Many unquantified, poorly understood, and often deeply uncertain risks can and should be included in economic evaluations and decision-making processes, the study says
Economic risks from climate change are likely to be greater than routinely calculated. This is because economic models routinely exclude potentially devastating but hard-to-quantify threats like the collapse of ocean circulation currents, civil breakdown and major weather disasters, according to a study published in the peer-reviewed journal Nature.
The study noted that while governments widely use economic models of climate change to understand the risks from continued warming and the potential economic benefits of reducing emissions, these economic models ignore a wide range of risks from climate change. This means the threat to society of slow action to reach net-zero emissions is likely to be higher than governments have anticipated.
Quantifying the risks of climate change for people, companies, and governments requires a challenging combination of science, biology, economics, and other fields. The study showed how some important risks get lost in this process.
Identifying the missing risks
Risks that cannot be quantified precisely are excluded from models—even when they are “potentially crippling”—for example the risk that climate change will increase and prolong violent conflict.
“Economic models of climate change are often telling governments to only pay attention to the most likely outcomes. That’s similar to assuming there’s no need to prepare for pandemics and terrorist attack. Responsible governments know it’s their job to anticipate unpredictable but potentially devastating events,” said Dr James Rising, lead author, the University of Delaware.
Such potentially catastrophic physical changes that could be caused by further warming—like the collapse of the Atlantic Ocean circulation current—are typically excluded from economic models because the social and economic consequences have not been calculated.
Another ‘missing risk’ the authors identified is the economic damage caused by extreme weather events. Although the damage from catastrophes like the recent floods in Pakistan—which has been attributed, in part, to climate change—is evident, economic models ignore the risk of damaging one-off events, focusing instead on long-term trends.
Franziska Piontek, a co-author, said, “Increasing severity of extreme events like floods, wildfires or droughts can be attributed to ongoing climate change and is expected to intensify. The recent Pakistan floods caused losses of $30-40 billion according to the Pakistan government, equivalent to about 10% of the country’s GDP. This alone far exceeds costs of combined climate change impacts estimated with current economic models for the country, highlighting how far these models potentially underestimate climate change costs.”
The study also noted that economic models fail to take into account the possibility of climate change creating risks that have not yet been anticipated. Former US Defence Secretary Donald Rumsfeld warned that security officials should pay attention to known unknowns and unknown unknowns, as well as the threats they knew about. Climate economic models can tell us the costs of the known knowns but they often ignore the known unknowns and particularly the unknown unknowns.
“Costing the consequences of climate change involves combining knowledge from diverse sources of expertise. At the same time many individual aspects are only just beginning to be understood. To respond effectively it is important that we recognise the complexity of this task and present the best possible assessments to politicians and the public. This study systematically explores and categorises the risks that are typically overlooked – and sets out a route for climate economics to address them,” explained Prof David Stainforth who co-authored the study.
Marco Tedesco of the Columbia Climate School, who co-authored the study, said, “As in the physical systems, feedback and non-linearity are crucial. These factors are currently not accounted for in the economic estimates. Moreover, many risks are completely ignored, putting their probability to occur to zero, which is not the case. Until the missing risks in climate economic models are resolved, governments will continue to be misinformed about the costs of climate inaction. It is likely much higher than economic models tell them.”