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CLIMATE CHANGE
THE COMPLETE FAILURE OF COMMUNICATION Climate Change ... Government Economic Models Fail to Account for Climate Change, Hindering Action 
Melting glaciers. Credit: NASA/JPL-Caltech Original article: https://www.eesi.org/articles/view/government-economic-models-fail-to-account-for-climate-change-hindering-action Peter Burgess COMMENTARY Peter Burgess | ||
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Climate Change
Government Economic Models Fail to Account for Climate Change, Hindering Action By Jonathan Herz March 31, 2023 Traditional macroeconomic models do not adequately respond to the urgency of the climate crisis because they model business as usual, assuming optimal market behavior and a stable climate. A recent National Academies of Sciences, Engineering, and Medicine roundtable convened experts to discuss how to build climate change into these models to more accurately evaluate long-term climate impacts.
But, while the use of GDP provides a certain consistency to these analyses, its omission of non-market impacts, like fossil fuel pollution, results in an incomplete and inaccurate picture of our economy. Fossil fuel externalities, alone, result in annual negative health impact costs in the United States of over $886 billion. This failure to consider greenhouse gas emissions reductions and climate adaptation costs and benefits means that the government does not have a full set of tools to help determine policy and spending that can address the climate crisis. Another omission in the focus on economic growth and development is consideration of the goal to improve economic conditions for those who have been historically disadvantaged or marginalized. Focus, instead, is on climate solutions like low-carbon technologies, which are disproportionately owned by wealthier and white households that also receive financial incentives like tax credits. Historically, many federal programs have not considered low-income users and their unique barriers to adopting these solutions, such as ongoing energy insecurity, higher initial costs of renewable energy and energy efficiency opportunities, and lack of home ownership. Recent laws, including the Infrastructure Investment and Jobs Act (P.L. 117-58) and the Inflation Reduction Act (P.L. 117-169), and executive actions, including Executive Order 14030 on Climate-Related Financial Risk and the Justice40 Initiative, are intended to set the United States on an equitable path to net-zero emissions by 2050. However, the outdated microeconomic and macroeconomic decision-making models that helped get us into this crisis are not going to result in a federal budget and monetary policies that will effectively advance climate solutions. Earlier this year, the National Academies of Sciences, Engineering, and Medicine Roundtable on Macroeconomics and Climate-related Risks and Opportunities met to “start building the scholarly climate-macro foundation” needed to change those decision-making models. The urgency of this task was summarized by Stanford University Professor of Interdisciplinary Environmental Studies Chris Field, who noted that, although the 1990 predictions of the Intergovernmental Panel on Climate Change (IPCC) were amazingly accurate, the global failure to adequately respond to those forecasts means that today, the world is simply out of time to keep global warming below 1.5°C. Even if harmful greenhouse gas emissions were reduced to zero tomorrow, the accumulated emissions of 200 years of fossil fuel consumption are already taking their toll. Climate adaptation now needs to be accompanied by actions on loss and damage as climate impacts that cannot be adapted to continue to batter regions across the world. Federal Agency Analyses with Existing Tools At the roundtable, Joseph Kile, director of microeconomic analysis at the Congressional Budget Office (CBO), discussed how adaptation and mitigation could reduce physical effects of climate change that decrease economic output and negatively impact revenues and mandatory and discretionary spending. The government can drive change through taxes, which transfer the costs of externalities back to the producer; subsidies, which motivate changes in consumer behavior to meet policy goals; and regulations, which enforce those policy goals. Using their current model, CBO estimates that climate change will reduce the growth rate of real U.S. GDP by an average of 0.03 percent a year, resulting in a cumulative GDP reduction of 1 percent by 2050. However, CBO and Office of Management and Budget (OMB) models do not fully account for the benefits of mitigating the long-term impacts of climate change because their time horizon is limited to 10 years, not the decades and centuries of potential benefits from mitigation. The banking system plays a crucial role in the macroeconomy. Federal Reserve Board Senior Adviser Adele Morris discussed the reserve's new climate scenario pilot in which the six largest U.S. banks will analyze