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January 27, 2015
Social Cost of Carbon to Threaten Global Economy
    by Robert Kropp

A report published in the journal Nature Climate Change warns that worsening climate change impacts could lead to dramatic increases in the social cost of carbon unless short-term mitigation measures are taken.

A 2013 report by leading environmental data provider Trucost estimated that unpriced natural capital costs amounted to at least $7.3 trillion in 2009, or 13% of global economic output. Greenhouse gas (GHG) emissions accounted for $2.7 trillion of the overall cost, followed by water use ($1.9 trillion) and land use ($1.8 trillion).

And in a widely cited 2011 report, Mercer warned institutional investors that the economic cost of climate policy could lead to as much as a 10% increase in portfolio risk over the next 20 years.

Mercer has announced that it plans to update that seminal report during the 2015 calendar year.

In addition to the reports cited above, numerous academic papers have been published in recent years that attempt to quantify the potential financial risks associated with worsening climate change effects. One such paper, entitled Temperature impacts on economic growth warrant stringent mitigation policy, was published recently in the journal Nature Climate Change.

Authored by Frances Moore and Delavane Diaz of Stanford University, the paper notes that many previous studies “have been criticized for lacking a strong empirical basis for their damage functions, which do little to alter assumptions of sustained gross domestic product (GDP) growth, even under extreme temperature scenarios.” In order to avoid this pitfall in their paper, the authors address the rate of GDP growth via two pathways: total factor productivity (TFP) growth and capital depreciation.

The study employs the Dynamic Integrated Climate-Economy (DICE) model developed by William Nordhaus for the Environmental Protection Agency (EPA). “Previous work has demonstrated that DICE results are sensitive to the inclusion of growth impacts,” the authors report, “but no previous studies have calibrated these damages using empirically grounded results.” Using empirical estimates, the authors find that climate change is likely to have the most negative economic impacts on the growth rates in poor countries.

Furthermore, “Temperature effects on growth rates imply much larger climate damages,” the authors state. “More stringent mitigation than is justified by transient impacts on economic output are probably robust to more realistic modeling of mitigation costs.”

It doesn't take a scientist to understand that the most devastating effects of climate change will impact developing nations first, or that delaying serious mitigation efforts will both make the effects worse and the cost of dealing with them far more expensive. And I'm not an economist either, although for two years I held a fellowship with the United Nations' Principles for Responsible Investment (PRI), during which time I decoded academic studies like that of Moore and Diaz for lay readers. Studies such as the one presently under consideration may not gain the headlines afforded reports from the Intergovernmental Panel on Climate Change (IPCC), but they do chip away at the inaction on the issue that is too often practiced by national governments and capital markets.

“Optimal climate policy in this model stabilizes global temperature change below 2 degrees Celsius by eliminating emissions in the near future and implies a social cost of carbon several times larger than previous estimates,” the authors assert. “Optimal mitigation rates are much lower if countries become less sensitive to climate change impacts as they develop.”


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