Two new reports show that widely-used economic models underestimate the impacts of climate change, with ripple effects for policy decisions and influential climate research, including studies by the Intergovernmental Panel on Climate Change (IPCC).
“What economists have done is say that climate change is a cat in the bush, not a tiger,” Edinburgh-based actuary Sandy Trust, who co-authored one of the reports, told Climate Home News.
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The reports—The Emperor’s New Climate Scenarios and Loading the DICE Against Pensions—show that economic models used by investors, politicians, central bank governors, and influential bodies like the IPCC have ignored tipping points, floods, droughts, and impacts on indoor work, underplaying the damage caused by climate change.
The misrepresentations stem from faulty assumptions about how climate change will affect society, writes Climate Home. For instance, the models account for temperature changes, but ignore the impacts of rainfall, and leave out economic losses for floods, droughts, and fires. And many influential economists assume climate change will not affect work conducted indoors, which the report authors say is “strikingly invalid.”
Rising temperatures can have a direct impact on productivity, explains Climate Home, citing carmaking giant Stellantis as an example. When the recent heatwave hit Europe, the company had to temporarily shut down its main manufacturing plant in Italy amid unsustainable working conditions.
Furthermore, economic models usually assume the progression of climate change will be linear and fail to account for tipping points—a critical climate threshold with irreversible effects.
But on the contrary, “as we get closer to 1.5°C, we’re much closer to triggering these tipping points that individually either increase the pace of climate change by releasing greenhouse gases or increase the rate of climate change,” Trust said.
Academic echo chambers are part of the problem, writes Climate Home. Economic journals are edited by economists who accept “shoddy standards” when articles “confirm what economists wish to believe,” said University College of London economist Steve Keen, who authored the pension funds report with Carbon Tracker.
His report shows that many pension funds use investment models that predict warming of 2.0 to 4.3°C will have only a minimal impact on member portfolios. That prediction relies on those flawed estimations of climate damage—that even with 5.0 to 7.0°C of warming, economic growth will continue. Keen said those findings cannot be reconciled with warnings from climate scientists that such extreme global warming would be an “existential threat to human civilization.”
Yet “these flawed climate risk models are used throughout the financial system, lulling economic decision-makers, from pension funds to central banks, into a false sense of security,” writes Carbon Tracker. The result is cavalier positions from officials like U.S. Federal Reserve Board Governor Christopher Waller. “Climate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the U.S,” he announced. “I believe risks posed by climate change are not sufficiently unique or material to merit special treatment relative to others.”
The IPCC also uses these models, concluding that 4°C warming would cause only a 10 to 23% decline in global GDP by 2100, relative to global GDP without warming. Yet other sections of the same report warned of catastrophic physical impacts at that level of warming.
The pension funds report warns of a potential wealth-destroying “climate Minsky moment”, named for economist Hyman Minsky, who theorized that long stable periods can end in abrupt financial crisis following risky borrowing and lending behaviour. That risk will present itself as financial markets wake up to the gap between mainstream economist forecasts and the reality of climate impacts, writes Carbon Tracker.
