How much is climate change going to cost us? Estimates have varied greatly over the years, from the Stern Review's worst-case scenario of around 20 percent of the global GDP, to economist William Nordhaus's vastly smaller number. A new study, however, suggests a much higher cost than many have estimated—largely, it turns out, because economists hadn't been looking at the issue in sufficient detail.
Computing the cost of climate change is tricky business, in part because making any economic projection is difficult, but also because of what economists call discounting, the key feature in the Stern-Nordhaus debate. There are different ways to think about it, but it's most helpful to think of discounting in terms of saving for future expenses. Say you know you will need to fix your car—or your planet—at some point, and that you'll have to pay $1,000 for the repairs the day you take it in to the shop. How much money would you need to save today so you could afford the repairs when you need them?
Accounting for regional differences in discounting likely masks the effects of substantial within-region variation in income.
Less than $1,000, of course, but the exact number depends on a variety of factors, including how urgent the repairs are. If you need them in a year, you'll need to put close to a grand in the bank. If you can wait a decade, you can put in much less.
Here's where economic inequality comes in. The world's poorest people are going to feel the worst effects of climate change, and they'll feel them sooner than the rich. As a result, they'll discount the future less; figuratively speaking, they need to put more money in the bank sooner than the rich. Many economic models of climate impacts, including Nordhaus's Regional Integrated Climate Economy model, now incorporate regional differences in economic prosperity to account for those effects.
The problem, argues a team of Princeton University researchers led by Francis Dennig, is that accounting for regional differences in discounting likely masks the effects of substantial within-region variation in income. To investigate that issue, the researchers broke down each of RICE's 12 regions into five subsets based on World Bank estimates of income distributions in each region.
While the new model, dubbed NICE (for Nested Integrated Climate Economy model), was otherwise mostly the same as RICE, it produced rather different results from its predecessor. If economic impacts of climate change are proportional to income—that is, the rich feel the effects more than the poor—then NICE's results match RICE's. Under the more plausible assumption that impacts are inversely proportional to income, NICE yields conclusions close to the Stern Review's.
While the truth is probably somewhere in between, the results mean the costs of climate change are higher than many had assumed—especially for the poor, whose fate "is not represented" in existing models, Dennig and his colleagues write. "We find that when future damage falls especially hard on the poor, considerably greater global mitigation effort is optimal than when damage is proportional to income," they write.
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