Climate Shock: the Economic Consequences of a Hotter Planet
Climate Shock: the Economic Consequences of a Hotter Planet
What we know – and what economists can quantify – is bad enough and should have prompted much more ambitious climate policy a long time ago. What we don't know – the known unknowns and unknown unknowns – by and large point in one and only one direction: to more ambitious climate action still.
good evening so welcome to this event of the festival of economics dedicated to growth environment at this current time in the world which is a bit tragic and we are really here to understand the possible consequences of the current changes my name is eugenio corcio i am a journalist of a la republica in italian daily and we have a very interesting person here gernot wagner i say wagner because i like to say wagner because it recalls it recalls the musician but i should say wagner so he's an environmental economist and he teaches at the new york university he writes for bloomberg green and for many years he has been focusing on this issue he's the author of climate shock which was written a few years ago about the economic consequences of climate changes well i read the book and there is a note which is very interesting for me about structural changes due to the tragic pandemic that is the spreading of teleworking or smart working as you may call it and warner notes that this technology is actually increasing with a lot of savings in terms of pollution because it's fewer cars fewer buses fewer aeroplanes so all these uh internet technologies video conferences are evolving rapidly and well this is a particularly important aspect in the light or in the wake of the kobit pandemic and then in the book there is a discussion about the cost of climate changes which are really huge in terms of gdp it's about three four five three four percent every year uh there are changes also in the hydrological structure of the world and by the way today we got the news from california that the wildfires of last summer of this summer cost between four unlike what trump did well decided that starting from 2035 no fuel cars will circulate but just electric cars so that's the uh objective of the governor of california and then every day we read in this in the news that there are rising waters glaciers which are really melting down or expansion of desert areas and then increasing inequalities of course because the most hit areas are actually the poorest areas and so there is increase in poverty uncontrolled uh migration and all that has uh human consequences but also economic consequences and that's the topic of gernot wagner's uh presentation so i'll give you the floor and after your speech we will have a q a session i know that you would have liked to be in trento which is a very beautiful city in the north of italy next year you will be here i'm sure you have the floor hopefully yes thank you thank you very much and uh yes i am here in new york city right now unfortunately not in italy um now uh let me start with saying what i won't be talking about which is i won't be talking about what we know about climate change climate economics suffice it to say what we do know is bad enough we should have acted a long time ago and when i say we of course this is the global policy community to reign in co2 emissions what i would like to talk about instead is what we don't know the the risks the uncertainties the sort of things where frankly we as economists simply are not not quite sure we have we might have we might have a good sense we we can guess uh we can guesstimate what the right answers ought to be but more often than not we simply don't know and we still have to pick some number often in order to draw some conclusions so to start with there are sort of two canonical facts in the economics of climate change um that actually have a surprising link to frankly the world we currently live in the cov19 pandemic one is more often than not whatever it is we're looking at we are not looking at linear changes we are not looking at how but if one variable changes something else um has an effect and there is a nice tight relationship between the two what we are looking at more often than not are exponential changes rapid changes things spinning out of control and just to give you a sense and uh i will not pretend to be an epidemiologist here um i am not um you know i pretend to be one on twitter but that's a different story but over the last six months or so right all of us have seen um um uh terms like this the the reproductive factor of covet 19. right if you happen to be listening to the german chancellor's angela merkel's press conferences right she is a trained physicist trait chemist trained chemist that have been known to to emphasize the specifics here uh we in the u.s unfortunately are not quite as lucky um but yes numbers like this right the reproductive coefficient of kobit 19 how many people on average one person is infecting um matters and matters a lot okay so just to use this as an example of how much exponential growth matters a coefficient of one means i on average infect one other person right well coefficient of two a coefficient of three right um means i infect two people or in fact three people on average if i have um covered and of course right the goal ultimately is to get this number below one for it to not to reproduce okay so that's the starting point right and there is a difference in 2x and 3x right this seems to be twice as bad that seems to be three times as bad well it turns out that's not the right way to think about it right two is not twice as bad as one two is much much worse compared to one and of course there are lots of different ways to think about this but one way is to line up 10 people and say after 10 interactions how many people will the 10th person on average in fact right how many infections will we see after 10 interactions well without doing too much math here if the factor is 1 after ten