E6: An economist's guide to climate change

Madison Goldberg: I’m Madison Goldberg, and you’re listening to Ask MIT Climate. Today, we’re asking a question that’s long attracted the attention of economists: How much should we be willing to pay to stop climate change?

So, spoiler alert: We’re not going to come up with a perfect answer. But by exploring how economists and climate scientists have tried to grapple with the dollar costs of a warming planet, we can learn a lot about the risks we’re facing and the policies designed to protect against them.

Our guest is Jennifer Morris.

Jennifer Morris: I am a principal research scientist at MIT in the Center for Sustainability Science and Strategy, or CS3. I'm an economist. And I'm thinking about ways that changes in climate might feed back to impact the economy.

MG: Dr. Morris is going to help us navigate the crossroads of climate science and economics. And she’ll explain why, even though pinning down the cost of climate change is complicated—really complicated—we can’t afford to ignore it.

Okay, we’re going to try to spare you—and also me—the economics jargon in this episode. But we do have to start off with one important definition.

JM: There's a term that is often used called the social cost of carbon. So this is, what is the dollar cost we can assign to a unit of carbon emissions that are released? So when we pollute, what does that cost for the economy?

MG: Here’s the general idea. Things that help keep climate-warming carbon out of the air, like building solar farms or planting forests, have a clear dollar cost. But there are also costs to not doing those things: higher risks of extreme weather, more days of scorching temperatures. The social cost of carbon translates those harms into dollars and cents.

JM: So then you can have a clearer picture of comparing costs and benefits, and making decisions about the types of projects you want to invest in.

MG: Governments have used the social cost of carbon to write policies that affect entire economies. In Canada, it was used to set the rate of a tax on carbon pollution. In the United States, it’s informed regulations on climate pollution from cars and trucks.

We want these policies to be overall good for the economy. So by baking the social cost of carbon into regulations, we ensure that every dollar we spend to fight climate change saves us more than a dollar in reduced harms.

That is, if we get this number right. Which, it turns out, is easier said than done.

JM: In the literature, we see such a wide range of numbers for the economic impact of climate change, for the social cost of carbon. It's very amenable to bouncing around and makes it very easy to kind of pick and choose the numbers you want to use.

MG: And the numbers do bounce around. When the U.S. government first calculated a social cost of carbon in 2010, its middle-of-the-road estimate was that each ton of carbon dioxide cost the economy $21. In the latter half of the Biden administration, the Environmental Protection Agency had it pegged at $190. Recently, the Trump administration cited a lack of clarity in the science, among other things, as a reason for scrapping the use of a social cost of carbon altogether.

So let’s dig into this. How do economists put a price tag on climate change? And how should we make plans when that cost is uncertain?

In the 1990s, the economist William Nordhaus came up with a way to answer those questions that has influenced science and policy ever since.

JM: Bill Nordhaus was really the pioneer in this space. Nordhaus built—it's still commonly used. It's called the DICE model. It was really kind of groundbreaking, because that was the first time that these negative consequences of climate change were purposely put into economic models to forecast how climate change would affect the economy.

MG: You can think of DICE and its successors as picking up where climate models leave off. Climate models estimate how much our pollution heats the Earth, and how weather patterns and sea levels are affected by that warming. But then…

JM: We need to go from climate change to physical impacts. Does higher temperature mean we can't grow crops as well? Does it mean we have issues with our coastal infrastructure? Does it mean we need to use more energy for air conditioning?

MG: With the model, you can look at how those impacts unfold over time and through the global economy.

JM: These climate impacts aren't like in a bubble. They propagate, they spread. So if you put in the model, hey, labor in agriculture is going to be hit hard, you now have less labor productivity than you did before, then the model will make projections that, hey, maybe we're not going to pursue as much agriculture here anymore because it's now just too expensive. Or we better invest in a lot more capital, like irrigation machinery that can do more of the work.

MG: These ripple effects are important. Climate change doesn’t just come down like an asteroid, wrecking everything in one blow.

JM: If over time we start expecting more of these heat events, we're not going to just keep doing the same thing, right? We're going to plant different crops. We're going to shift timing of when we plant them.

MG: All this adaptation helps blunt the costs of climate change—but if we only look at that dollar cost, we miss a lot of pain under the surface.

JM: Adaptation is not costless. There are real world impacts, and they could take the form of laborers being replaced more with machines that aren't affected by heat as much. Or you have to shift where you're working. But if you're saying, well, hey, you're not going to be able to grow corn well in the Corn Belt anymore, that can be quite devastating for that local economy.

MG: So, as you can tell, these models have a lot of moving parts. And as we think about why there’s so much uncertainty in this research, it’s useful to ask what those parts are.

JM: There's, I would say, like five climate impacts that are overwhelmingly studied. So these include the temperature impact on mortality, on labor productivity, on agricultural yields, on energy demand, and on like, sea level rise, coastal infrastructure. But we know that there are a lot more impact categories that matter.

MG: For instance, these models mostly deal with slow-moving changes, like in average temperature and rainfall. Dr. Morris says they have yet to fully capture extreme events, like hurricanes or wildfires.

Or what if climate change affects things more fundamental than labor markets and real estate?

JM: Some of these potentially really big players, crime, migration, conflict, we don't really know how to quantify them.

