Climate Shock: The Economic Consequences of a Hotter Planet

A visit to my son’s family often provides me with an opportunity to read a book from my bucket list.  This time it was Climate Shock (2015), authored by the late Harvard economist Martin Weitzman and Columbia economist Gernot Wagner. I found this short (152 pages of formal text) book to be both informative for economists yet still very accessible to non-economists.

Bathtub as Atmospheric Capacity

The authors preface their analysis with two key questions:

“Do you think climate change is an urgent problem?”

“Do you think getting the world off fossil fuels is difficult?”

They believe that a positive answer to both should lead readers to find the appropriate current action for them to take, a subject addressed in their last chapter.

The authors provide an in-depth discussion why climate change is a unique “wicked” problem. Four features define its “wickedness.”

  • Climate change is global – among other things, the free rider problem across countries and sectors is pervasive.
  • Climate change’s effects are long term – many of the worst consequences won’t take place for many years, well outside the bounds of both the political and economic policy cycles.
  • Climate change is irreversible – much of the CO2 that has built-up over the last 200 plus years will be difficult, if not impossible, to remove from the atmosphere.
  • Climate change features pervasive uncertainty regarding the links between greenhouse gases emitted and the resultant physical and health damages.

The authors address what we know and don’t know regarding each of these features and indicate that existing evidence suggests large confidence bounds (such as those indicated in the paragraph below from the 2021 IPCC report) for predictive effects; however, the median estimates suggest a strong case for action.

“The equilibrium climate sensitivity is an important quantity used to estimate how the climate responds to radiative forcing. Based on multiple lines of evidence, the very likely range of equilibrium climate sensitivity is between 2°C (high confidence) and 5°C (medium confidence).” IPCC 2021 Physical Sciences Report A.4.4

For an intuitive sense of the seriousness of climate change, they present a bathtub analogy (see above image), which simply features the relationship among a tub, a faucet, and a drain. Think of the faucet as the array of pollutants and emissions that enter the tub (the atmosphere) and the drain as the actions that remove its effects from the planet.  If the faucet is left open too long, the tub fills up and the atmospheric effects increase and become harder to reverse.  Furthermore, expanding the drain size is viewed as very difficult. Advocates for regenerative agriculture might disagree (see below.)

After making a compelling case for reform, the authors address why change is so difficult.  They cite Nicolo Machiavelli’s timeless advice from The Prince (1532.)

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.  Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.” (Page 20)

The authors present two specific theories as to why serious reform is difficult. The Copenhagen Theory posits that major change only takes place in steps and over a long period of time; stated differently, “do as the Danes have done” will be difficult to implement broadly.  A second theory features the “crowding out bias,” which highlights the notion that people might be encouraged to adopt some behaviors that will reduce climate change and its effects but will then act as if they have done their part; so the array of needed changes will not take place at the scale necessary to successfully reduce climate change and its effects.

They propose a variety of options for reform.  Since both are economists, it’s not surprising that they emphasize putting a significant price on carbon as the most efficient way to drive behavioral change.  When they wrote the book, the authors suggested a minimum carbon price of $40 per metric ton.  Most current estimates are much higher.  Given the lack of feasibility of introducing serious carbon pricing, they see little appetite to follow Sweden, which introduced carbon prices in 1991 at $29 per metric ton (MT). This price has been continually increased since then with the carbon price in 2022 at $137/MT.

Politics and short-term consequences may mean that second and third best solutions – such as subsidizing particular activities – might be the most viable serious policy response. This was clearly the case for the United States in the Inflation Reduction Act passed in 2022, which contained a raft of subsidies for the development and purchase of greenhouse gas reducing technologies.  

Such incentives, however, must confront the massive subsidies given to fossil fuels.  In short, much of the world faces a negative price on the emission of carbon into the atmosphere.  Wagner and Weitzman cite a fossil fuel subsidy of $15 per MT as the average negative price at the time of their book.  For 2022, the International Energy Agency estimates world-wide fuel subsidies in excess of one trillion dollars, double the amount in 2021; some of these subsidies (in Europe, for example) are a direct result of policy actions designed to counter the effects of responses to Russia’s invasion of Ukraine. Given the roughly 9 billion tons of carbon put into the atmosphere each year, this amounts to a subsidy in excess of $100 per metric ton. Even at half this amount, as was typical prior to 2022, this massive subsidy discourages reduced consumption of fossil fuels.

