The costs of climate change: Which curve to follow?
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).