This hurricane season’s storms of unprecedented scale and destructiveness make it clear that climate change is no future threat, but a very immediate problem, and the surge of disinformation that’s followed in this election year underscores how difficult it continues to be to motivate people to work together to address the existential threat. But action is possible — imperative, in fact — and there’s a ray of hope.
This past May, we talked to economists Adrien Bilal of Harvard and Diego Känzig of Northwestern about their latest paper, which turns years of conventional economic wisdom on its head. Previous work had suggested climate change’s impact on the world economy was around $200 in losses per ton of carbon emitted, or around 2 percent of world GDP — a lot, but not enough to get governments to act.
Bilal and Känzig’s work suggests the social cost of carbon is likely far bigger — six times bigger — than previously estimated: losses of more than $1,000 per ton, or around 12 percent of world GDP per degree of warming. Six times bigger than the previous consensus, those are staggering numbers — roughly equivalent to the economic drag on big economies if they were permanently at war.
But that means acting is both more imperative — and, counterintuitively. more affordable. It may still cost $80 to avoid each ton of carbon emitted, but you get a lot bigger return on your investment.
Based on the sheer size of those new numbers, Bilal and Känzig argue that it’s very much worth it for countries of means to spend the money now to avoid much greater costs down the line. In fact, the potential losses are so vast it makes sense for these countries to go ahead and act on their own to avoid climate change losses, even if other nations do nothing. The excuse of the collective action problem falls away on this analysis.
Bilal and Känzig’s work has made as big a splash as any economics paper in recent memory, so we reached out to talk about what’s new and different about their approach, how their take on the data led to their striking conclusions, and what they hope decision-makers in government and industry will take away from their work — and hopefully put into action.
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Economists Adrien Bilal (left) and Diego Känzig (right)
Your new paper has gotten a lot of attention for a couple of reasons, the first being that you’re talking about an impact six times bigger than most economists have suggested, more in line with what climate scientists have been saying. What’s different about your methodology and how did it lead you to the numbers you’ve come up with?
Adrien Bilal: So virtually all of the previous work that’s been done on the subject has relied on comparisons of different countries that heat up or cool down at different points in time. The U.K. gets a little hotter in one year, and then Germany stays cool. And then you look at how GDP in the U.K. evolves following that change in temperature. And that generally gives you numbers in the vicinity of $150 per ton of carbon emitted and a 2 percent decline in GDP per degree Celsius in warming.
But we think that is quite different from what climate change is actually doing to the world. It’s not only that the U.K. is going to heat up a little more than Germany, but the whole world is heating up because of climate change. And, in particular, oceans are also heating up. And when the whole planet warms, that has potentially really different implications for the climate system, increased frequency of extreme weather events that then have big local impacts.
And so that’s actually what geoscientists have been telling us for a long time, but it simply hadn’t percolated into economics. And so we took that perspective very seriously and thought, “Well, what happens when we basically compare years where the world is very hot to years where the world is cooler?” And that gives you a much larger effect of climate change on the economy.
So tell me about those findings. And I’m asking you for the explain-it-to-me-like-I’m-five answer.
Adrien Bilal: Well, the one number to look at is what we call the social cost of carbon. (Actually, everyone calls it that.) That’s the number that adds up all of the economic losses for the world in dollars that correspond to emitting one ton of carbon. One ton of carbon is roughly what you emit if you take a transatlantic round-trip flight or a drive between the East and West Coasts of the United States. So we figure how costly that is for the world economy and, our headline number is that that cost is about $1,000 per ton, with a 12 percent decline in GDP per degree of warming. That’s about six times bigger than shown by previous work.
So the most interesting implication of the paper is not the bigger numbers, but that you argue from those numbers that it’s cost-effective for large countries to take local action, and that will have a real impact on the global situation — regardless of what anyone else does. It’s a great argument against the catastrophism we’ve seen where people will say it doesn’t make sense to make interventions because China will still be building coal-fired plants, or the energy demands of blockchain and A.I. mean that we’re going to bring more coal online even in the West.
Adrien Bilal: And that’s the silver lining of our findings that otherwise you could see as pessimistic. Because, well, now we realize the costs are much bigger than we’d thought. And that means that for a big economy like the U.S. — that accounts for a lot of the economic activity in the world — well, then it should care, to the extent that it’s large, about the consequences of climate change.
So for the U.S. alone, climate change will cost about $200 per ton out of that $1,000 figure. That’s what we find, which again is much bigger than previous estimates. But we also know from work that has studied the Inflation Reduction Act that a lot of the subsidies or policies that aim to decarbonize the economy, they cost about $80 per ton that you avoid emitting. You can spend $80 per ton to avoid a cost of $200 per ton — and so suddenly, it is cost-effective for the United States. Even if it doesn’t care about any benefits for the rest of the world, it should still decarbonize to a substantial extent because it’s going to be cost-effective from its own perspective.
