Prof. William Nordhaus, winner of the Nobel Prize in Economics for 2018. Nordhaus was the first to create a quantitative model that describes the interrelationship between climate and the economy, and he tries to estimate in his works the expected economic price of the climate crisis, as well as the possible solutions to contain it
The economic crisis that hit Israel and the world following the outbreak of the corona virus in 2020 illustrates well the ability of a natural phenomenon to significantly affect our lives. These unfortunate consequences raise doubts among many regarding the economic damages that are expected as a result of the worsening of the effects of a wider and much more difficult phenomenon from the natural world: the climate crisis. Today, there is a debate among economists on the question of what the extent of these damages will be, and claims are being made that they are expected to be much more significant than initially thought.
One of the prominent voices in the debate on the subject is Prof. William Nordhaus, winner of the Nobel Prize in Economics for 2018. Nordhaus was the first to create a quantitative model that describes the interrelationship between climate and the economy, and he tries to estimate in his works the expected economic price of the climate crisis, as well as the possible solutions to contain it.
According to estimates presented by Nordhaus bArticle who published in 2018, after winning the Nobel Prize, that if the average global temperature rises by 3 degrees Celsius, the global GDP (gross domestic product, the total value of the goods and services produced - in this case, all the countries of the world) will subsequently decrease by approximately 2.1 percent - and an increase of 6 degrees will lead to a decrease of 8.5 percent in GDP.
However, in the opinion of other prominent economists, Nordhaus' estimates of the extent of the expected economic damage are too low. "It can be said that most economists do not agree with Nordhaus's estimates," says Prof. Natan Sussman of the Israel Democracy Institute, an economics expert at the Institute for Advanced Studies in Geneva.
All industries will be affected
The principle that guides the various assessments on the subject is cost-effectiveness. Taking measures against the climate crisis naturally has an economic price. From a purely economic point of view, taking such measures is only worthwhile if their cost is lower than the cost of the economic damage that will be caused if they are not taken.
According to Australian economist Prof. Steve Keen, Nordhaus's estimates imply that taking measures against the climate crisis will only be financially viable if and when the global temperature rises Cross the high threshold of 4 degrees Celsius.
In the article Keen recently published in the journal Globalizations, he claims that the economic benefit of taking measures against the climate crisis is higher than Nordhaus estimated and that the economic damages of the crisis will be more significant than Nordhaus anticipated. According to Cain, one of the problems with Nordhaus's estimates lies in the fact that he predicts that the industries responsible for 87 percent of the world's GDP will not be affected by the climate crisis, because they are not conducted under the sky but in closed or underground spaces. This includes industries such as manufacturing, transportation, communications, finance, insurance, real estate (not located onshore), underground mining, retail and wholesale trade, and government services.
According to Cain, this claim is fundamentally wrong, and all industries will be affected by the climate crisis. According to him, the reason for this is that the impact of the climate crisis will not be limited to an increase in temperatures only: thus, for example, extreme climate events such as fires, floods and hurricanes are expected to worsen, which may also severely damage closed buildings.
Sussman adds that the damages of the climate crisis may also cause a financial crisis - that is, a situation where financial institutions, such as banks, are damaged. "When there is a flood, for example, houses that people took out mortgages to finance them and offices that companies took out loans for are destroyed," he says. "When the buildings are flooded, the banks that gave the mortgages and loans will not get the money back."
"When an economic crisis is accompanied by a crisis in the financial system, it is much more serious," explains Sussman. The reason for this is that the financial institutions can greatly assist in rescuing the economy from a crisis, by taking steps such as providing loans to individuals and businesses and making investments - which are not possible when they are not functioning.
Cain also criticizes Nordhaus' assumption that the decline in global GDP following the climate crisis will be moderate and gradual. According to him, according to scientific forecasts, the increase in global temperatures will actually be accompanied by tipping points, which if the temperature reaches, catastrophes will occur that will cause enormous damage - such as the complete melting of the sea ice in the summer in the Arctic region and the extensive melting of land ice in Greenland and Antarctica which, according to many studies, may already occur in the coming decades.
And what about the decrease in energy costs?
According to Sussman, taking measures against the climate crisis today has not only a great benefit, but also a significantly lower cost than in the past. "In recent years, the cost of using solar energy, including its installation and maintenance, has dropped dramatically, And today it is much cheaper than fossil fuels", He says. According to him, there has also been tremendous progress in the development of technological solutions that make it possible to store solar energy, so that it can be used even at night and on cloudy days. "Noordhaus, and other economists who made forecasts until 4-3 years ago, did not expect this decrease in costs," says Sussman.
Beyond that, reducing the effects of the climate crisis is not the only economic benefit of solar energy and other environmentally friendly technological developments, and they allow their users to enjoy additional benefits, for example by saving money. For example, an electric car is more energy efficient than a car that runs on an internal combustion engine, methods from the world of green construction enable savings in home heating and cooling expenses, and using bicycles creates local employment (such as shops and bicycle garages) and is also beneficial for health. Also, following the transition to electric transportation, the reduction of air pollution from vehicles in city centers is expected to save the public and governments a lot of health expenses (medications, hospitalization days, loss of work days and early mortality), due to an expected reduction in respiratory and cardiovascular morbidity.
The use of solar energy can also allow private users to sell excess electricity to the grid for a fee (for example to residents of the southern periphery of Israel, which is rich in sunlight), and to provide electricity from the roof of the house in developing countries, where in many cases there is no connection to the electricity grid, and even to create local networks that will supply and store electricity as needed .
"Economists underestimated the economic benefit of the transition to green energy in their predictions," says Sussman. According to him, these economic benefits are also very relevant to Israel. "I heard in one of the government offices the statement that the Europeans will take care of the climate and we will take care of the Iranians, that's the attitude. But the new studies show that the green policy is good for us beyond the environmental benefits."
Better to be safe than sorry
Of course, not everyone will benefit from the transition to green energies - fossil fuel industries, for example, will experience losses from reducing or ceasing the use of oil, coal and natural gas (and according to Sussman, they also have a very strong lobby, which tries to prevent such moves). "Nevertheless, looking at the company as a whole, this move is worthwhile, and you can use the profit from it to compensate those with a negative interest - to tell them 'take the money and go, open another business for you,'" says Sussman.
According to Sussman, the seriousness of the damages that are expected if the climate crisis continues and worsens should not be underestimated, and vigorous action must be taken to prevent them. "When it comes to the climate, it's better to be careful than complacent, because you can't negotiate with nature," he concludes.
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