The ongoing discussion of climate change has important results for economies. Whether the change is real or an artifact of measurement problems, whether it is caused by human activity or a natural part of weather cycles, whether it can be offset by technology or behavior change or not, it affects economies.
The very fact of the existence of the discussion affects people’s thinking about the many choices they make. Choices and their impact are at the core of economic behavior. Thus, two articles in The Economist magazine recently that offer a slightly revisionist view of climate change and climate change models are very relevant to the operation of national economies.
In the piece entitled “Apocalypse perhaps a little later,” The Economist staff reports that the increase in earth’s temperature has apparently plateaued recently. The article does not give a reason for this phenomenon. It does suggest several possibilities, including the protective effect of cloud cover, or a “greater natural variability” than previously imagined (The Economist staff).
Although perhaps giving the world some much needed extra time to make the critical transition from finite fossil fuels, this apparent slow-down does not offer the nations of the world a complete reprieve from the troubles that climate change will cause (The Economist staff).
The problem for nations is that even a slower climate change than expected cause’s uncertainty (The Economist staff). Uncertainty about the future of crops, and shipping, and agricultural pests, and fuel usage, just to name a few possibilities, all contribute to an atmosphere of lowered confidence. Such an ambiance of reduced assurance about the future is hostile to economic investment. Entrepreneurs and venture capitalists all prefer a more secure future to one that involves more unknowns.
The other article from The Economist, titled “Hot air: Are models that show the economic effects of climate change useless?” casts doubt on the techniques used by economists (The Economist staff). The techniques used to predict the impact on economic activity, as the article points out, are often “so arbitrary that their models say almost nothing useful” (The Economist staff).
They leave out a great deal, as do many models in economics. These items can end up being more important, as externalities, than the factors that were included in the model itself. In the case of climate change models, the article suggests that the factors that are sometimes excluded or “played down” are those that could push the system past the point of instability (The Economist staff).
One example is the potential for melting of the permafrost in the Arctic tundra. These soils are filled with methane, which is a potent greenhouse gas. The release of the quantity of greenhouse gas that is currently sequestered in permafrost would increase the rate of climate change.
The article suggests that the damage from such a series of events could cost 60 trillion dollars (The Economist staff). Since many buildings and railways in that part of the world are built on permafrost, this is perhaps not an excessive estimate. Thus, knowing the real impact of climate change would be vital to the economic health of all nations.
Knowing what is going to happen in the arena of climate change might well be beyond the capabilities of current science, given the immense complexity of the system, and the amount of missing information. After all, scientists cannot feasibly do experiments on global weather and ocean currents. However, economists and other observers can try to compensate for biases and tendencies in the way they view problems.
These articles suggest that an open mind and a willingness to consider all potential factors are essential assets to an economic modeler. Furthermore, these articles suggest that as with some other areas of economics and finance, uncertainty and other non-rational factors can be as powerful as facts and actual events in shaping economic behavior.
Works Cited
The Economist staff. “Apocalypse perhaps a little later: Climate change may be happening more slowly than scientists thought. But the world still needs to deal with it.” The Economist (2013). Web.
—. “Hot air: Are models that show the economic effects of climate change useless?” The Economis (2013). Web.