Ambitious climate action pays off

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Action to mitigate climate change costs money - but damage caused by climate change also entails financial burdens, particularly for future generations. So how much action to mitigate climate change makes economic sense? To find out, an international team of researchers led by the Potsdam Institute for Climate Impact Research has fed an earlier computer simulation with current data and findings from climate science and economics. The research projects, with participation from environmental economists from Heidelberg University, have shown that limiting global warming to under two degrees - as agreed at the 2015 UN climate conference in Paris - produces an economically optimal balance between future damage caused by climate change and present mitigation costs. That would require a CO2 price of over USD 100 per ton.

In 2018 William Nordhaus from Yale University (USA) won the Nobel Prize in Economics for integrating climate change into long-run macro-economic analysis. Specifically, the US scientist earned it with the aid of a computer simulation, the Dynamic Integrated Climate-Economy Model. The DICE model has now been updated based on recent research results from climate science and economic analysis. This comprises among others an improved carbon cycle model, a recalibrated temperature model and an adjustment of the damage function, which judges how strongly future climate changes will impact on the global economy. Normative assumptions of the recalibrated DICE model specifically concern the question of how to fairly distribute wealth between present and future generations, taking account of climate change. The updating of what is termed the social discount rate derives from a broad range of expert recommendations on intergenerational justice. Further additions relate, for example, to technologies on negative emissions with which CO2 can be removed from the atmosphere or the feasible speed of transition from a carbon-based economy.

The social discount rate plays a key role in the updated DICE model. This economic concept indicates how we rate the well-being of our children and grandchildren, as compared to our own well-being. The climate-related impacts of current emissions will have long-term effects. In order to be able to assess them appropriately, different views on how to strike a balance between the interests of current and future generations have to be taken into account. For the first time, the study contains a representative selection of recommendations from over 170 experts. The target of remaining under the two degrees limit is the economic optimum according to the social discount rates proposed by the majority of experts. In this context, Dr Frikk Nesje from the Alfred Weber Institute for Economics of Heidelberg University explored how to best mediate among different expert opinions on the social discount rate for policy purposes.

The changes in the model, particularly the reassessment of the social discount rate in favour of the well-being of future generations, have also impacted on carbon pricing. While William Nordhaus’ standard DICE model results in USD 40 per ton of CO2 in 2020, the model updated by the international research group calculates a CO2 price of over USD 100 in the fully recalibrated model. This would then - with few exceptions - make it higher than what most economic sectors implement, even in the most ambitious regions in the world, economist Dr Nesje emphasises. For example, a CO2 price of over USD 100 is about three times higher than the European Union emissions price. The study thus calls for more stringent climate policies to avoid leaving an unjustifiably high burden of climate impact to coming generations.

Participating in the study "Climate Economics Support for the UN Climate Targets" were, besides researchers from the Potsdam Institute for Climate Impact Research and Heidelberg University, researchers from the University of Hamburg, the University of Gothenburg and Chalmers University of Technology in Gothenburg (Sweden) along with London School of Economics and Political Science and the University of York (UK). The findings were published in "Nature Climate Change".

M.C. Hänsel, M.A. Drupp, D.J.A. Johansson, F. Nesje, C. Azar, M.C. Freeman, B. Groom, T. Sterner: Climate Economics Support for the UN Climate Targets. Nature Climate Change (published online 13 July 2020).

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