Experts: Economic models "grossly underestimate" costs of global warming

New research shows that our existing economic models “grossly underestimate” the costs of climate change. As a result, current carbon prices are 10 to 20 times lower than they need to be to stop catastrophic climate change.

The shocking (but somewhat not surprising) findings are presented in a new study by leading climate economist Nicholas Stern and co-author Simon Dietz, from the UK’s Grantham Research Institute. According to their research we need a globally coordinated carbon price of $32 to $103 per tonne of emissions, as early as next year. And within two decades the price need to almost triple and rise to $82-260 per tonne of carbon emissions.

Current carbon prices are much, much lower than this. In the European Union, a tonne of carbon emissions costs €5.7 or about $7.7. In California a tonne of carbon emissions - despite having one of the world’s highest carbon price - only costs around $12.

The report, which will be published in the Economic Journal, came to this conclusion after reviewing the DICE-model, a widely-used economic model developed by Yale Professor Bill Nordhaus in 1991. This model by Nordhaus has served as a basis for other major climate studies – such as the recent IPCC report. The problem though is that the DICE-model is based on data of the climate impacts we had knowledge about in the 90s. But nowadays, that data is old as we now know that the climate impacts are much worse than we previously expected. Unfortunately, the usage of this old model has led to a severe underestimation of the taxes and fees required.

“It is extremely important to understand the severe limitations of standard economic models, such as those cited in the IPCC report, which have made assumptions that simply do not reflect current knowledge about climate change and its [...] impacts on the economy,” Stern said.

The revised economic model by Stern and Dietz takes into account new and updated climate data. It also calculates that the ability to generate new wealth would be affected by climate change – due to climate impacts such as extreme weather, destruction of coastal and water infrastructure, and so on.

“The new version of this standard economic model, for instance, suggests that the risks from climate change are bigger than portrayed by previous economic models and therefore strengthens the case for strong cuts in emissions of greenhouse gases,” Dietz said.