Economists can't predict the economic effects of climate change

People often wonder what use are economists. In terms of climate change, this is a particularly appropriate question.

Economists can't predict the economic effects of climate change

Most economists are not very absorbent, and cannot be used effectively as flood defences.

Nor can they be effectively deployed to scrub carbon from the atmosphere, and, as a profession we have a general tendency to produce hotter rather than cooler air, thus rendering us particularly useless at cooling.

However, all is not lost.

The annual jamboree for economists and allied professions is the Allied Social Sciences Association meeting.

This takes place ridiculously early in January every year, and is a combination of a showcase for research and a mass hiring fair for PhD students wishing to enter into economics posts.

One of the highlights is always the presidential address by the incoming president of the American Economic Association.

From a climate perspective, this year was quite interesting, with a significant number of papers beginning to focus in on the costs of not doing anything to avert ongoing global warming.

In 2015, the president of the American Economic Association produced a proposal, in his presidential address, for what he termed the “climate club”.

This was a grouping of nations, similar perhaps to trade or financial groupings like the original European Economic Community. The crucial aspect is that club members would undertake coordinated, but quite costly, actions to reduce the impact of global warming.

Those outside the club would be subject to very significant tariffs and other penalties when wishing to trade or otherwise do business with members of the club.

This year, a number of papers were presented, both frightening and fascinating, which looked at global climate catastrophe. In assessing the impact of climate change, economists are at a significant disadvantage. Our tools and models are generally not very good at very long horizons.

One analysis suggests that the economic costs of preventing this collapse are relatively modest, but rapidly rise, due to the fact that there is a threshold after which the collapse becomes inevitable.

A further paper looks at the potential economic impact of mass acidification of the seas.

This happens when the oceans absorb more and more carbon dioxide, contracting the seawater into diluted acid. This would wipe out current reefs, including the Great Barrier Reef, and result in major changes in commercial fisheries.

The estimates of the costs globally are small, because of the potential for aquaculture to adapt.

A third paper suggests that the shutting down of what is called thermohaline circulation — the Atlantic conveyor that circulates cool and warm water around the oceans — would not necessarily be bad for Europe.

If the Gulf Stream were to shut down, this would of course result in much cooler temperatures in Europe. But as the world is warming anyway, maybe the two will offset each other?

There would of course be significant effects, including greatly increased warming. But, in simple terms, this would result in the desertification of the Amazon and perhaps the spread of the Sahara further south.

But as these areas are relatively poorer, the economic analysis suggests that the impact would be limited.

All three of these are ‘correct’ in so far as they go, but they seem to me to have one fatal philosophical flaw. They are linear.

We simply have no idea, economically, what the effect would be of mass oceanic acidification.

Economics is a great tool for evaluating economic issues.

When it strays into the area of long-term climate, it is at sea.

We barely understand the costs of action, and have no real clue, even to orders of magnitude, of the costs of inaction.

When economists make sweeping statements on the likely costs of geological, climatological, or metrological catastrophes, these will be used, shorn of caveats, by short-sighted politicians.

Brian Lucey is professor of finance at the School of Business, TCD

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