MG: If increasing drought forces people to move, that’s bound to have economic impacts—but it’s really challenging to estimate those. You might also feel like that’s the wrong question to ask when we’re talking about huge disruptions to people’s lives. After all, many of the things we value most feel really hard—if not impossible—to put in terms of dollars and cents.

JM: Thinking of areas like biodiversity or ecosystems, it's easy to ignore those, because like, those aren't going to go into GDP numbers.

MG: But if climate change robs our planet of species, that’s part of its cost.

And then, of course, there’s the toll of climate change in human lives. Economic models can capture what mortality means for the workforce and buying power, but obviously that’s nothing compared to what these losses actually mean to us.

JM: When you're talking about mortalities, valuing that becomes in some ways a human judgment, ethical question. And I think that's why a lot of the non-market impacts haven't been incorporated as much.

MG: With so many missing pieces, there’s reason to suspect these models underestimate the costs of climate change. You might also start to wonder if zeroing in on a dollar number is all that useful. And, actually, you’d be in good company. In the late 2000s, the economist Martin Weitzman took a look at the climate models that underpin all this research and concluded that they called for a totally different approach.

JM: The Weitzman argument is that when we think about expected damages of climate change, there’s these very small chances of devastating, like tipping point events happening, that would be catastrophic.

MG: This is something climate models have suggested for decades: At certain levels of warming, there’s a small—but nonzero—chance that climate change swiftly accelerates, raising the world’s temperature to heights whose effects are very hard to predict. We don’t have estimates of what these scenarios would cost, just a profound sense that we don’t want to find out.

JM: So once you're in that world, he argues that the typical cost benefit analysis doesn't work. So he kind of pushes for more of a precautionary principle where that uncertainty shouldn't mean do nothing. The uncertainty should lead us to taking action so we don't end up in that really bad space.

MG: In this view, climate policy isn’t about doing exactly enough to balance costs and benefits. It’s more like buying insurance against catastrophe—the same way you would against a house fire or a car crash.

So, have we learned anything from economic modeling at all?

Well, as the statistician George Box said, all models are wrong, but some are useful. Even if the dollar figures they produce are imperfect, these models can still reveal things like which economic sectors, and which regions of the world, are especially vulnerable. Because climate change doesn’t affect everyone, or everywhere, the same way.

JM: Africa and the Middle East, as well as Southeast Asia, commonly show up as some of the biggest hit places. And a lot of that is due to the climate piece. Higher temperature impacts. But then when you get to economic impacts, you're adding on the vulnerabilities in those places, where so much of their economy is agricultural based, so if you start having bad impacts of climate change on your agricultural yields, it's like, it can become devastating in those places.

Sometimes in this space, it makes people uncomfortable to acknowledge that in some places climate change can have some benefits. But I think it's unfair to not point those out as well. Some work that we've done on the impacts of climate change on labor productivity show large gains in like, Canada and Russia.

But even if there are some benefits we might see along the way, overall, the economic impacts will be negative. How negative is the big question.

MG: And yes, it’s a very hard question. And it’s reasonable to look for solutions that don’t rest on answering it. You might decide, like Martin Weitzman, that we should phase out climate pollution as fast as we can, to buy insurance against disaster.

There’s also the European Union’s approach. Polluters are charged for every ton of carbon they emit, but the price isn’t set by pinning down a social cost of carbon. Instead, the EU sets a cap on pollution, and the price rises and falls as needed to stay under that limit.

You could also accept that no social cost of carbon is going to be spot-on, and still believe that picking a cost somewhere in the ballpark of good-faith estimates will offer us a better future than ignoring the risks of climate change.

JM: Maybe that’s in the realm of a hundred or two hundred dollars per ton of CO2. Maybe you start lower and you kind of build your way up there over time. If nothing else, it's forcing us to say that there is a cost to emissions.

MG: As for throwing up our hands and saying that we shouldn’t regulate or tax climate pollution at all, because we don’t know exactly what it costs… Well, that’s actually pretty different from acknowledging scientific uncertainty. It’s more like saying that the cost is exactly zero. And as hard as it is to predict the harms of climate change, that’s one number we can be confident is wrong.

JM: Even if we don’t know what the social cost of carbon is, the optimal carbon tax is certainly not zero. And the types of consequences we would get by kind of overinvesting in action have a lot of benefits, right? So is it going to encourage more renewable energy than we otherwise would have built? Well, who cares? That's great. Like we have cleaner energy, less air pollution, like, the upside, downside risks are not the same.

If we can identify things that are easy, low cost and reduce emissions, those seem like no brainers. I think that's where we can maybe best inform decision making.

MG: Ask MIT Climate is the climate change podcast of the Massachusetts Institute of Technology. Aaron Krol is our executive producer, and the writer for today’s episode. David Lishansky is our sound editor and producer. Michelle Harris fact-checks our episodes. The music is by Blue Dot Sessions. And I’m your host and associate producer, Madison Goldberg.

Many thanks to Dr. Jennifer Morris for speaking with us. You can find more Ask MIT Climate at climate.mit.edu, or find us on TikTok, Instagram, and Youtube @askmitclimate. And if there are other climate topics where you’re wondering if everything adds up, send us your questions at askmitclimate@mit.edu.