Economic Models under Scrutiny: Critics Argue They Fail to Capture the Full Extent of Climate Damage

Economists Urged to Take a Broader, Cross-Discipline View to Assess Climate Impact on the Economy

As international climate talks loom in Dubai, economists are busy updating their estimates of the economic consequences of global warming. However, critics argue that these estimates, often calculated down to decimal places, are flawed due to the limitations of economic models. Detractors claim that these models fail to capture the full extent of climate damage, potentially providing an excuse for policy inaction. This article explores the shortcomings of current economic models and the need for economists to adopt a broader, cross-disciplinary approach to assess the impact of climate change on the world economy.

The Limitations of Integrated Assessment Models (IAMs)

Integrated assessment models (IAMs) are the primary tools economists use to draw conclusions about the economic implications of climate change. These models rely on the theory of general equilibrium, which assumes that an economy will reach a new balance after an external shock. However, critics argue that climate change is fundamentally different from other shocks because its effects are long-lasting and irreversible. They contend that the assumptions underlying IAMs are flawed, rendering their results unreliable.

One particular issue with IAMs is their use of a quadratic function to calculate GDP losses based on temperature change. Critics argue that this choice underplays the likely impact, especially if the planet reaches environmental tipping points where damage occurs at an accelerating rate. Furthermore, different IAMs produce divergent results, making it challenging to interpret and compare the findings.

Questioning the Credibility of Economic Models

Critics point to the discrepancy between economic models and the tangible impacts of climate change witnessed in recent years. Record-breaking temperatures, droughts, floods, and wildfires have already caused billions of dollars in damage. Yet, some economic models suggest that the economic harm caused by climate change will be less severe than the COVID-19 pandemic or the 2007-2009 financial crisis. These implausible conclusions raise doubts about the credibility of economic models in assessing climate-related risks.

Professor Steve Keen of University College London argues that economists should check their results against common sense and prevailing climate science. He emphasizes the need for economists to broaden their focus beyond IAMs and consider energy models, cities, and natural capital to gain a more comprehensive understanding of the structural changes required to address climate change.

The Call for a Broader Approach

Advocates of a broader approach argue that IAMs are too narrow in scope to capture the extreme risks posed by climate change. Economist Nicholas Stern suggests that a more comprehensive analysis, incorporating energy models, cities, and natural capital, would provide a better guide for investment decisions to address climate change effectively. He believes that a deeper understanding of the structural changes required is essential.

Finance Watch, a Brussels-based public interest NGO on financial issues, calls on economists to collaborate with climate scientists to develop more meaningful and reliable results. The European Union, which positions itself as a climate leader, plans to conduct a major study on climate risks in early 2025. This study presents an opportunity for economists to adopt a broader approach and produce results that align with scientific consensus.

Conclusion:

As economists update their estimates of the economic impact of climate change, critics argue that the current economic models are inadequate for capturing the full extent of climate damage. Integrated assessment models (IAMs) have limitations that prevent them from accurately representing the risks and consequences of climate change. A broader, cross-disciplinary approach that incorporates energy models, cities, and natural capital is necessary to provide a more comprehensive understanding of the structural changes required to address climate change effectively. By collaborating with climate scientists, economists can develop more meaningful and reliable assessments that align with scientific consensus and guide policy decisions.


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