The Flattening Climate Damage Function
Could the Social Cost of Carbon Decline over Time Due to Adaptation Progress?
I enjoy reading New York Times pieces by David Wallace-Wells about the climate change challenge. The point of this blog post is to gently push back against the general “doom and gloom” flavor that emerges from many of his pieces.
Does climate change pose an existential challenge for people in the developing world?How do people and academics evaluate this theme? Back in 2005, I published a paper titled; “The Death Toll from Natural Disasters” where I convinced myself that richer nations suffer fewer per-capita deaths from natural disasters. In 2021, we released a NBER Working paper documenting that richer nations suffer less economic damage and recover faster from floods than do poorer nations.
These results suggest that richer people and richer places are less likely to die and suffer less when place based shocks occur. What could be the mechanism? Richer people have access to better foods, live in better housing, live in places with better infrastructure and have access to better emergency health care and disaster relief services. Richer nations have better disaster preparation plans and are more likely to alert their citizens. All of this evidence suggests to me that a key strategy in adapting to new climate risks is to accelerate economic development.
The point of my 2010 Climatopolis book was that since the world is urbanizing and since urbanites invest more in their human capital that urbanization would accelerate climate change adaptation in the developing world. Wallace-Wells does not engage with the theme that people in the developing world have an ever increasing capacity to protect themselves from the serious threats that climate change poses. Why? Incomes are rising in the developing world and the menu of pro-adaptation products they can purchase grows each day. Read our 2017 paper for more details here on endogenous innovation.
Developing countries are integrated into the world’s trading system and this allows for migration to richer nations, allows for inflows of capital and allows these countries to import cutting edge technology. As the U.S, Europe and Asia innovates and creates new pro-adaptation products ranging from cell phones to air conditioners, these blue prints diffuse around the world and people in developing countries can buy these goods and protect themselves. In this sense, the “invisible hand” accelerates adaptation.
I am willing to bet David Wallace-Wells and other pessimists about the following statistical test. Old timers will recognize that this resembles the famous bet between Julian Simon and Paul Ehrlich.
In the equation below, I present a typical “climate damage function” that empirical economists estimate. Damage represents the dollar damage or deaths that area i at time t suffers. For example, this could be Miami in the year 2007 or Uganda in the year 2021.
In this linear production function of damage, each place “i” has its own intercept (called “a”) here. Due to geography, different areas face different average risks and this subscripted “a” captures this. Over time, the damage incurred can change. For example, if the world economy is booming then Vt may decline over time because fewer people are living in poverty.
Recall from basic algebra class that the slope of this function is “B”. This represents how the damage to place i in year t is affected when extreme weather occurs. Extreme weather could be extreme heat, drought or a natural disaster. We expect that B is positive as this reflects that extreme weather causes damage.
THE ADAPTATION HYPOTHESIS posits that B is shrinking towards zero over time as this means that we are getting better at taking punches from Mother Nature. Why is adaptation progress accelerating? I sketched some reasons above and my 2021 book studies this in detail. Richer nations experience a reduction in the marginal harm caused by disasters. Consider the ugly recent Hurricane Ian that hit Florida. It may have caused $50 billion in damage. The U.S Economy’s GNP is $20 trillion per year. 50b/20t equals 50/20000 = 5/2000 = 1/400. There is no place based shock that knocks the U.S economy off course.
As Florida rebuilds, homes will be rebuilt with better materials that meet modern codes and a more resilient local economy will emerge so that the next Hurricane Ian causes less damage and a smaller “B” emerges. This is the adaptation hypothesis. As we grow richer, we value our safety more but climate change causes less risk to our safety. This dynamic is missing in the writing of David Wallace Wells. If as we grow richer, the death count and destruction caused by extreme weather declines, then the social cost of carbon declines.
Is David (the new Paul Ehrlich) and his colleagues at the New York Times willing to bet me (the new Julian Simon). 12 years ago , Joe Romm turned down this bet.