The costs of inaction
Economists attempting to evaluate the impacts of climate change are often caught between hard theory and exceedingly rocky empirics. Impact assessment models are necessarily based on highly aggregated – and sometimes highly simplified – damage functions. This study takes an alternative approach: a bottom-up, physical impact assessment and respective monetization, attempting to cover a much broader set of impact fields, feeding directly into a macroeconomic and welfare analysis at the national level. To ensure consistency, our approach applies impact assessment at the sectoral impact chain level using shared socioeconomic pathways, consistent climate scenarios, computable general equilibrium evaluation, and non-market impact evaluation. The approach is applied to assess a broad scope of climate impacts in Austria. Results indicate significant impacts around ‘known knowns’ (such as changes in agricultural yield from climatic shifts), with uncertainty increased by ‘known unknowns’ (e.g. changes in water availability for irrigation, changes in pest and diseases) but also raises the question of unknowns and unknowables, which may possibly dominate future impacts (such as exceedance of critical ecosystem function for supporting agriculture). Climate change, ultimately, is a risk management problem, where insurance thinking warrants significant mitigation (and adaptation) action today.
Analysis of the study result indicate that the current welfare damage of climate and weather induced extreme events in Austria is an annual average of € 1 billion (large events only). This has the potential to rise to € 4 to 5 billion by mid-century (annual average, known knowns of impact chains only), with an uncertainty range of € 4 to 9 billion. When extreme events and the tails of their distribution are included, even for a partial analysis focused on extremes, damages are seen to rise significantly, e.g. with an estimated increase to € 40 billion due to riverine flooding events alone by the end of the century. These highlight the need to consider the distribution of impacts, as well as the central values.
Full text: “Climate Change Impacts at the National Level: Known Trends, Unknown Tails, and Unknowables” (December 8, 2014)
Steininger, Karl W., Gernot Wagner, Paul Watkiss, Martin König. “Climate Change Impacts at the National Level: Known Trends, Unknown Tails, and Unknowables.” In: Steininger, Karl W., König, Martin, Bednar-Friedl, Birgit, Kranzl, Lukas, Loibl, Wolfgang, Prettenthaler, Franz (Eds). Economic Evaluation of Climate Change Impacts, Springer (2015).
Brief German summary: Wagner, Gernot. “Versicherung und Klimawandel.” In: Steininger, Karl W. (Ed). “Die Folgeschäden des Klimawandels in Österreich,” Cost of Inaction (COIN) Broschüre (2015).