Economy

Economic models buckle under strain of climate reality

Published

10 months ago

November 22, 2023

Nov 22 (Reuters) – Ahead of international climate talks in Dubai this month, economists are updating estimates of the impact of global warming on the world economy, sometimes calculating down to a decimal place the hit to output in decades to come.

But detractors say those numbers are the product of economic models that are not fit to capture the full extent of climate damage. As such, they can provide an alibi for policy inaction.

Record temperatures, droughts, floods and wildfires this year have caused billions of dollars of damage, even before emissions take warming beyond the 2015 Paris Agreement cap of 2 degrees Celsius (3.6 Fahrenheit) above pre-industrial levels.

Still, some economist models conclude – implausibly, say the critics – that by the turn of the century, warming will cause less harm to the world economy than COVID-19 has, or hit global shares by less than in the 2007-2009 financial crisis.

Nobel-winning U.S. economist William Nordhaus sparked controversy in 2018 with a model that found the climate policies that best balanced the costs and benefits from an economic point of view would result in warming of more than 3C by 2100.

A year earlier, the Trump administration cited similar models to justify replacing the Obama-era Clean Power Plan with one allowing higher emissions from coal-burning plants.

Many policymakers acknowledge the modelling’s limitations: European Central Bank executive board member Isabel Schnabel said in September it could understate the impact. Others go further, saying the whole approach is flawed.

At issue are the “integrated assessment models” (IAMs) economists use to draw conclusions on anything from output losses to financial risk or the pricing of carbon markets.

They rely on a theory of how demand, supply and prices interact throughout an economy to find a new balance after an outside shock – the so-called “general equilibrium” model developed by 19th century French economist Leon Walras.

“But climate change is fundamentally different to other shocks because once it has hit, it doesn’t go away,” said Thierry Philipponnat, author of a report by Finance Watch, a Brussels-based public interest NGO on financial issues.

“And if the fundamental assumption is flawed, all the rest makes little sense – if any,” he told Reuters.

Another issue is that IAMs have for years used a “quadratic function” to calculate GDP losses that involves squaring the temperature change – while ignoring other methods such as the exponential function better suited for rapid change.

Critics say this choice is doomed to underplay the likely impact – particularly if the planet hits environmental tipping points in which damage is not only irreversible but happens at an ever-accelerating rate.

Line chart with data from Climate Tracker shows varying predictions of global warming damage as percentage of GDP.

THE SMELL TEST

Adding to the confusion, IAMs produce sharply different results according to their specific design and the variables they choose to include, making interpretation difficult.

The 2023 update of Nordhaus’ model, described on his website as the “most widely used climate-change IAM”, estimates damages of 3.1% of global GDP when 3C warming is reached.

By contrast, the latest run of the model used by the Network for Greening the Financial System (NGFS) – a grouping of central banks – calculates the path to 2.9C of warming in its “current policies” scenario would by 2050 have caused 8% of lost output from hazards such as drought, heatwaves, floods and cyclones.

Finance Watch also pointed to a 2020 study by the G20-backed Financial Stability Board (FSB) that cited economist estimates that 4C of warming could shave as little as 2.9% off the average value of global financial assets by the year 2105.

“None of the assumptions that this relatively small group of economists have made about global warming ‘pass the smell test’,” University College of London professor Steve Keen wrote in a paper this year of the need for economists to check their results against common sense and prevailing climate science.

Nordhaus did not reply to an emailed request for comment.

The FSB said its 2020 paper highlighted how much estimates of the hit to financial assets varied and that it was working with others to help authorities better understand the risks.

“To that end, the FSB has been working on the development of conceptual frameworks and metrics for monitoring climate-related vulnerabilities,” FSB Deputy Secretary General Rupert Thorne said in an emailed statement.

Livio Stracca, the ECB official who chairs the NGFS work on climate scenarios said by email that it openly accepted that, like any model, they had “certain limitations”. NGFS Secretary General Jean Boissinot said the body was keen to work with the academic community to resolve the issues.

But while advocates of IAMs say they are getting better all the time, others such as Nicholas Stern of the LSE/Grantham Research Institute said their focus was inherently too narrow to make sense of the extreme risks posed by climate change.

“They misrepresent the problem in terms of risk and in terms of what we need to know and do,” Stern told Reuters.

“We’ll need to look at energy models, cities, natural capital – and that is serious, deep economics around structural change,” he said, adding this method would better guide the investment decisions needed to address climate change.

Finance Watch’s Philipponnat said the European Union, which sees itself as a leader on climate issues, would have a chance to embrace a broader approach with a major study on climate risks it has scheduled for early 2025.

“Our main message is: ‘Economists, speak to climate scientists and come up with results that make sense’,” he said.

Writing and reporting by Mark John; editing by Barbara Lewis

Our Standards: The Thomson Reuters Trust Principles.

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Economy

B.C.’s debt and deficit forecast to rise as the provincial election nears

Published

2 days ago

September 10, 2024

Anne Joseph

VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.

Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.

Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”

The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.

Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.

“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”

Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.

Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.

Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.

B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.

The election is expected to be called on Sept. 21, with the vote set for Oct. 19.

“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”

Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.

Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.

The premier said that now is not the time to reduce supports and services for people.

Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.

Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.

This report by The Canadian Press was first published Sept. 10, 2024.

Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.

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Economy

Mark Carney mum on carbon-tax advice, future in politics at Liberal retreat

Published

2 days ago

September 10, 2024

Anne Joseph

NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.

But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.

He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.

Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.

Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.

Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.

This report by The Canadian Press was first published Sept. 10, 2024.

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Economy

Nova Scotia bill would kick-start offshore wind industry without approval from Ottawa

Published

2 days ago

September 10, 2024

Anne Joseph

HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.

Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.

The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.

Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”

Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.

Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.

This report by The Canadian Press was first published Sept. 10, 2024.

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