Cost of climate change grossly underestimated: Nicholas Stern

Latest report by eminent economist criticises current climate change models for not adequately reflecting the science of climate change and its impact on global economics

By Snigdha Das
Published: Tuesday 24 June 2014


The financial risks from unchecked global warming are considerably higher than previously estimated, warns Nicholas Stern, one of the world’s most influential economists. He has called for stronger cuts in greenhouse gas emissions.

In his latest report, Endogenous growth, convexity of damages and climate risk, Stern is critical of current economic models used to calculate the fiscal fallout of climate change as they fail to acknowledge the full extent of the likely impact of climate change and are predicted on “assumptions” about global warming's effects on GDP. As a result, even the recent and hugely authoritative series of reports from the UN Intergovernmental Panel on Climate Change (IPCC) are significantly flawed, said Stern, a professor at the Grantham Research Institute on Climate Change and the Environment, a research centre at the London School of Economics (LSE).

Limitations of standard models
“It is extremely important to understand the severe limitations of standard economic models, such as those cited in the IPCC report, which have made assumptions that simply do not reflect current knowledge about climate change and its potential impacts on the economy,” he said. 

For the study, Stern and his colleague Simon Dietz modified some key features of the “dynamic integrated climate-economy”, or DICE, model, which was devised by William Nordhaus in the 1990s to take into account the latest findings and some of the uncertainties about the major risks of climate change that are usually omitted. The standard DICE model has been used in a wide range of economic studies of the potential impacts of climate change, some of which have been cited in the Fifth Assessment Report of the IPCC

“While this standard economic model has been useful for economists who estimate the potential impacts of climate change, our paper shows that some major improvements are needed before it can reflect the extent of the risks indicated by the science,” Dietz said in a press release issued by LSE. “Our aim was to show how a new version of the model could produce a range of results that are much more representative of the science and economics of climate change, taking into account the uncertainties.”

What Stern-Dietz model predicts 
For instance, the standard model usually assumes a single temperature—3°C—for climate sensitivity (long-term change in global average temperature because of a doubling of the atmospheric concentration of greenhouse gases). The new model allows a wider range of values—from 1.5°C to 6°C—to be considered for measuring climate sensitivity. 

It also includes a broader range of potential climate impacts, because the standard model tends to underestimate the potential economic damage that could be created by climate change. The standard model implausibly suggests that a loss of global GDP of 50 per cent would only result after a rise in global average temperature of 18°C, even though such warming would is likely to render the Earth uninhabitable for most species, including humans, Dietz contends in a press release issued by LSE. 

The new model includes the possibility that such damage could occur at much lower levels of global warming. Standard economic models rule out the possibility that global warming of 5-6°C above pre-industrial levels could cause catastrophic damages, even though such temperatures have not occurred on Earth for tens of millions of years. Such an assertion, he says, is without scientific foundation and embodies a false assumption that the risks are known, with great confidence, to be small.

The new model also takes into account that climate change can damage not just economic output, but productivity. The standard model assumes that rising levels of greenhouse gases in the atmosphere only affect economic growth in a very limited way, according to Dietz.

 “I hope our paper will prompt other economists to strive for much better models which will help policy-makers and the public to recognise the immensity the potential risks of unmanaged climate change. Models that assume that catastrophic damages are not possible fail to take account of the magnitude of the issues and the implications of the science,” said Stern. 

The peer-reviewed findings of their research will be published in The Economic Journal.

This study is available with India Eenvironment Portal.


Endogenous growth, convexity of damages and climate risk: how Nordhaus’ framework supports deep cuts in carbon emissions

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