Another thing I’ll add is something we don’t discuss in the paper, which is that these decarbonization policies, given our numbers, almost pay for themselves. If you take a 30 percent tax rate into account, you get $200 of benefits back — that’s about 60 to 70 dollars that go back to the government once it taxes the economic activity that materializes as a result of avoiding climate change. And that’s close to the $80 that you spent in the first place, the cost of the policy. That’s more speculative, and again, that’s not something that’s in the paper, but we think that’s a pretty powerful argument that may incentivize governments to take more action.
It’s almost a greed-is-good argument you’re making. You’re looking at something a lot of people see as just a cost, just more spending, and seeing an opportunity. Your argument is that mitigation efforts give you a return that’s much greater than what you put into it, even if it’s very expensive.
Diego Känzig: Right. I think the key challenge is obviously that a lot of these costs will arise far in the future, and maybe some politicians are not as forward-looking. But to balance that a little bit, we’ve already seen the intensity, the frequency of extreme events has gotten much more intense. We also see this with recent examples of wildfires, or the extreme cold that we’ve had in the U.S. Those factors are only going to become worse if we stay on the current trajectory.
So do the big global conferences still matter from your perspective if individual countries can be motivated to take meaningful action on their own? Also, how big does an economy need to be for its efforts to be cost-effective? Does it have to be something on the scale of the U.S.?
Adrien Bilal: So this is going to be cost-effective only for the big actors like the U.S., China, and Europe. Now, in order to decarbonize all the way to what the right amount for the world would be, you would still have to put a price on carbon that’s about $1,000 per ton. That doesn’t change. I mean, the price on carbon, the extent to which you’re willing to subsidize green technology from the whole world’s perspective is still $1,000 a ton. So the U.S. is going to be willing — or may be willing — to decarbonize all the way to the point where it costs $200 per ton. Then you move on to decarbonize the next sector of the economy that is on the list. You start with the cheapest ones and then you make your way up the list.
The key question is how much of the economy remains to be decarbonized after the big economies act. And if there’s a big chunk of the economy that remains, then even under our estimates, you’re not going to decarbonize enough to benefit everyone.
These conferences are still critical because you want to go all the way to what the world needs in terms of decarbonization, not just what every country individually needs. The large economies are going to do it anyway. But for smaller countries, the argument doesn’t quite hold. They’re not willing or able to pay the $80 per ton because the amount of benefits it brings them, individually, to avoid one unit of emission is just not that large.
And so the international agreements are going to be much more critical from that perspective, too. Smaller countries would have to band together — I’m thinking here of the small Pacific states.
Diego Känzig: We’ve talked a lot about mitigation, but now that we probably can’t avoid at least some degree of warming, adaptation becomes much more important. Adaptation is very costly, and climate change will affect countries located in hotter areas much more. And these are often poor countries — they can’t afford adaptation measures to the extent that developed countries can. So in that sense, I feel like international coordination is crucial because, obviously, if we allow for unequal impacts, this can lead to migration, can lead to a lot of problems. And that’s why I think it’s really paramount to have something like the IPCC.
On just mitigation, I actually think our results really change the trade-offs here. If you think about green innovation, if the U.S. does it, that’s already great to the extent that these technologies get spread around the world and everybody can benefit from them. So there are huge positive externalities to developing green technologies in the United States, in China, and in Europe.
And, also, one other aspect that we see, for instance, in Europe now, with the European carbon market, they try to implement the so-called carbon border adjustment mechanism, which taxes the carbon content of imports. And this, in turn, could also lead to other countries implementing carbon taxes or other carbon pricing measures so that they can avoid that. So in some sense, if the big countries act on mitigation, that’s going to have a huge impact on mitigation all around the world.
Given that we’ve seen so much climate pessimism, even doomerism lately, people suggesting that we’ve failed on mitigation and we’re on to adaptation — and there’s obviously a lot of anxiety around the effectiveness and durability of international agreements — do you feel like your work in a way opens the door for some hope?
Adrien Bilal: As I was saying, one silver lining is that large countries can take unilateral action — it makes sense to them. And then as Diego said, I think given the large technology transfers that happen across borders, that can have pretty substantial effects on the world’s ability to mitigate and potentially adapt as well.
The other thing I’ll say is relative to previous work, the impacts that we find are more similar across countries — where previously we were under the impression that some countries would gain substantially while many would lose and because of this tension it would be hard to coordinate international action, suddenly it looks like countries are much more in the same boat than we thought. And so I think that what we’ve shown strengthens the case for international cooperation.
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Photo by David McNew/Getty Images; photos courtesy Adriel Bilal and Diego Känzig
This post was originally published on The.Ink.