The Climate Cost Conspiracy: Inflating Economic Damages for Profit
The non-peer-reviewed recent paper claiming that global temperature increases drastically harm economic activity is a prime example of the climate industrial complex inflating costs.
The assertion that a 1°C rise in global temperature could lower world GDP by 12% at its peak starkly contrasts with empirical data suggesting a reduction of merely 1-3%.
This article critically examines the methodology and conclusions of the paper, arguing that the authors are overstating the economic damages while ignoring their own clear evidence that warmer temperatures have recently boosted global GDP.
The authors rely on a time-series local projection approach to estimate the impact of global temperature shocks on GDP. This method is fraught with issues. The paper exploits natural variability in global mean temperature to infer the impacts of climate change. However, natural variability, such as El Niño and volcanic eruptions, is not representative of long-term climate change effects.
These short-term variations overstate economic impacts compared to the more gradual and predictable warming trend observed historically. Additionally, the approach assumes that innovations to the temperature process are orthogonal to their long-run trends, which is a flawed assumption.
Economic and temperature trends are interlinked, and decoupling these trends for analysis can lead to erroneous causal inferences. Selecting a two-year horizon to model temperature shocks fails to capture the long-term adaptive responses of economies, skewing results towards immediate but transient disruptions rather than considering long-term resilience and adaptation.
One glaring omission in the paper is the lack of consideration for the positive economic impacts of recent warming. Empirical evidence consistently shows that recent warming has had beneficial effects on economic activities. Figure 1, shows this in clear detail.
The authors acknowledge this but devise a clever plan to get around this pesky fact…
A simple regression of global GDP on temperature will yield a spuriously positive association between the two variables, as economic growth is associated with higher GHG emissions which eventually translates into higher temperature.
Therefore, we do not focus on the level of temperature as the treatment in our projections, but instead focus on so-called temperature shocks.
Moderate warming has led to longer growing seasons and increased agricultural yields. Ignoring these positive outcomes results in a skewed analysis that overstates the negative impact on GDP. Additionally, warmer temperatures in colder regions have reduced deaths and heating costs, freeing up disposable income and boosting economic activity.
These cost savings are not accounted for in the paper, further exaggerating the negative economic impacts. The paper also ignores human and technological adaptation to climate changes, such as improved agricultural practices, advanced weather forecasting, and resilient infrastructure. These dynamic responses mitigate many of the negative impacts the paper claims are so severe.
The paper extends the Dynamic Integrated Climate Economy (DICE) model to include capital depreciation damages and uses reduced-form results to estimate structural damage functions. This approach is highly problematic.
Including capital depreciation damages without robust empirical backing introduces significant bias. The relationship between temperature and capital depreciation is complex and context-specific, making it difficult to generalize across different regions and economic sectors.
Furthermore, calibrating the model based on historical data from 1960 onwards fails to account for future economic dynamics accurately. The past six decades have seen unprecedented technological and social changes, which may or may not represent future trends. Additionally, the conclusions heavily depend on the choice of discount rate.
A higher discount rate, which might be more appropriate given the uncertainty and long-term nature of climate impacts, could significantly reduce the present value of estimated damages.
While the paper attempts to address issues with their causal interpretation, these efforts fall short. Controlling for global economic downturns and macro-financial variables does not eliminate all confounding effects.
Economic cycles are complex and multifaceted, and their interaction with temperature shocks can vary widely across different contexts. The assumption that reverse causality is negligible is also debatable. Economic activities influence GHG emissions. This bidirectional relationship complicates isolating temperature impacts on GDP.
Furthermore, the consistency of results across different time frames and the application of global temperature shocks to country-level GDP does not ensure broader generalizability. Regional differences in climate sensitivity and economic structure lead to varied impacts, which a single global model surely fails to capture.
In conclusion, this paper epitomizes the climate industrial complex’s tendency to inflate costs while ignoring clear observational data showing that warmer temperatures have recently boosted global GDP.
The reliance on a flawed time-series local projection approach, the exclusion of positive economic impacts, and the biases in structural damage functions and model calibration all contribute to an overestimation of climate change damages.
The entire discourse surrounding rising costs and climate change is essentially about justifying ways to extract money from individuals and industries by placing a price on a non-toxic trace gas.
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