How Is Climate Change Affecting The Economy – Ten Facts About Climate Change and the Economics of Climate Policy, a joint report by The Hamilton Project and the Stanford Institute for Economic Policy Research

Ryan Nunn, Ryan Nunn Assistant Vice President for Applied Research in Community Development – Federal Reserve Bank of Minneapolis @ryandnunn Jimmy O’Donnell, Jimmy O’Donnell Former Senior Research Assistant – The Hamilton Project @JFOdonnell13 Jay Shambaugh, Under Secretary for International Affairs – U.S. Department of the Treasury @JayCShambaugh Lawrence H. Golder, LHG Lawrence H. Golder Senior Fellow – Stanford Institute for Economic Policy Research (SIEPR) Charles D. Kolstad and CDK Charles D. Kolstad Senior Fellow – Stanford Institute for Economic Policy Research (SIEPR) Xianling Long XL Xianling Long Research Assistant – Stanford Institute for Economic Policy Research (SIEPR)

How Is Climate Change Affecting The Economy

How Is Climate Change Affecting The Economy

The world’s climate has already changed measurably in response to the accumulation of greenhouse gas (GHG) emissions. These changes as well as potential future disruptions have prompted intensive research into the nature of the problem and possible policy solutions. This document aims to summarize what is known about both, adopting an economic approach that focuses on how to achieve ambitious climate goals at the lowest cost.

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There are significant uncertainties surrounding both the extent of future climate change and the extent of the biophysical consequences of such change. Despite the uncertainty, climate scientists have reached a strong consensus that in the absence of measures to significantly reduce GHG emissions, climate change will have significant, long-lasting effects on many of Earth’s physical and biological systems. Central or intermediate estimates of these effects are significant. Furthermore, there are significant risks associated with low probability but potentially catastrophic outcomes. Although efforts to reduce GHG emissions have focused only on moderate outcomes, economists argue that uncertainty and associated risks justify more aggressive policy action than would otherwise be warranted (Weitzman 2009; 2012).

Scientific consensus is expressed through summary documents offered every several years by the United Nations-sponsored Intergovernmental Panel on Climate Change (IPCC). These documents show projected impacts under alternative Representative Concentration Pathways (RCPs) for GHGs (IPCC 2014). Each of these RCPs represents different GHG pathways over the next century, with higher numbers associated with higher emissions (see Box 1 for more information on RCPs).

The expected trajectory of GHG emissions is important for accurately predicting the physical, biological, economic and social impacts of climate change. RCPs are scenarios selected by the IPCC, which represent scientific consensus on likely pathways for GHG emissions and concentrations, emissions of air pollutants, and land use to 2100. In their most recent assessment, the IPCC selected four RCPs to estimate and analyze. We describe the RCPs and some of their assumptions below:

The IPCC does not assign probabilities to these various emission pathways. It is clear that the pathways require different changes in technology and policy. RCPs 2.6 and 4.5 will likely require significant technology advances and policy changes. It seems highly unlikely that global emissions will follow the path specifically described in RCP 2.6; Annual emissions will have to start decreasing in 2020. In contrast, RCPs 6.0 and 8.5 represent scenarios in which future emissions follow past trends with little or no change in policy and/or technology.

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The four RCPs show different impacts on global temperatures. Figure A shows the projected increase in temperature (relative to preindustrial levels) associated with each RCP scenario. Figure 1 suggests that only significant reductions in emissions under RCPs 2.6 and 4.5 could stabilize average global temperature increases at or around 2°C. Many scientists have suggested that it is critical to avoid a temperature increase of more than 2°C or even 1.5°C—a large increase in temperature would cause extreme biophysical consequences and associated human welfare costs. It is worth noting that economic assessments of the costs and benefits of policies to reduce CO2 emissions do not recommend policies that limit temperature increases to 1.5°C or 2°C. Some economic analyzes suggest that these temperature targets would be too stringent in the sense that they would involve financial sacrifices that outweigh the value of climate-related benefits (Nordhaus 2007, 2017). Other analyzes support these goals (Stern 2006). Under scenarios with little or no policy action (RCPs 6.0 and 8.5), average global surface temperatures could rise by 2.9 to 4.3°C above pre-industrial levels by the end of this century. One consequence of temperature rise under these conditions is that sea level will rise by 0.5 to 0.8 m (Figure B).