interactions we are still left with one a total of ten people infected but the tenth interaction we have one um new person in fact okay what about two it's not twice as bad it is a thousand times as bad right approximately a thousand it's 1024. it's not twice as bad it's a thousand times it's bad what about a factor of three without doing too much math here we are looking at approximately sixty thousand right that is that's exponential growth that is the reason why nicholas sarkozy on um uh oh sorry manuel macron a french president current french president um on right on friday goes to the theater with his wife demonstrating normalcy on tuesday his culture minister gets infected and on thursday the entire country is shut down right that is exponential growth within days now with climate change fortunately or unfortunately depending on your perspective um it is simply not playing out over days it's playing out over years over decades over centuries now when i say fortunately right the fortunate part is um we don't have runaway climate change that is literally happening over days but the problem is there is no immediate reaction there's no immediate consequence to our action or inaction today right whether or not we uh pass climate policy today makes essentially zero difference to temperatures tomorrow or next week or even next year it affects what happens in decades in centuries never mind that yes there too it is all about this exponential growth things don't get worse linearly things get back but get worse exponentially now of course with climate we are not talking about um the reproductive coefficient of a of a dc of a virus we are talking about temperature changes and then we are talking about the impact in dollars or euros right in monetary terms well the principle is exactly the same when you go from one degree to two degrees to three degrees and so on things don't just get slightly worse they get a lot worse exponentially worse and that principle is frankly very difficult really difficult to explain nobody hardly anyone has an intuitive grasp of this as we've just seen the last six months at political leaders the world over they had a very steep learning curve right learning within days weeks sometimes hopefully but still it is a very very difficult concept to understand that a change of two here doesn't make things twice as bad it makes things many many times as that that is probably the most fundamental concept in all of climate economics that is very difficult to wrap our heads around and time scales don't help the fact that we are talking about decades and centuries doesn't help at all um i promise no more math no more no more calculations here but um to my second point about how what we don't know makes a much bigger difference than what we do know um so probably the most important figure that nobody has ever heard of few have heard of um this room now excluded here but the most important figure in many ways deciding future on this planet as we know it the impacts of climate change the long-term impacts of climate change is something called the social cost of carbon technically the social cost of co2 what is that other than the most important figure deciding determining life on this planet as we know it it is the cost that each ton of co2 emitted today causes over its lifetime and yes that stuff sticks up there for a while right every time emitted today half of it is still there a thousand years from now plus minus a few hundred years this is a long long term problem what we do today what we do in the coming decade or two determines uh outcomes centuries millennial heads and of course we are pumping much too much co2 into the atmosphere so the economist's take on this is well we can calculate that impact we can do a calculation and at an earlier speaker here at the festival bill nordhaus nobel laureate he won a nobel prize essentially for being first uh in attempting this calculation the world's most ambitious benefit cost analysis more long-term more global more uncertain more irreversible more consequential than almost any other public policy problem out there unique probably in the combination of those factors long-term global answer okay and meanwhile the number that comes out of these calculations matters it matters a lot and it changes a lot based on some fundamental assumptions that are frankly very very difficult to pin down so just to give you um a sense here of the order of magnitudes involved by now for quite a while for about a decade or so that number the cost that each ton of co2 emitted today causes um and by the way right the average american emits about 20 of these tons average european around 10. i'm a dual citizen i get 30. so every one of these 30 tons 20 tons for an american causes approximately according to very standard calculations around 50 dollars right 45 50 euros per ton of co2 that's the standard calculation it's been with us for a while meanwhile there are lots and lots of assumptions that feed into it that make it so and in many cases we simply don't have the right the correct and some of the more fundamental assumptions are precisely the climate damages how changes in temperature translates into damages right that is one a second fundamental assumption there was another uh prior speaker today christian golier who spent many many years focused on this very problem the discount rate how should those long-term damages decades centuries hence be discounted back to um today okay let's just take those two as an example um build north houses standard benefit cost analysis makes certain assumptions about damages as anyone has to do um and frankly it has been making those assumptions for around 25 years since 1992 when he first published those results the fundamental assumption damages are related to changes in degree centigrade through a quadratic function right so we know there is no linear relationship it is not a straight line as temperatures increase damages increase quadratically meanwhile when we look at lines like this right let's say this here is the quadratic version um there is no way to tell whether a slightly different version with maybe a different number up here is the more correct extrapolation the more correct assumption frankly largely because we have no idea what happens out here in a world that frankly nobody of us has ever seen lots and lots of assumptions well the difference here even though there's a lot of uncertainty makes a huge difference in the final outcome standard assumption fifty dollars slightly different damages we are looking at numbers suddenly much greater than 100 or even larger huge difference in outcome slight difference in assumptions and frankly very little we know currently climate scientists know climate economists know about which of these assumptions is correct second number i mentioned the discount rate the importance of the discount rate um the basic assumption that's been with us for a while is what feeds into these calculations is a discount rate of around four in the quarter percent that's the bill note house's standard assumption um the us government under president obama took a slightly different view used three percent slightly lower and hence the social cost of carbon this fifty dollar number uh in fact was fifty dollars as opposed to lower below those um fifty dollars meanwhile ever so slight changes here only decreasing the discount rate to something like 2.5 not much right much like the the coveted coefficient or the difference here isn't very big for discount rate itself the difference in outcome is enormous and here too yet again we are looking at social cost of carbon figures of much greater than 100. everything else the same and frankly these are just two illustrative examples here of the difference um there are larger questions around uncertainties that increase this number much much larger still fat tails that's just one example at the risk of high consequence low probability events tipping points sort of surprises in the climate system or for that matter in us in society in how we react to those surprises right the underlying temperature change may not be all that much but we as society react in frankly surprising ways and suddenly you have enormous economic costs that once again make a huge difference in the outcome even though our standard models in many ways um don't capture that difference um one last point and i will leave it at this just to be clear this doesn't look like much versus a number that is greater than a hundred dollars the difference is in fact enormous on the left just now here talking a bit about u.s politics 50 ish per ton of co2 is essentially what by now is an exxon mobil supported set of bipartisan carbon tax bills introduced in this congress right it's not going to be law in the current uh environment the current political environment but even now we see carbon tax bills introduced in congress that are somewhere around 40 50 dollars per ton of co2 to today and when i say exxon mobil supported yesterday by now there's a coalition of oil companies that support that that say yes this is the number we can get behind that we want a carbon tax or at least tacitly support a carbon tax on this magnitude fifty dollars if a hundred dollars and more is the right number if the number on the right is correct or frankly we just don't know it might be 100 it might be 200 it might be more we just don't know suddenly we are in green new deal territory suddenly we are looking at joe biden's two trillion dollar climate investment plan suddenly we are looking at much much more ambitious climate policy suddenly the policy instrument is very different the carbon tax won't do we won't be able to look at a hundred dollars hundred fifty dollars more and say oh yeah there's just a simple clean carbon tax bill and it'll solve everything no um there is frankly in many ways politically no way to get there and more importantly it's not even the right tool if the right number per ton of co2 is a hundred dollars or more the right tool isn't to say all we need is price on carbon and we can get out of the way it is a much much more fundamental transformation of the economy on the left we might be looking at sort of evolutionary change on the margin the things that economists are often very comfortable thinking about on the right that's a revolution that is a much much more fundamental transition well beyond tinkering a little bit on the margin um trying to introduce carefully let's say a carbon tax the carbon price the cap and trade system um that's just a very very different environment so with that let me stop here and i look forward to the discussion thank you very much professor wagner thank you for this quite large scenario that you depicted there's one thing that we should say you just talked about the carbon tax about the difficulty there are in introducing this carbon tax and you also said it could be useful but apart from the carbon tax considering that the carbon tax would do something but apart from that many things are happening worldwide electric cars are being produced and our habits as consumers are improving we've got separate waste collection and the management of waste or resources is certainly advanced in developed countries as you said in your book we are teaching our children to close the type of water when they are brushing their teeth we're teaching our children to put plastic glasses uh or plastic and glass in the right container so these are little habits that in a way contribute to the environmental balance and this obviously should lead to a reduction in the emission of co2 which is really the culprit which is really the villain and industry likewise are getting equipped adopting circular economy recycling policies so much so that there are diffuse actions being taken on a large scale perhaps not exponential scale but there are measures being taken and apart from in economists scholars environmentalists there's