Groupthink on the Economics of Climate Change
Chapter 6 in my forthcoming book "How Economists will Destroy Capitalism"
The extent to which groupthink is the primary outcome of the refereeing process in economics can be seen in how papers subsequent to Nordhaus’s “To Slow or Not to Slow: The Economics of The Greenhouse Effect” {Nordhaus, 1991 #5598} have repeated, rather than removed, Nordhaus’s elementary mistakes. Despite the facts that his assumption that climate change only affects industries exposed to the weather is false, and that his list of industries that he assumes will be unaffected by climate change is ridiculous, all subsequent papers on the economics of climate change have adhered to these original assumptions.
The economics chapter of the 2014 IPCC Report detailed all the studies since Nordhaus’s which calculated aggregate economic damages from global warming. None of these studies diverged from Nordhaus’s original fallacious assumptions about the nature of global warming—that it will only affect weather-exposed industries—and the industries it would affect. The coverage column shows the industries considered in each of these subsequent studies, and they are all restricted to the same set of weather-exposed industries that Nordhaus thought would be the only ones affected by global warming. Manufacturing, road and air transportation, communication systems, wholesale and retail services, government activities, and the finance sector, are all conspicuous by their absence. Even open cut mining, which Nordhaus later realised was exposed to the weather, is not considered—see Table 4.
Table 4: Summary of studies on economic damages from global warming, IPCC 2014 Report {IPCC, 2014 #5795`, Table SM10`, p. SM10-4 }
Furthermore, subsequent papers have also adhered to Nordhaus’s practice of stating the damages from global warming in terms of the difference between hypothetical future GDP with global warming, and a hypothetical future GDP in the absence of global warming.
These are the numbers that politicians and the media treat as serious estimates of the impact that global warming will have on human civilization. But they are, for want of a more technical term, complete bollocks. Not only are they based on transparently false assumptions, they also report estimated damages as a comparison of one future, hypothetical number—predicted output in the future with global warming—to another future, even more hypothetical number—predicted output in the future without global warming. This is very different to how economists normally make predictions about economic growth, which is with respect to the annual rate of change of GDP.
When you convert these superficially large damage estimates into predicted declines in the annual rate of economic growth, you find that not a single damage estimate by economists predicts a decline in the level of GDP, from any level of global warming. All of them predict that GDP growth will continue, just slightly more slowly, despite global warming levels of 7°C {Howard, 2021 #6898}, and even 8.6°C {Stern, 2007 #6163`, Figure 6.6`, p. 159}.
When Nordhaus first surmised that 3°C of warming would reduce GDP by 0.26 percent, what he meant was that he estimated that GDP in 2100 with a 3°C increase in global average temperature would be 0.26% smaller than GDP in 2100 would have been, if there had been no change in global average temperature. This is in contrast to the standard way that economists compare alternative policies, which is in terms of the impact on the rate of economic growth. However, there is a simple formula that enables these hypothetical comparisons to be converted into a prediction of the fall in the annual rate of economic growth:
Convert the percentage of expected damages into a fraction by dividing by 100;
Add the fraction of expected damages to GDP to one;
Take the natural logarithm of this number;
Divide this by the number of years between the start date of the analysis and the date when the damages are expected; [1] finally,
Multiply the result by 100, and you have the predicted fall in the percentage rate of economic growth.
Applying this formula to Nordhaus’s pre-hunch estimate in his 1991 paper that 3°C of warming by 2100 would reduce global GDP by 0.26% (which is 0.0026 when expressed as a fraction), we get a prediction that this amount of global warming will reduce the rate of economic growth over the 109 years between 1991 and 2100 by 0.0024% per annum:
Statistical agencies report the recorded growth rate of GDP to one decimal place of accuracy: “the rate of economic growth last year was 3.1%”, for example. Nordhaus’s claim that 3°C of warming will reduce the annual rate of economic growth by 0.0024% is saying that the impact of 3°C of global warming by 2100 will be to reduce the rate of economic growth by one fortieth of the accuracy with which economic growth is measured today. It is a claim that the economic impact of 3°C of global warming will be literally unmeasurable in terms of the rate of economic growth.
Even his much larger “hunch” of a 2% decline in future GDP also resolves into a drop in the rate of economic growth equal to one fifth of the accuracy with which change in GDP is measured today:
As well as adhering to Nordhaus’s way of expressing damages, the overwhelming majority of these subsequent papers have also adhered to the magnitude of damages that he estimated. Only one of the studies shown in Table 2 reported expected damages of more than 3% of future GDP (Maddison and Rehdanz’s 2011 prediction of a 12.4% fall), while one paper (Tol 2002) predicted a 2.3% increase in future GDP from a 1°C increase in global average temperature.
A recent paper—“Rising Temperatures, Melting Incomes: Country-Specific Macroeconomic Effects of Climate Scenarios” {Mohaddes, 2024 #7498}—summarized almost all economic damage estimate papers since Nordhaus’s 1991 paper.[2] The majority of these later studies still report future damages similar to Nordhaus’s original 2% estimate—which, as noted above, translates to an unmeasurable fall in the rate of economic growth.
Figure 1:l Image taken from
{Mohaddes, 2024 #7498`, Fig 7. GDP impact of increases in temperature}
But even the largest estimate here—the 60% fall in GDP in 2100 from 4°C of warming predicted by Kotz et al {Kotz, 2024 #7413}—translates into a prediction that economic growth will continue, but just at a slower rate. The Kotz number predicts a 1.2% fall in the annual rate of economic growth between 2024 and 2100:
