Mild with a chance of catastrophe

How bad is the economic impact of climate change going to be? Unlike the hyperbole spread in some circles, climate change is not going to kill us or destroy our way of life. Yes, it is going to be costly, and yes, we need to adapt to a changing climate, but it is not going to be the end of civilisation. In this respect, a new meta-study by Richard Tol is instructive, because he shows the estimates for the economic impact of global warming using different methodologies.

In my book on the interplay of geopolitics and economics, I have an entire chapter on the impact of climate change on global economies and the implications for different countries. In there, I show that the central estimate for the economic effects of climate change on global GDP is some 2.5% by 2050 if we keep on polluting as usual. This estimate is based on the consensus among econometric studies. But as Tol points out, econometric studies tend to be the most optimistic about the economic impact of climate change. If one uses computable general equilibrium models, the estimated effects get somewhat bigger but remain overall quite manageable. Yet, if one uses elicitation models, where experts are asked to estimate the quantitative and qualitative impacts of climate change that cannot be captured in econometric models, the estimated effects of climate change are getting much larger. Somewhere in the order of 5-7% is what experts think is possible if feedback loops and nonlinearities that are not models in econometric models are taken into account.

Economic impact of climate change using different estimation methods

Source: Tol (2022)

Should we believe these dire warnings? Hard to say, but here is what we can say about climate change:

• It is clear that climate change will have a negative impact on the economy and will cost material sums of money to adapt to and cope with.

• How big this impact of climate change will be is uncertain and while standard econometric models expect a relatively small impact, the impact can be very large indeed if we are unlucky.

• Poorer countries will be hit harder by climate change than richer countries and this should concern us in more affluent countries because the most likely reaction of people in poor countries is to migrate to more affluent countries.

It is especially the last point that should motivate us to help poorer countries in their fight against climate change. Whatever we spend today to help them is going to be small fish compared to what we will have to spend to deal with masses of migrants that are much larger than what we see today.

Yet, overall, I am optimistic that we will be able to deal with the cost of climate change. It isn’t going to be as big as some people may think and if we act now, we can keep the costs to a level that government finances can cope with. Yet, if we delay adaptation and mitigation measures, the bill for governments and the taxpayer will only rise.