What Will Climate Change Do to the Economy?

Modeling the economic consequences of climate change is difficult, uncertain work. In addition, any result is sure to be subjected to political attack. For decades, Yale’s William Nordhaus has been developing models that can inform policy decisions.

Accurately assessing how the planet's climate will change in the decades and centuries to come is an incredibly complex and uncertain task. Predicting future twists and turns in the economy is no easier. Mesh the two together, and you're a long way from a back-of-the-envelope sort of calculation. To take just one variable out of thousands: Will sea-level rise this century remain in the expected range of two to seven feet, or could instability in the massive East Antarctic ice sheet add significantly to the surge? And if that happens, which cities can adapt and which will be inundated, and how will such variations affect economic production?

A number of key policy decisions depend on anticipating what will happen with the climate, the economy, and the interactions between the two in coming decades. In an opinion piece for the Washington Post, former Treasury Secretary Robert Rubin wrote, "Good economic decisions require good data. And to get good data, we must account for all relevant variables. But we're not doing this when it comes to climate change—and that means we're making decisions based on a flawed picture of future risks. While we can't define future climate-change risks with precision, they should be included in economic policy, fiscal, and business decisions because of their potential magnitude."

William Nordhaus, the Sterling Professor of Economics at Yale University, is a leading voice among those working on models that integrate economic and scientific data to provide exactly this kind of guidance. In an interview with Yale Insights, he emphasized that while long-term projections necessarily include a lot of uncertainty, they still tell us a lot. "You're not actually asking ‘What's going to happen in 2200?'" he said. "You're asking, 'Given our best guess about the climatology, the carbon cycle, the economics, what should we do today?'"

What lesson does Nordhaus draw from his models? "We need to put a price on emissions," he said. What that price should be depends on society's goals, he explained, but plugging those in lets the models offer useful guidance. "If we want to limit the temperature rise to three degrees centigrade over the next x number of decades, what kind of pricing structure on emissions would help cap that temperature increase?"

The models can help identify that price, but there must be political will to follow through—another complexity in the climate-change equation.

When Australia implemented a carbon tax in 2012, for example, it was hailed as a model for other nations. The country is among the most carbon intensive on a per-capita basis as a result of its dependence on coal-fired electricity generation. But even before the carbon-tax program was fully enacted, Tony Abbott was elected prime minister on a promise to repeal the tax, which he saw, according to the Wall Street Journal, as a “handbrake on the economy," to the tune of $9 billion a year in Australian dollars (about $8.4 billion USD). The law was repealed in July 2014.

In making that choice, Australia focused on the immediate costs of putting a price on carbon emissions. In the United States, a report from the federal Council of Economic Advisers focused on the economic costs of delaying a response to climate change. The report described immediate action as “climate insurance” that would protect against the worst possible impacts. It concluded by noting that "although delaying action can reduce costs in the short run, on net, delaying action to limit the effects of climate change is costly."

Nordhaus acknowledged that any action on climate change involves uncertainty about its economic effects. "We don't actually know how much it would cost to slow climate change because we haven't started doing it," he said. "It's like we're recommending a big dose of some drug for the economy when we've never taken that drug before. We need to know how the economy is going to respond to this—we think we know, but we don’t know for sure."

We also don’t know what will happen without the medicine.

Sterling Professor of Economics, Yale University