Climate Change Economics and the Climate-Conflict Nexus: Some Takeaways for Policy-Makers

On the occasion of the 2018 Nobel Prize in Economic Sciences, which was awarded to William Nordhaus for his work on climate change economics (alongside Paul Romer for his contribution to macroeconomics), we highlight some essential findings of that research and then link them to research on climate change and human security (conflict). From this we derive some policy implications that can be drawn when linking results from integrated assessment models (climate change economics) with what we know from analyses of the climate-economy-conflict nexus.

A fishing boat in Bangladesh. Countries in the Global South, which are more reliant on climate dependent sectors such as fishing, will be harder hit economically by climate change. Photo: Jason Miklian / PRIO

Nordhaus’ contribution to climate change economics

Limiting global warming to 1.5-2°C, as aimed at by the Paris Agreement, requires ‘deep emissions reductions in all sectors, a wide portfolio of mitigation options and a significant upscaling of investments in those options’, as the recent IPCC 1.5°C special report (SR15) recommends. However, greenhouse gas (GHG) reductions on such a massive scale, essentially down to zero by the second half of this century, come with enormous economic opportunity costs. Unless those costs can be brought down, the 1.5°C goal will be politically unattainable, as William Nordhaus, the 2018 Nobel Prize Laureate in Economics, has often stated.

Nordhaus pioneered the economic analysis of climate change ‘by integrating climate change into long-run macroeconomic analysis’, helping us understand the damage done by climate change and how policymakers could respond to this threat to humanity. Nordhaus used integrated assessment models (IAMs), specifically the Dynamic Integrated Climate-Economy model (DICE) and a regional version called the Regional Integrated Climate-Economy model (RICE) to investigate how economic growth affects the climate through GHG emissions and, in turn, how the resulting global warming inflicts costs on society in the future. Estimates from such IAMs, by Nordhaus and many others in the meantime, on economic damage from climate change (and thus potential benefits from avoiding such damage) and on costs of mitigation measures, rely on specific assumptions and data that are, to some extent, subject to debate. Nonetheless, they provide important political guidance in terms of offering an overall intuition, in highly aggregated form, of the benefits and costs of GHG mitigation, globally, and at regional and national levels.

Following in the footsteps of the English economist Arthur Pigou (1877–1959), Nordhaus was also an early advocate of using carbon taxation, rather than non-market instruments, such as end-of-pipe or technology regulations, to achieve GHG emission cuts. When burning fossil fuels, most of their carbon content is released as CO2, which is the most important GHG in terms of its global warming effects. This means that taxing carbon content in fossil fuels is equivalent to taxing CO2 emissions. Carbon taxation increases the cost and thus discourages the consumption of fossil fuels. It thus encourages firms and individual consumers to find alternatives to carbon-based sources of energy and encourages the development and use of new technologies.

Economic and social consequences of global warming

A recent UNEP report documents that in 2017 global GHG emissions increased again, after signs of levelling off in the prior 2-3 years. This suggests that commitments by the parties to the Paris Agreement to cut their emissions, and even more so implementation of these commitments, are still falling far short of what is needed to reach the 1.5-2°C target. Moreover, slow progress in reducing emissions means that global emission levels will peak later in time, which in turn will require even more drastic and costly cuts in the future. Another recent report, the above-mentioned IPCC SR15, casts strong doubts over whether the 1.5°C target can still be reached. It also shows that climate change is already now having a strong impact in many parts of the world. Indications include, for example, recent heat waves in Europe, wildfires in Sweden, Greece, and California, droughts in Cape Town, South Africa, and powerful storms in Florida and the Philippines. The IPCC predicts that the Earth will reach 1.5°C warming above pre-industrial levels by as early as 2030. It also delivers its starkest warning ever that, as climate change worsens, negative impacts on economic growth, health, livelihoods, food security, water supply, and human security will grow significantly, unless international political action is taken to limit warming to 1.5°C and prepare societies to withstand severe climate change impacts.

The IPCC SR15 concludes that economic damage from global climate change will be lower if, by the year 2100, the world warms only by 1.5°C, rather than by 2°C or more. The mean net present value of global economic damage caused by climate change is estimated to be $54 trillion and $69 trillion at 1.5°C and 2°C warming respectively, relative to the 1961-1990 period. In the same vein, the Fourth US National Climate Assessment report states that the US economy could lose hundreds of billions of dollars – or, in the worst-case scenario, more than 10% of its GDP – by the end of the century if global warming continues apace. Such climate change-induced economic consequences imply that climate change will act as a poverty multiplier by increasing the number of poor people and by making poor people even poorer. However, climate change-induced economic damage will not be uniformly distributed across the globe. Developing countries, and in particular countries in Sub-Saharan Africa, South-East Asia, and Latin America, are more likely to disproportionately experience these negative economic effects of global warming. The main reason is that a much larger share of their GDP is made up of climate dependent sectors, such as agriculture, fisheries, and tourism, and that they have a lower capacity to adapt to climatic changes.

Implications for human security

While research in climate change economics provides a wealth of information, at highly aggregated levels, on economic damage that is likely to result from global warming, and on how GHG emissions could be reduced in economically efficient ways, it tells us very little about specific social implications, including those for human security, of global warming. Such implications have been studied in another, very important field of scientific research.