a wide cultural movement on anthropologists social scientists expert in ethics and moral issues and this is somewhat slowing down the dramatic curve do you think so or do you think that this is not enough for is the phenomenon irreversible already let me address it this way so i don't have a driver's license i'm a vegetarian you are looking at all of our 70 square meters right here in a small apartment in lower manhattan center of a city um should we be doing these things should we be using our recycled water bottles or the you know the fancy wooden espresso cup yes of course right it's the moral thing to do yes does it make a difference does individual behavior change make a difference no it does not it cannot and just to give you a sense frankly the last six months has shown that we literally just went back to our caves or to our apartments right we shut down we did we shut down our economies the world over right china first then the rest of the world followed nobody left home for three months so at least we shouldn't have what happened to emissions the most extreme measures we can imagine emissions globally at the peak in april declined by something like 17 less than 20 less than a fifth and that's just emissions right we are still adding co2 to the atmosphere it's like if your bathtub is overflowing and you turn down the spigot by 20 no you have to turn it down to zero otherwise water will still accumulate in the bathtub and of course meanwhile right we are back to a net decrease of emissions somewhere between three four percent on net for the whole year 2020 emissions might go down globally by something like three or four percent is that good yes is it good that we um we fly uh less these days um yes up to a point right i wish i could be you with you uh today in trento um of course but frankly there are lots and lots of conferences in cleveland ohio where i would much rather not be in a hotel in cleveland right about now and where i like being in new york where i like having my kids behind me do their taekwondo class as we speak and i'll have dinner with them right after i'm with you right there are uh advantages here um there are real advantages here um but um um that said right of course there were real costs associated with the lockdown they're real economic costs lots of them meanwhile emissions barely decreased and even at the peak the 20 just isn't enough so what all of this tells me is first individual action just isn't enough again should we be doing these things yes of course it's the moral thing to do right we teach our kids to turn on the water when they brush their teeth yes of course we should all be you know living in smaller homes and driving less yes sure by all means let's not be actively immoral right uh you know pope francis is on to something uh of course yes um but individual action individual responsibility just isn't going to do this what it takes right is more economic activity more investment literally right actually decreasing emissions is not going back to our caves doing less it is more activity it is more investment it is china announcing this tuesday right uh three days ago um that it will be carbon neutral by 2060 emissions peak by 2030 that was its prior commitment um it will probably achieve this peak uh much sooner actually maybe even by 2025 or so middle of this decade uh because of fundamental forces uh market forces and policy um and then announcing that it will continue this path um and decrease its emissions much much further um down the line now yes right now china is building coal plants yes right now uh part of its its stimulus yes there was a green component to that too but lots of the money flow uh went into uh fossil fuels um those are steps backwards meanwhile the fundamental forces point in the right direction and yes it takes policy it takes ndrc the national development and reform commission in its next five-year plan from 2021 through 2025 to enshrine the transition that is necessary to achieve carbon neutrality by 2016 in its laws in its plans it takes much much more takes re-channeling fundamental economic forces it does not take you and me sipping our water from uh water bottles or recycling that is not the way to decrease co2 well let's not discourage our citizens from using these behaviors so we shouldn't say that it is useless something that denying people says and there is perhaps a reference in your book let's say 3 000 years ago the seas we're higher than today and indeed we have four signs in some regions in italy did you think that this could be one of those dramatic uh times and then there will be a spontaneous improvement of the situation or do you think that the impact of co2 will be decisive for the fate of the planet i do think that um now just to be clear it wasn't three thousand years ago it was three million years ago over 3 million years ago 3.1 million years ago by now at least that concentrations of co2 in the atmosphere were as high as they are today 3.1 million years ago plyocene quite a very different world uh sea levels were between 20 and 60 meters higher than they are today temperatures were between two and four degrees leaf um higher than they are today um so yes right it doesn't take much to realize that 20 60 meters of sea level rise is a very very different world than from the world we live in and no people weren't around 3.1 million years ago of course not now all right just to be clear in many ways the point of the cost of climate change right it's not that the planet itself won't survive the planet has been through this before we have not right i'm sitting here in new york city actually you know fairly high up for uh for new york city but i'm within 10 meters of global average sea levels here um well 3.1 million years ago of course this year was under water never mind that right continents have shifted in between so i didn't certainly didn't look like this um now the point of course is that it is co2 anthropogenic co2 