So, what carbon price would appropriately match the social cost of the damage that results from its release into the atmosphere? A November 2022 EPA report cites a minimum carbon price of $120 per metric ton based on a discount rate of 2.5%.  Resources for the Future, an American research foundation, continues to update its estimates of the social cost of carbon.  Here are two citations from a recent broadcast on the topic.

 “The social cost of carbon is an economic measure of the marginal damage from an additional ton of greenhouse gas emissions … It basically says that if you have a baseline of greenhouse gas emissions, and you emit an additional ton of greenhouse gas emissions, what is the effective dollar cost to society—the social cost from the addition of that ton of greenhouse gas emissions? Or you can flip that around and say, What is the dollar benefit of not emitting that ton of greenhouse gas emissions? That’s what the social cost of carbon will tell you.” —Kevin Rennert (2:40)

“Here is the big reveal, or estimate, for the [social cost of carbon]: After putting together all the pieces—the socioeconomics, the emissions, the climate modeling, the temperature [change], the projections, the climate impact studies, and the discounting—we ultimately come to an estimate for the [social cost of carbon] of about $185 per ton of carbon dioxide. How does that compare to the other estimates out there? The natural benchmark estimate is the existing interim estimate used by the federal government, which amounts to $51 per ton of carbon dioxide.” —Brian C. Prest (7:21)

The authors address one geo-engineering alternative to carbon pricing:  volcanic eruptions that put tons of sulfur dioxide into the stratosphere.  They cite the Mount Pinatubo eruption in Philippines in 1991 which decreased global temperatures by 0.5 degrees Celsius.  Of course, these effects were temporary and come with the downsides of spewing sulfur dioxide.  Clearly, strategies such as releasing sulfur dioxide to combat carbon dioxide would be non-starters.

The authors do not mention other options such as regenerative agriculture, which seeks to protect the soil so that vegetation can grow and, consequently, absorb carbon dioxide.  My son shared with me the documentary “Kiss the Ground”, which makes a strong case for the power of soil regeneration, and against traditional tilling and pesticide use.  The documentary markers argue that a vibrant transformation of agriculture and the management of land can significantly reverse the carbon put in the atmosphere historically.  The documentary is readily available at Kiss the Ground Film | Official Website (

If judgments regarding policy are to be based on the stream of future costs and benefits, how one incorporates future effects into present terms becomes central.  Typically, economists use discount rates reflective of the cost of risk-free borrowing or the returns needed to postpone consumption, such as the 2.5% rate in the EPA estimate noted above.  Governments typically use a rate in the 2% to 4% range.  The authors make an interesting case for much lower, or even a negative, discount rate.  Lower or negative rates give much more weight to future effects when the damage cost of climate change is projected to increase markedly.  Here’s their argument.

“…the primary driver for low discount rates is uncertainty around the correct rate itself. Who knows what the discount rate should be a century or two from now. The less we know about the correct discount rate, the lower it ought to be. Since we know less about the right discount rate the further out we go, the rate ought to decline over time.” (page 69)

If a low or negative discount rate is chosen, the higher the present discounted value of actions taken today.  For example, at 1.5% instead of the 2.5% cited above, the EPA estimate of the social cost of carbon per metric ton rises to $340.

Wagner and Weitzman conclude their book with three recommendations:

  • Scream well – that is, protest constructively
  • Learn to cope – by adapting to present and prospective changes in the climate
  • Encourage profitable opportunities – to incentivize capital to flow towards adaptation and mitigation rather than to the continued use of fossil fuels.

On page 78, the authors cite Pascal’s wager regarding how to deal with uncertainty.  Pascal asked whether one should lead a virtuous life in order to avoid eternal damnation.  He argued that even if eternal damnation did not take place, one could take solace in having led a virtuous life.   A parallel argument exists for responding to climate change.  If the effects of climate change are real, people will benefit from a more sustainable, cleaner and healthier environment.  Even if the effects are less than many predict, people will still benefit from a cleaner and healthier environment. 

Bottom line:  act now to change personal behaviors and to influence policies that encourage the transition to reduced carbon in the atmosphere.

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