Modelling the energy and economic damage of climate change

Steve Keen

The following is first draft of a submission by Prof Steve Keen to the Australian Government House Standing Committee on the Environment and Energy, and is reproduced with the author’s permission.

To the House Standing Committee on the Environment and Energy.

I am Professor Steve Keen, currently a Distinguished Research Fellow at the Institute for Strategy, Resilience and Security (www.isrs.org.uk) of University College London. My research activity recently broadened from the economics of finance and instability to the energy and economics of climate change. [1]

As part of my research on economics of climate change, I have reviewed the literature on the economic impacts of climate change, focusing in particular on the work of 2018 Nobel Prize winner William Nordhaus and his research associates. This research predicts relatively small economic damages from climate change. To cite a 2018 paper by Nordhaus after he was awarded the Nobel Prize, “Including all factors, the damage equation in the model assumes that damages are 2.1% percent of global income at 3°C warming and 8.5% of income at 6°C warming.” (2018: https://doi.org/10.1257/pol.20170046, p. 345).

If these estimates are accepted, then Climate Change, though significant, would not have a major impact on the economy. These predictions are for a fall in the rate of per capita economic growth from roughly 1.5% per year to 1.48% per year (Nordhaus 1994, https://www.jstor.org/stable/29775100, p. 48). These estimates imply that a gradual approach to climate change mitigation – such as that envisioned in the Climate Act’s target of zero carbon net emissions by 2050 – will suffice.

Unfortunately, the research on which these sanguine estimates rely is highly flawed. I will give two instances.

1. The estimates assume – they do not prove, they simply assume – that 87% of GDP will be unaffected by climate change (“Our estimate is that approximately 3% of U.S. national output is produced in highly sensitive sectors, another 10% in moderately sensitive sectors, and about 87% in sectors that are negligibly affected by climate change” (1991, http://www.jstor.org/stable/ 2233864, p. 930)
2. They also assume – but not prove – that the weak relationship between temperature and income today can be used to predict the impact of climate change. For that reason, the co-editor of the economic section of the 2014 IPCC Report Richard Tol recently remarked on Twitter that “10K is less than the temperature distance between Alaska and Maryland (about equally rich), or between Iowa and Florida (about equally rich). Climate is not a primary driver of income.” (https://twitter.com/RichardTol/status/ 1140591420144869381?s=20)

My full refereed paper on this fatally flawed research is available at https://www.tandfonline.com/doi/full/10.1080/14747731.2020.1807856. Its abstract is:

“Forecasts by economists of the economic damage from climate change have been notably sanguine, compared to warnings by scientists about damage to the biosphere. This is because economists made their own predictions of damages, using three spurious methods: assuming that about 90% of GDP will be unaffected by climate change, because it happens indoors; using the relationship between temperature and GDP today as a proxy for the impact of global warming over time; and using surveys that diluted extreme warnings from scientists with optimistic expectations from economists. Nordhaus has misrepresented the scientific literature to justify the using a smooth function to describe the damage to GDP from climate change. Correcting for these errors makes it feasible that the economic damages from climate change are at least an order of magnitude worse than forecast by economists, and may be so great as to threaten the survival of human civilization.”

Given this knowledge, while I support the 2050 Net Zero target, I wish to advise the Committee that this in all likelihood seriously underestimates the time we have left to avoid catastrophic climate change. Rather than 30 years, we may well have as few as ten. That is the import of scientific research into climate change. At present, virtually all economic research on this topic should be ignored by the Committee, with the exception of the important work of the now deceased Martin Weitzman (see https://academic.oup.com/reep/article- abstract/5/2/275/1565182).

Sincerely, Steve Keen

1. My research profile at Google Scholar is: https://scholar.google.com/citations?user=hbcdga0AAAAJ&hl=en