Rethinking the Cost of Climate Change

Now a new statistical framework makes it possible to understand just how much climate change could impact markets across the globe.

A newly released paper, published in the journal Nature Climate Change, outlines methodology for using historical climate and economic data to predict how climate change could affect gross domestic product, a common economic performance measure, of countries around the world.

"A Top-Down Approach to Projecting Market Impacts of Climate Change," is co-authored by Derek Lemoine, assistant professor of economics in the UA Eller College of Management, and Sarah Kapnick, physical research scientist for the National Oceanic and Atmospheric Administration at the Geophysical Fluid Dynamics Laboratory.

"If you want to think about the economics of climate change, one of the major questions is 'What are the costs of climate change?'" Lemoine said. "The worse it is, the more we should be doing about it."

As a result of Lemoine and Kapnick's research, two primary insightful findings were revealed.

First, data shows that nearer-term climate change could raise the average rate of economic growth in more affluent countries, while reducing the growth rate in poorer countries.

"Nearer-term climate change may not be that bad — in terms of GDP — for richer countries," Lemoine said. "What countries should be asking is, 'How much do we care about inequality around the world?'"

The second major finding was the correlation between climate variability and economic variability in many countries. When climate change makes weather in regions across the globe more variable, the variability of economic growth also increases.

"As the world warms ... that can actually make GDP more variable, which is a largely unexplored consequence of climate change," Lemoine said.

Rather than using the standard, bottom-up approach of analyzing and aggregating individual sectors, the new prediction framework utilizes a top-down, macroeconomic approach. Kapnick said this offers a new, credible avenue for estimating climate impacts.

"It frees us from making various assumptions about individual sectors of the economy for each country," she said. "This new methodology can be applied to any climate model output. It allows for an independent assessment of economic impacts of climate change from current methods (and) provides another tool in our toolbox for estimating climate change impacts."

Lemoine explained that while the framework uses historical temperature and rainfall data, it does not account for factors such as ecological disruptions or rising sea levels, which could end up being more important than the types of GDP impacts they focus on. For this reason, he envisions that their framework could be used as a starting point on which additional assumptions can be added to develop thorough climate change models and influence climate change policies.

"The major benefit is that we are not introducing a lot of new assumptions," Lemoine said. "With that baseline, anybody else can layer on whatever assumptions they want to make it more comprehensive or long-term."

Uncovering the true costs of climate change is a complicated challenge, but using historical data to predict future impacts offers an empirically grounded model to approaching the task, Lemoine said.

"It's a really hard question because there are a lot of links in the system," he said. "We are really just letting the data speak and projecting that forward to predict near-term climate change impacts."