climate change.

A Matter of Scale

By Douglas Fischer, and Nicole Heller, Climate Central

Many climate models lack the resolution to see the full range of impacts from a warmer world.

Global climate models are enormously complex mathematical endeavors. To keep them manageable, scientists chop the Earth into large grids to track impacts. Some models use grids the size of continents; others can be as small as 150 square kilometers.

Either way, however, the large-scale resolution means that many important regional and local impacts effectively disappear.

University of California, Berkeley, economist Michael Hanemann has attempted to refine the resolution to examine the economic impacts of climate change in far smaller chunks of property. As he downscales to a 12-square-kilometer grid to look at impacts within California, for instance, he finds that damages – and uncertainties – increase precipitously.

Take temperature increases. A model might show an average increase of 2ºC across an entire continent – a harmless enough jump. But that average might in reality reflect a slight 0.5ºC increase on the coasts and a more consequential 3ºC or 4ºC increase mid-continent – a far different beast entirely. The same is true with time scales, Hanemann noted. A two-week heat snap can be devastating to both lives and livelihoods – for some crops even a few days of heat above 90ºF kills the season. But that kind of heat can get masked in a model using monthly averages.

“The more I've looked into the literature and talked to physical scientists, the more evident it is that most of the damage is done during extreme events,” Hanemann said. But they are largely invisible to many economic models using broad spatial and temporal scales.

“Running (a climate model) on a daily time stamp is a massive computing problem, so it's understandable why they do what they do,” he added. “But this significantly understates things.”