How much will climate change impact the economy? I don’t know (Part II)

This is a follow up to last week’s piece critiquing an article by Keen et al from 2021, a debunking of the seminal work of William Nordhaus, best represented in a 2018 paper.  Nordhaus’ modeling suggests global economic damage will amount to 2% of income at 3°C, and 7.9% at 6°C.

Last week’s piece was focused on tipping points, which are theoretical thresholds developed by scientists that suggest accelerations in the deleterious effects of climate change as temperatures climb.  I pointed out that Keen et al are assuming that the human economy will be unable to adapt or to migrate in the face of these accelerations and thus that economic damage will be far higher than suggested by Nordhaus.  

The empirical evidence thus far suggests that, in terms of global GDP, the world economy has been able to cope with the range of pressures wrought by 1.5°C of warming.  If the next 1.5°C are going to be catastrophic, we should be able to see some significant signs of strain in the current data.  Keen et al make no effort to empirically identify the effects they theorize.  

Of course the existence of the tipping points themselves is founded in solid empirical foundations.  Scientists have, for example, studied the loss of polar sea ice in detail and performed diligent research to understand the depletion of Amazonian rainforest and its effect on atmospheric greenhouse gas levels.  I have no inclination or ability to challenge these findings, indeed my entire argument is based on strict empirical principles.

The question is not whether extreme temperature increases will make human habitation difficult or impossible in large parts of the globe, but whether humanity has the capacity to adapt to these extreme – but incremental – changes.  The rapid economic developments of the 20th century, for example, coincided with a period during which large parts of the world were effectively uninhabitable, most notably Northern Canada, Siberia, and almost the entirety of central Australia (hopefully we can all agree to set aside Antarctica).  Keen et al even concede that some parts of the world’s land area will be opened up to habitation as temperatures continue to rise:

“When global warming changes the mean climate state, some regional climates are eliminated while new climates are introduced, shifting the distribution of regional climates across the face of the Earth.  Of course, not all climate shifts would be regionally detrimental, but overall a mismatch would develop between the new global climate and the conditions under which human populations developed. In a changing world, potentially billions will be presented with the option to stay put and try to adapt, or to migrate to more climatologically favorable regions.  These geopolitical and economic challenges lie well beyond the narrow economic considerations demonstrated by the equilibrium quadratic fit [used by authors like Nordhaus].”

This concession implies that the extent to which human economy is able to cope with the ravages of climate change is an empirical question.  It is certainly possible that our ability to adapt will be overrun by the rapidly changing climate: the speed of the required adaptation will clearly be related to the rate at which global warming develops.  It is also true that adaptation would be unnecessary if global warming was effectively addressed.  Nordhaus’ quadratic fit may be a simplification of a wide range of competing forces but it does put a stake in the ground that can only be pulled out if new evidence emerges to suggest that the changing climate is winning the race against technological advance.  At present such evidence is generally lacking.

The ability of human beings to adapt to the changing climate, like the effect of tipping points, should not be underestimated by climate scientists.  The economic development of Singapore provides a case in point.  Over the past 70 years, the country has been transformed from a poor tropical city-state completely lacking in natural resources to a global economic powerhouse as rich as almost any country on Earth.  

As climate change progresses, an interesting question is whether Singapore’s development can be sustained and replicated.  Keen et al cite the example of neighboring Jakarta, which, apparently, scientists have estimated will be rendered “permanently fatal” for human inhabitants if global temperatures increase by 3.8°C or more.

Unfortunately I can’t find the reference for this assertion – Keen et al does not provide a citation – and thus cannot confirm its veracity or easily interpret its implications.  “Permanently fatal” suggests that anyone daring to step off the plane at Soekarno-Hatta International will instantly drop dead on the tarmac.  More realistically, I suspect it means that those unable to find shelter during the heat of the day will suffer an increasing rate of heat-related distress and death.  If my interpretation is correct, the GDP of the Jakarta region will not fall to zero but will be driven by the extent to which economic activity can take place at times and in locations that are more hospitable to human survival. The fact that Keen et al resort to language like this weakens their argument immensely.

But back to Singapore…

It’s fair to say that economic productivity is generally lower in more equatorial regions than it is in more temperate climes. This is true both in extremum and at the margins.  Numerous studies have considered the existence and causes of productivity differences around the world, attempting to explain the disparities between the Global North and South and also between, for example, the northern and southern states of the US.

Over the past century, these disparities have dramatically declined for countries like Singapore and, to a lesser extent, Jakarta, and also between, say, Alabama and New York.  One key driver of this has been the invention and proliferation of air conditioning, a critical technology that is seemingly ignored by Keen et al.  But Lee Kuan Yew, the founder of modern Singapore, suggested that this was singularly crucial to Singapore’s development: 

“Air conditioning was a most important invention for us, perhaps one of the signal inventions of history.  It changed the nature of civilization by making development possible in the tropics.  Without air conditioning you can work only in the cool early-morning hours or at dusk.”

Many of the most productive activities untaken by humans take place in air-conditioned environments.  True, this technology requires energy and much current electricity production relies on fossil fuels.  It is also true that tropical locations are generally well-suited to solar power production, which would perhaps be sufficient to provide air-conditioned environments for most or all tropical inhabitants.  It may even be possible for people in Jakarta to keep working after the city is rendered “permanently fatal” from 3.8°C temperature increases.

This is just one example where technology has allowed people to thrive even in the tropics.  Similar counter examples involving technological solutions could be offered to address questions of food security and most of the other issues proffered by Keen et al.  The simple reality is that extreme economic damage is not inevitable even if we experience extreme future changes in the climate.

The key point is that the evidence will ultimately decide the extent to which competing theories apply in a changing world.  It is certainly possible to outline a range of calamities that will befall mankind if climate change goes unabated, but it is also possible to propose theories to explain the way human civilization may be able to adapt to these changes.  Thus far we seem to have been able to do it, but this may not last forever.  It is often said that there is nothing as dangerous as a bad theory.  I suspect that trivializing and hyping the consequences of global warming are equally dangerous and that the truth lies somewhere betwixt the two extremes.

Finally, a quick point about the power of rhetoric and the role of scientists in spurring action on climate change.  Keen et al state that:

“Nonetheless, since politicians pay disproportionate attention to the opinions of economists in formulating most government policies, this trivialisation of the dangers of climate change by economists has had serious deleterious effects on the human response to climate change.”

It is true that the policy response to climate change has been weak and that this is most likely driven by the relatively modest economic losses thus far attributable to climate change.  I’d also add that the difficulties the Global South will face from climate change should be enough to prompt action by rich countries that will likely be more sheltered from the effects of warming.

That said, the way to win the policy argument is by providing evidence to counter the economists’ models, by demonstrating the emergence of climate-related economic losses and the inability of humanity to mitigate and adapt to the damage.  They will not win by offering only counter theories, however plausible they happen to be.

Keen et al conclude by stating that “where economics has failed, science should prevail.”  I would go further and say that science must prevail.  Unfortunately for Keen et al and their ilk this means finding support for their views in existing economic and financial data, something they have not yet been able to do.