The extent of climate change is a function of atmospheric stocks of CO2 and other greenhouse gases, and stocks at any point in time reflect cumulative emissions up to that point. Thus, the contribution of a given country or region to global climate change can be measured in terms of its cumulative emissions.

Until the 1990s, historical responsibility for climate change rested primarily with more-industrialized countries. Between 1850 and 1990, the United States and Europe alone produced nearly 75 percent of combined CO2 emissions (see Figure C). Such historical responsibility is a primary issue in the debate about how much of the burden should fall on the shoulders of developed versus developing countries to reduce current and future emissions.

How Is Climate Change Affecting The Economy

Although the United States and other developed nations are responsible for a large share of the current excess concentration of CO2, the relative contributions and responsibilities are changing. As of 2017, the United States and Europe accounted for just over 50 percent of the cumulative CO2 emitted into the atmosphere since 1850. One reason for this sharp decline (as shown in Figures C and D) is that CO2 emissions from China, India, and other developing countries have grown faster than emissions from developed countries (although among major economies, the United States has the highest per capita emissions rate in the world and is higher than China and India). is far ahead [Joint Research Center 2018]). Therefore, it appears that to avoid the worst effects of climate change, efforts to reduce emissions will require historic contributors—the United States and Europe—as well as more recently developing countries such as China and India.

Economic Development In An Era Of Climate Change

Nations’ pledges under the Paris Agreement suggest significant reductions in emissions, but not enough to avoid 2°C warming

In light of the recent increase in global emissions, as well as the potential rise in emissions, temperature and sea level under RCPs 6.0 and 8.5, the future of climate change may look bleak. Failure to act on any climate policy would result in annual emissions growth rates well above those limiting temperature increases beyond the 1.5°C and 2°C (Figure E) focal points. As shown earlier, cost-benefit analyzes in different economic models lead to different conclusions about whether it is optimal to limit temperature increase to 1.5°C or 2°C (Nordhaus 2007, 2016; Stern 2006).2 Fortunately, countries can take steps to combat climate change. , which is referred to in Figure E as “current policy” (which includes policy commitments made prior to the 2015 Paris Agreement). A comparison of “no climate policies” and “current policies” shows that the emission reductions implied by current policies will reduce global temperatures by approximately 1°C by the end of the century. A large part of this low emission pathway is attributable to actions taken by states, provinces and municipalities around the world.

Further reductions are implied by the 2015 Paris Agreement, under which 195 countries pledged to take additional steps. If Paris Agreement pledges are met, global temperatures in 2100 will be kept 0.5°C below “current policy” and about 1.5°C below “no climate policy” (see Figure E). Although this is seen as a positive outcome, these policies will allow temperatures in 2100 to remain 2.6 to 3.2°C above pre-industrial levels – significantly higher than the 1.5 or 2.0°C targets that form the centerpiece of the policy. discussion

In the following set of facts, we describe the costs of climate change to the United States and the world, as well as potential policy solutions and their associated costs.

Chart: Environment Or Economy?

The material changes described in the preamble will have a significant impact on the US economy. Climate change will affect agricultural productivity, mortality, crime, energy use, storm activity, and coastal flooding (Hsiang et al. 2017).

In Figure 1 we focus on the economic costs imposed by climate change for various cumulative increases in temperature in the United States. It is immediately apparent that economic costs will vary greatly depending on the extent to which technological and policy changes limit global temperature rise (above pre-industrial levels). At a temperature of 2°C by 2080–99, Hsiang et al. (2017) project annual losses for the United States to be 0.5 percent of GDP over the years 2080–99 (solid line in Figure 1). In contrast, if global temperature rises as large as 4°C, the annual loss would be about 2.0 percent of GDP. Importantly, these effects increase disproportionately as temperatures increase: for the United States, increasing mortality as well as shifts in labor

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