How realistic are the Shared Socioeconomic Pathways?

You have to give it to Ivo Welch. He has a talent for writing research that addresses issues of enormous practical importance but that is very left field and not typically addressed in the academic literature. Just look through his list of publications and you will find a ton of interesting material. In his latest working paper, he challenges what is probably one of the most consequential economic models in use today: The Shared Socioeconomic Pathways (SSP) to model climate change.

To be clear, neither Ivo nor I are climate sceptics. Ivo even recently published a good book on what can be done about climate change. But Ivo does something very simple. He looks at historic relationships between population growth, GDP growth, technological progress, and standard of living to estimate how likely it is that the SSP will materialise. This is essentially an analysis if the SSP are internally consistent.

For the uninitiated, let me first explain what the SSP are and why they are so important. The SSP are the foundation of the Assessment Reports of the International Panel for Climate Change and the foundation for most research on the economic impact of climate change. To quote myself from a previous publication:

“The SSPs provide assumptions about crucial social and economic developments, whereas the [Representative Concentration Pathways for CO2 emissions] provide assumptions for the required climate change mitigation efforts. Together, these two kinds of pathways form a matrix architecture for simulating the future of climate change.

The main advantage of the SSPs is that they are based on a common set of input parameters used by otherwise-different models around the world. To develop the SSPs, Riahi et al. (2017) began with a set of qualitative narratives for geopolitical and socioeconomic scenarios. These qualitative scenarios were then populated with quantitative projections for crucial socioeconomic drivers, such as population growth, economic activity, urbanization, and education. Specifically, the long-term economic projections included in the SSPs were developed by a team of economists at the OECD who also develop the most frequently used long-term economic forecasts for nearly 200 different countries (Dellink, Chateau, Lanzi, and Magné 2017).

Once the qualitative narratives had been agreed upon, Riahi et al. (2017) tested the basic input parameters with a range of Integrated Assessment Models (IAMs) that derived other important variables, such as land use, energy use, and greenhouse gas scenarios. The different IAMs were tested against each other to determine the range of possible outcomes and to check for consistency between the models.

Finally, for each SSP, Riahi et al. (2017) derived a baseline scenario that assumed no new climate regulation and, crucially, no price on carbon emissions. For each SSP, different RCPs were run to show whether a specific concentration pathway is feasible and, if it is, what measures would be needed to achieve desired outcomes and what stresses these measures would put on society and the economy. The new SSPs allow for a more comprehensive modeling of the interaction between climate change, politics, society, and economy.”

You can read about the five different SSP (imaginatively called SSP1 to SSP5) in the book I just quoted from.

What Ivo Welch did was very simple. The basic assumptions about the SSP were developed by a group of experts and economists from the OECD then put some fundamental numbers behind these scenarios. Ivo simply checked how likely it is (based on historical experience) that we will get a future with these combinations of population growth, GDP growth, etc.

To cut a long story short, the chart below shows the likelihood of some pathways and the assumed living standards in these pathways.

Probability of achieving the expected living standard

Source: Welch (2024)

The chart shows that the assumed living standard (GDP/capita) is way too low in SSP3 and SSP4 and we are almost certain to have much higher living standards (and thus higher CO2 emissions) in these pathways given the other assumptions for population growth etc. Meanwhile, the living standard forecast in SSP5 are too high and thus assumes a much higher level of CO2 emissions than is likely to happen. This is particularly ironic since the SSP5 scenario is one where we continue to use fossil fuels as the main source of energy in the future. Essentially, what it means is that models based on SSP5 overestimate the living standards that can be achieved with the help of fossil fuels as well as the CO2 emissions in such a world.

But the problem doesn’t stop there. Based on assumptions about technological progress and the adoption of low carbon technologies, different pathways for global warming are possible within each SSP. Here is what Welch’s research has to say about the probability of emission intensities in these scenarios:

Probability of achieving expected CO2 emissions intensities

Source: Welch (2024)

SSP1-RCP2.6 and SSP2-RCP4.5 are too optimistic in terms of technological progress for low carbon technologies. Meanwhile, the assumptions for SSP3-RCP7.0, SSP4-RCP7.0, and SSP5-RCP8.5 are too pessimistic for the adoption and development of low carbon technologies. There is a bias to overestimate carbon emissions in SSP3, SSP4, and SSP5, while there is a bias to underestimate emissions and global warming in SSP1 and SSP2.

What to do then? For starters, one could adjust the assumptions behind these different pathways and use them to build better models. The research of Ivo Welch indicates that the reasonable baseline pathway is one of RCP6.5, rather than RCP7.0 and that a plausible range is for RCP4.5 to RCP7.

This implies that climate change is going to happen, and it is likely to have a significant negative impact on our living standards. But it isn’t going to be as bad as the worst-case scenarios currently in use suggest, nor is the world going to be as green and friendly as current best-case scenarios suggest.

In my view, the world is going to be a worse place because of climate change, but we aren’t going to die. We can deal with the problem, but we have to be pragmatic about it, not ideological. Using economically reasonable assumptions about the world we are going to live in is a key foundation on which to build a reasonable and effective strategy to deal with the problem.