Climate change can be best understood as a ‘threat multiplier’; that is, a phenomenon that further increases the likelihood of social instability or even violent conflict by exacerbating pre-existing problems, such as poor economic conditions, political and economic inequality, or deficient governance. Many scholars have argued that increasing temperatures, decreasing precipitation, increased variability thereof, or extreme weather events, as a result of climatic changes, could lead to more social conflict, and perhaps also to more violent social conflict, via their negative economic impacts (see, e.g., here and here). Specifically, climate change-induced income losses could increase economic and social inequality and thus grievances, reduce opportunity cost of joining armed groups that promise to address such grievances, and reduce governments’ ability to provide for people and maintain peace and stability. Migration due to climatic changes, and resulting deterioration in living conditions in certain places, is potentially another conflict trigger, as we show here.

We think that claims about massively increased migration, social violence, and even civil wars resulting from climate change are highly dubious.

Empirical studies on the climate-conflict nexus have, thus far, produced contradictory findings. For instance, while some studies have reported that climate change leads to more violent conflict particularly in Africa (e.g., here and here), others found no significant effects of this kind (as reported here; see also here and here). In view of this scientific literature, the Human Security Chapter of the IPCC’s Fifth Assessment Report (IPCC AR5) (2014) stated that ‘…collectively the research does not conclude that there is a strong positive relationship between warming and armed conflict’.

Yet, because climatic changes are unlikely to have the same, uniform effect on individuals and communities around the globe, recent studies have focused more on areas where agriculture represents a large share of the national income and where rain-fed crops dominate, such as in sub-Saharan Africa and Asia. Most of these studies conclude that adverse climatic conditions have a negative effect on agricultural production, livestock prices, and incomes, as well as food prices. However, recent research also shows that whether adverse economic conditions, induced by climatic changes, lead to social conflict depends on the national, regional, and local socio-economic and political institutions. In particular, there is quite robust evidence that adverse climatic conditions increase conflict risk primarily in places that are poor, highly dependent on agriculture, and the home of politically marginalized groups.

The good news is that most parts of the world should be able to cope with climate change-induced economic damage without experiencing significantly increased levels of social unrest and violence. The bad news is that the worst hit in this respect are likely to be places where human livelihoods are already precarious and levels of social unrest and violence are quite high even now.

What conclusions can we draw from IAMs and the climate-conflict literature combined?

The relationship between climatic changes, their economic implications, and social conflict (including violent conflict at various scales) is very complex and not yet fully understood empirically, meaning ex post. And because meaningful predictions for the coming decades are highly problematic without robust evidence on the climate-conflict nexus in the past, we think that claims about massively increased migration, social violence, and even civil wars resulting from climate change are highly dubious.

This gap between what appear to be plausible arguments about climate change causing social conflict on the one hand and the existing empirical evidence on the other is not the result of poor data and inappropriate methods social scientists are using for their research. The main reason is that effects of climatic changes on economic conditions, and knock-on effects of changes in economic conditions on social conditions and conflict are highly contingent on a myriad of local and regional conditions. This is why analyses at the global or world-region scale tend to produce very ambiguous or non-significant findings.

From what we know, thus far, based on such more nuanced analyses, the good news is that most parts of the world should be able to cope with climate change-induced economic damage without experiencing significantly increased levels of social unrest and violence. The bad news is that the worst hit in this respect are likely to be places where human livelihoods are already precarious and levels of social unrest and violence are quite high even now.

If we now connect what we know from IAMs with what we know from the statistical (empirical) analyses of the climate-economy-conflict nexus, what can we conclude from this research in combination?

At the global scale, the IAMs tell us that keeping the world within the Paris Agreement warming targets is likely to be achievable at lower total cost if global GHG emissions peak within the next few years, if emissions are reduced essentially to zero within the next 30-50 years, and if this can be done through economically efficient policy-instruments, such as carbon taxation. To the extent this could be achieved, richer countries might then be more willing and able to provide support to those countries and localities therein that are identified by the more fine-grained empirical research on the climate-economy-conflict nexus as being particularly vulnerable to climate change. Conversely, this means that if richer countries do not engage in drastic emission cuts very soon, they are likely to face both more severe economic damage from climate change and higher mitigation and adaptation costs at home. This, in turn, would probably reduce their appetite for providing support to poorer countries suffering even more from climate change-induced economic damage and its knock-on effects, including social conflict.

Some takeaways

The existing scientific evidence indicates that further delays in sharply reducing GHG emissions will inflict large economic damage on future generations both in rich and poor countries and are likely to increase social conflict and violence particularly in some parts of the Global South that are already suffering from such problems today. However, drastic cuts in GHG emissions have strong distributional effects within countries, imposing higher opportunity costs on some sectors, individuals, or geographic areas, than on others. They also require painful trade-offs between reduced economic growth in the short or even medium term, which may cause severe social conflict, and avoiding large economic damage from climate change in the long-term, which may cause even worse social conflict. Such distributional problems and trade-offs are very difficult to deal with even in rich countries, as the recent “Gilet Jaune” unrest in France demonstrates. But they are probably even much more challenging in poorer countries and should be a top priority both in climate and in development policy. Scientific research could contribute to such policy efforts by coming up with quantitative assessments of the net effects of different GHG mitigation strategies both on economic welfare and social conflict. One starting point for this could be forecasting research by Hegre and colleagues. They show that broader socioeconomic development, expressed by higher growth in education and poverty alleviation, could help in offsetting most of the conflict risk in developing countries associated with reduced economic growth due to implementation of policies to curb GHG emissions.