Droughts, floods and tropical storms not only cause short-term damage, they also dampen economic growth for decades. To reflect these costs, the CO₂ price would have to be much higher.
30 billion euros: This is how much reconstruction in western Germany could cost after the flood disaster in July, that is how much money the federal and state governments have earmarked for the regions affected. And thus for an extreme event that is likely to have at least significantly exacerbated global warming. Given these dimensions, the question arises whether the destructive consequences of climate change are always sufficiently factored into political decisions.
Not nearly enough, writes a group of climate economists led by Jarmo Kikstra from the International Institute for Applied Systems Analysis (IIASA) in the specialist magazine Environmental Research Letters. According to their calculations, climate change could be around six times as expensive by 2100 as previously assumed. Even with an average warming scenario at the end of the century, the global gross national product would be around 37 percent lower as a result of climate damage than in a world without man-made warming. So far, economic losses of six to seven percent by 2100 had been assumed.
Most existing models, however, assume that climate damage – even if it is very expensive in the short term in the case of extreme weather events – has little effect on economic growth in the long term. Climate researchers are now questioning this assumption. For example, had one Evaluation of the International Monetary Fund (IMF) of 174 countries since 1960 show that rising temperatures can dampen economic growth for a long time. “Climate change makes harmful events like the recent heat wave in North America and the floods in Europe much more likely,” said co-author Chris Brierley of University College London in a statement. “If you stop assuming that the economy will recover from events like this in a matter of months, the cost of warming looks much higher than what is usually shown.”
Tropical cyclones can hold back economic growth for more than a decade
“The work is going in a direction that other studies also point,” says climate physicist Christian Otto, who researches the economic consequences of global warming at the Potsdam Institute for Climate Impact Research (PIK) and was not involved in the current study. “The damage caused by extreme events involves much more than just destroyed material.” Together with colleagues, Otto was able to prove that tropical cyclones and rivers overflowing could slow the economic growth of the affected countries for more than a decade.
Positive effects are also conceivable in the short term. If a storm or flood destroys many buildings, the local construction industry usually benefits in the following years. “This boom in individual industries does not seem to be strong enough to have a positive overall economic effect,” says Otto. The loss of machines and systems, which often cannot be replaced for years and therefore do not produce anything, and the resulting delivery bottlenecks are usually more serious. In developing countries in particular, extreme events can also have an impact on “human capital”: children may not return to school after a severe drought or flood, with consequences for the countries concerned for decades.
If the long-term economic consequences are included, according to the current calculation, the CO₂ price should be 2800 euros per ton. For comparison: in the EU emissions trading system, it recently fluctuated around 60 euros per ton.
A higher – and therefore probably more honest – CO₂ price could have a major impact on climate policy. In order to weigh up climate damage, politicians use so-called integrated assessment models, which also include the “social costs of carbon”. These are, for example, the economic damage caused by a ton of CO₂, for example through reduced crop yields. In this way, the benefits of climate protection can be expressed in numbers, similar to an insurance policy.