co2 put there by humans by humanity um that is generating a world that looks very different from anything any one of us has ever experienced and yes it is uncertainties than not knowing the fact frankly that climate scientists today are not predicting that sea levels would increase by as much as 20 to 60 meters because of the co2 already there right we are talking about one to two meters of sea level rise by the end of the century which just to be clear that is bad enough that should prompt us to act a long time ago but frankly that was my initial point the stuff we know is bad enough we need to cut co2 emissions in a major way not by going back to our caves our apartments but by investing in clean green lean mean efficient infrastructure and re-guiding re-channeling fundamental economic forces in the right direction through right germany california phasing out internal combustion engines through um china declaring itself to be carbon neutral by the way europe too of course right so these long-term goals right by now are in place are they ambitious enough already no is there enough action already happening in support of them no not at all um i i mentioned uh one last point quickly the um the social cost of carbon figure right as the guide in how ambitious policy ought to be well um actually almost regardless whether you think it's 50 or 100 but of course especially if you believe it is at least 100 and higher and frankly we just don't know well in europe right 50 of co2 emissions are covered under the current emissions trading system that's a good thing what's the price well it's somewhere around 20 30 um euros but now it is uh high again which is great fantastic right it is 30 euros more than we here in the u.s are being for the most part california are excluded now but of course that is not nearly ambitious enough it is not nearly high enough relative to the true social okay because now we're having so many problems there are jobs there are they're lacking there are factors to be reorganized with social distancing there's so much that is necessary do you think that there's still a determination to have insulation at home still have solar panels so as to use less uh oil and oil is even more it's even cheaper now don't you think that this could be an obstacle to this we are not in an easy situation right now not at all right and you know just to give you a sense so right so i'm i'm sitting here in new york i haven't left our apartment in quite a while or you know yes i've been outside but um uh my wife is a uh is a physician at one of the hospitals here um that was hit the hardest sort of you know epicenter of the epicenter so no right for several weeks in our lives this spring i couldn't care less about climate change if you ask me i right there there were different more immediate problems so to be clear this hits home yes it does so back to the point of investing in um low carbon high efficiency technologies uh implies that we actually would could employ many many more people doing the kinds of things that we know is necessary and that frankly we aren't currently doing because precisely because it would cost too much money why does it cost too much money to put solar panels here right on on our roof why is that the case well first of all the price has come down significantly by a lot that's a that's a difference but why does it cost more because it employs a lot of people why is the fossil fuel sector uh so relatively speaking so um efficient in the sense that a lot of energy with minimal inputs well other than the fact that when we burn a ton of coal or um a barrel of uh oil we are not currently for the most part paying for the consequences the pollution consequences but well it is a very um labor-efficient industry very little labor input to get a lot of energy now but once the solar panel is on the roof uh essentially uh you know solar technology in many ways is a lot more efficient because there is no input needed other than the maintenance on the side um which is of course what scares electric utilities and energy companies uh upfront investment and then you just reap uh the benefits meanwhile um the installation process the the fact that every wind turbine has a hundred tons of steel the large ones right that costs money that would employ a lot of people insulating homes right um is one of these no green new deal style projects that would reap a lot of benefits yes cost money but frankly well we're currently in the world where government ought to be spending a lot more uh not currently doing that right here in the u.s especially where the stimulus bill the next one is stuck in congress and frankly prominently stopped at least until we have a presidential inauguration um and the real problem is that we are not using the money that we should be spending in the kind of ways that would address not just one problem the pandemic and the current economic deep freeze we are in but frankly address another large systemic problem thank you very much for your most interesting explanation and as a matter of fact in europe in our continent government are certainly getting better aware the new commission as shared by van der lion said that investments being financed by european institutions should be targeted to a new development model to use energy more efficiently reducing kerbin mitigating pollution so we should focus on that then the pedenics broke out with the need of europe as the other regions in investors and so we're now faced with a need to invest wisely and we hope that this can contribute to bring about a leap forward in terms of infrastructures at european level and at the meantime we hope that in the states too the new ruling class is more responsible and understands that efforts are to be made to safeguard the environment and the planet so basically we should be sensitive to that thank you very much mr wagner thank you for your contribution and hope to see you again in person here in toronto thank you you