The costs of climate change: Which curve to follow?

The DICE model developed by Professor William Nordhaus of Yale University (winner of the 2018 Nobel Prize for Economics) is certainly one of the first integrated assessment models to explore the interactions between the economy and climate, but it is not without questions. For example, would the effects of a 4°C warming really be so negligible to the point of costing only a loss of 4% of global GDP? Therefore, in parallel, other models have emerged indicating that the impacts of climate change are likely to be much more significant. The most well-known works to date are the Dietz and Stern model (2014) and the Weitzmann model (2012).

On the graph below, it is possible to compare the three models cited by looking at the potential cost of climate change (as a percentage of global GDP, on the vertical axis) as a function of an increase in global temperature (on the horizontal axis).

Below, we compare these three models by looking at the potential cost of climate change (as a percentage of global GDP, on the vertical axis) as a function of an increase in global temperature (on the horizontal axis).

Climate Change Damage Functions

The first information that emerges from this comparison is that the Dietz and Stern (DS) and Weitzmann (W) models integrate the possibility of threshold effects do not seem to be as effective in the Nordhaus (N) approach. Indeed, between an increase of 2°C and 4°C, the DS curve goes from a cost (GDP loss) of 2% to 50% and the W curve goes from a cost of 1% to 9%, while the N model follows an almost linear relationship from 1% to 4% of global GDP.

While the award of the Nobel Prize to an environmental economist was a first step towards more widespread recognition of the economic costs of climate change, this graph raises the question of the Nordhaus’s assessment potentially underestimating the risks of climate change. If we follow the Nordhaus curve further, we see that a (quite hypothetical and extreme) 11°C increase in global temperature would "only" cost 25% of global GDP. As underlined by a recent article from Bob Ward (LSE Professor), the model assumes that damages are a quadratic function of temperature change that does not include sharp thresholds or tipping points, yet climate risks are precisely a source of instability and a matter of potential shocks through non-linear evolutions, as suggested by scientific climate research.

Félix Fouret, Carbon/Climate Analyst

Sources: Beyond Ratings, Bob Ward (LSE), Covington and Thamotheram (2015).

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