New Analysis Finds Economic Impact Of Global Heating 6 Times Greater Than Expected

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In 2018, William Nordhaus won the Nobel Prize in economics for his research that showed that an increase in average global temperature of 1 degree Centigrade would lead to a reduction in global economic input of between 1 and 3%. That has been the conventional wisdom on the economic impact of global heating since then, but new research by Adrien Bilal of Harvard University and Diego Känzig of Northwestern University comes to quite a different conclusion.

In a research paper dated May, 2024, entitled The Macroeconomic Impact of Climate Change: Global vs. Local Temperature, they conclude that the economic impact of global heating is six times greater than what Nordhaus said it was. In the introduction, the pair explain, “We reach this conclusion in two steps. First, we rely on a time-series  local projection approach to estimate the impact of global temperature shocks on Gross Domestic Product (GDP).

“This approach exploits natural variability in global mean temperature — the source of variation closest to climate change — which we show to predict extreme climatic events much more strongly than country-level temperature. We find that a 1°C rise in global temperature lowers world GDP by 12% at peak. Second, we use our reduced-form results to estimate structural damage functions in a simple neoclassical growth model. We find that climate change leads to a present value welfare loss of 31% and a Social Cost of Carbon of $1,056 per ton of carbon dioxide.”

The Massive Economic Impact Of Global Heating

Neue Zürcher Zeitung is a Swiss German-language daily newspaper that was founded in 1780. It has a reputation as the Swiss-German newspaper of record and is known for detailed reporting on international affairs. In a story about the economic research by Bilal and Känzig, it says the long term impact on the economy from global heating would be massive — comparable to that during the Great Depression of the 1930s. That, however, was a temporary event (although it did not feel that way to those caught up in it), while climate change will have effects for centuries.

Känzig, who is Swiss, told NZZ, “When we first saw the result, we were shocked.” He and his co-author Adrien Bilal went over the research and tested the model they used several times. But in the end, they became convinced of their result, which is particularly surprising when viewed from an economic perspective. “On the other hand, the result is in very good agreement with research in climate science.” Känzig said. “If you talk to climate scientists, they paint a much more dramatic picture,” than the one presented by William Nordhaus six years ago.

Where does this discrepancy between the prior research and this new study come from? It is a pretty shocking difference, after all. Känzig and Bilal noticed that previous economic model calculations use country-specific weather data to draw conclusions about the economic impact. But that analysis neglects the fact that climate change is a global phenomenon. Country-specific data, for example, does not include the temperature of the oceans, even though it has a strong influence on how storms develop before they move inland.

A Comprehensive Analysis

The overall conclusion from the paper is that extreme weather events such as heat waves, heavy rainfall, or high wind speeds will increase more than previously assumed in the economic models used. The more heat waves there are, the more productivity will decrease, not only for people working outdoors but also for employees in the office. Also, events such as power outages will become more likely. Another new approach in the paper is that it not only analyzes damage caused by reduced productivity, but also capital losses. “Rainfall, floods or storms will cause major damage to infrastructure,” says Känzig. Roads, power lines, and other infrastructure will be destroyed.

This latest research shows that because the potential damage is so high, investments in climate protection are much more worthwhile than previously thought. Climate activists believe this new research could bring about a rethink in international climate policy — for example in terms of investments in climate friendly technologies designed to mitigate the extent of global heating.

Känzig is hoping for this too. “The climate is a topic that is very close to my heart,” he says. At the beginning of his career, he completed internships at the Swiss National Bank and the Bank of England. He actually wanted to research monetary policy, “But then I realized that, given the enormous relevance of climate change, there is too little economic research on the subject,” he said.

Reaction To ‘The Research

Since the paper was published, there has been a lot of agreement within the economic and scientific communities, but there has also been criticism. Some people think that calculations used in this latest model do not take into account the fact that the world is adapting to climate change. According to Känzig, this is an understandable objection. “But nobody can say today how much the world will actually invest in adaptation measures.”

Others criticize the results as being too optimistic because the analysis does not include so-called tipping points — events in which an ecosystem collapses due to warming — which would have catastrophic consequences. Känzig said he remains convinced that the economic damage caused by climate change has so far been greatly underestimated and that any new insights, such as this new study, will only serve to inform people of the seriousness of the impending climate crisis from global heating.

Conclusions About Global Heating & Economics

In the conclusion to their research, the authors write:

“In this paper, we demonstrate that the impact of climate change on economic activity is substantial. We leverage natural climate variability in global mean temperature to obtain=time-series estimates that are representative of the overall impact of global warming. We find that a 1°C rise in global temperature causes global GDP to persistently decline, with a peak loss at 12%. This large effect is due to an associated surge in extreme climatic events.

“By contrast, local temperature shocks used in the traditional panel literature lead to a minimal rise in extreme events and to much smaller economic effects. Together, our results imply a SCC of $1,056/tCO2 and a 31% welfare loss from a moderate warming scenario. These effects are comparable to having a major war fought domestically, forever (emphasis added). Not only do our results indicate that climate change represents a major threat to the world economy, they also have salient consequences for decarbonization policy. Many decarbonization interventions cost between $27 and $95 per ton of CO2 abated. A conventional SCC value of $151/tCO2 implies that these policies are cost effective only if governments internalize benefits to the entire world, as captured by the SCC. However, a government that only internalizes domestic benefits values mitigation benefits using a Domestic Cost of Carbon (DCC).

“The DCC is always lower than the SCC because damages to a single country are less than to the entire world. For instance, under conventional estimates based on local shocks, the DCC of the United States is $30/tCO2, making unilateral emissions reduction prohibitively expensive. Under our new estimates however, the DCC of the United States becomes $211/tCO2 and thus largely exceeds policy costs. In that case, unilateral decarbonization policy is cost-effective for the United States.”

 The Takeaway

Mark Z. Jacobson is a professor of civil and environmental engineering and director of the Atmosphere/Energy Program at Stanford University. He knows a thing or two about this global heating stuff and how to take measures to reduce its impact. He is also a good friend of CleanTechnica, having written several articles for our little community out on the edge of the internet. I asked Professor Jacobson for his take on this latest economics research and he replied, “This study adds to the growing list of studies that suggest that the social cost of carbon and the resulting economic cost damage resulting from climate change are much higher than previously thought.”

Nearly two-thirds of our planet is covered by the oceans. Ignoring the impact of hotter seawater due to global heating is simply going to lead to unrealistic results. People may argue with the conclusions Bilal and Känzig came to — is the social cost of carbon over a thousand dollars a ton or is it only $574.22? Such questions are like asking how many angels can dance on the head of a pin. The primary benefit of this study is that it forces us to consider the entire Earth, not just its land masses, when considering the economic impact of global heating. For that alone, the pair deserve a Nobel Prize of their own.