the impact of climate-related financial risk to their residential and commercial real estate portfolios and loans, based on both current policies and steps to reach net-zero greenhouse gas emissions by 2050. The Federal Reserve’s climate scenario analysis is in addition to traditional bank stress tests, which assess whether banks are sufficiently capitalized to absorb losses during stressful conditions while still meeting obligations to creditors and lending to households and businesses. The climate scenario, however, unlike the stress tests, will not affect bank capitalization requirements. The Federal Reserve is still a long way from incorporating climate change in its decision-making. Limitations of Federal Macroeconomic Models and Advancement of Climate Models Heather Boushey, the chief economist for the White House’s Invest in America Cabinet and a member of the President’s Council of Economic Advisors, cited the limitations of macroeconomic tools now in use—primarily their assumption of a stable climate; their reliance on GDP, with its limitations noted above; their use of energy models that do not incorporate alternative energy sources and energy transitions; and their use of deterministic models that will always generate the same output rather than reflecting the uncertainty policymakers face. Public Policy Professor Solomon Hsiang of the University of California, Berkeley, further noted that existing models are not designed to address the multiple variables of climate change risks and damages. Traditional macroeconomic models do not respond to the urgency of the climate crisis because they model business as usual, noted Rachel Cleetus, policy director at the Union of Concerned Scientists. Senior Economist Eric Kemp-Benedict of the Stockholm Environment Institute explained that macroeconomic models typically assume optimal market behavior and a stable climate, and do not address the rapid change that is actually occurring. While this simplifies complex models, it does not accurately resemble the real world we experience. Models need to incorporate the compounding and cascading impacts of physical risk—including extreme events, slow-onset disasters, and potential tipping points—and socioeconomic and racial inequities. In contrast, climate models used by the National Oceanic and Atmospheric Administration (NOAA) no longer count on returning to a steady baseline, explained NOAA Chief Scientist Sarah Kapnick. Past trends are not necessarily useful in future analyses. For example, as Kapnick noted, “the glaciers are going away.” The year 2022 was the 34th in a row that glaciers lost rather than gained ice. According to the US Geological Survey, glacier change has major socioeconomic impacts, including global sea level rise, tourism disruption, natural hazard risk, fishery disruption, and water resource alteration. NOAA’s new climate model, SPEAR, considers climate projections and ocean, atmosphere, land, and sea ice characteristics and responses to changing greenhouse gas emissions over the 20th and 21st centuries. Initial Steps to Improve Modeling Progress is being made. Two new Council of Economic Advisors and OMB assessments, a review of federal budget exposure to climate risks and a new section in the Long-Term Budget Outlook, focus on climate change. And their 2023 white paper, Methodologies and Considerations for Integrating the Physical and Transition Risks of Climate Change Into Macroeconomic Forecasting for the President’s Budget, is working towards changing the “static world” of macroeconomic models, which now constrain federal decision-making. There are macroeconomic models in use today that link GDP to economy-environment interactions using integrated assessment modeling. For example, the DICE model estimates the optimal path of reductions of greenhouse gas emissions. The intergovernmental Organization for Economic Co-operation and Development (OECD) links its ENV-Growth model, which projects future global and country-specific GDP and income, to its ENV-Linkages model, which focuses on economy-environment interactions. The Federal Reserve’s FRB/US model forecasts and analyzes macroeconomic issues, including both monetary and fiscal policy, and incorporates aspects of climate-related financial stability risks. While these organizations have started to integrate climate change into their economic models, there is not yet a comprehensive model that incorporates all economic sectors and long-term horizons. What will be of most use is a complete, ecological economics green model that incorporates growth, distribution, and climate in a finite world. But as the National Academy of Sciences roundtable demonstrated, the United States has a long way to go in order to quantify the economic and fiscal impacts of climate change and climate action—and not much time left in which to do it. Author: Jonathan Herz
| The text being discussed is available at | https://www.eesi.org/articles/view/government-economic-models-fail-to-account-for-climate-change-hindering-action and |