By Robert E. Rubin
Robert E. Rubin, co-chairman of the Council on Foreign Relations, was treasury secretary from 1995 to 1999.
Good economic decisions require good data. And to get good data, we must account for all relevant variables. But we’re not doing this when it comes to climate change — and that means we’re making decisions based on a flawed picture of future risks. While we can’t define future climate-change risks with precision, they should be included in economic policy, fiscal and business decisions because of their potential magnitude.
The scientific community is all but unanimous in its agreement that climate change is a serious threat. According to Gallup, nearly 60 percent of Americans believe that global warming is caused by human activity. Still, for many people, the effects of climate change seem like a future problem — something that falls by the wayside as we tackle what seem like more immediate crises.
But climate change is a present danger. The buildup of greenhouse gases is cumulative and irreversible; the pollutants we are now emitting will remain in the atmosphere for hundreds of years. So what we do each day will affect us and the planet for centuries. Damage resulting from climate change cuts across almost every aspect of life: public health, extreme weather, the economy and so much else.
What we already know is frightening, but what we don’t know is more frightening still. For example, we know that melting polar ice sheets will cause sea levels to rise, but we don’t know how negative feedback loops will accelerate the process. As polar ice melts, the oceans absorb more heat, which causes more ice to melt. And the polar ice sheets have already started to melt.
When it comes to the economy, much of the debate about climate change — and reducing the greenhouse gas emissions that are fueling it — is framed as a trade-off between environmental protection and economic prosperity. Many people argue that moving away from fossil fuels and reducing carbon emissions will impede economic growth, hurt business and hamper job creation.
But from an economic perspective, that’s precisely the wrong way to look at it. The real question should be: What is the cost of inaction? In my view — and in the view of a growing group of business people, economists, and other financial and market experts — the cost of inaction over the long term is far greater than the cost of action.
I recently participated in a bipartisan effort to measure the economic risks of unchecked climate change in the United States. We commissioned an independent analysis, led by a highly respected group of economists and climate scientists, and our inaugural report, “Risky Business,” was released in June. The report’s conclusions demonstrated the significant harm that climate change is causing now and that will almost certainly be far more severe in the future — to the agricultural, energy and coastal-property sectors, as well as to public health and labor productivity more generally.
By 2050, for example, between $48 billion and $68 billion worth of current property in Louisiana and Florida is likely to be at risk of flooding because it will be below sea level. And that’s just a baseline estimate; there are other scenarios that could be catastrophic.
Then, of course, there is the unpredictable damage from superstorms yet to come. Hurricane Katrina and Hurricane Sandy caused a combined $193 billion in economic losses; the congressional aid packages that followed both storms cost more than $122 billion. We can’t attribute all the damage caused by Katrina and Sandy to global warming, but we know that rising sea levels led to significantly worse surges, and that the frequency and intensity of superstorms are almost certain to increase if global warming persists. It’s highly likely that as climate change continues, the damage will not increase on a straight line. Instead, it will increase on an upward-sloping curve, that could become catastrophically steep, because of negative feedback loops and other factors.
And dramatically rising temperatures in much of the country will make it far too hot for people to work outside during parts of the day for several months each year — reducing employment and economic output, and causing as many as 65,200 additional heat-related deaths every year. That’s almost twice as many deaths as those caused by motor vehicle accidents in 2012.
The U.S. economy faces enormous risks from unmitigated climate change. But the metrics we currently use to measure economic growth, fiscal prospects and business earnings do not incorporate these risks. If we are going to have a well-informed and accurate debate about the economic costs of action vs. inaction, the public and private sectors need metrics that honestly reflect climate-related risk.
First, future federal spending to deal with climate change is likely to be enormous and should be included in fiscal projections, whether in existing estimates or in additional estimates that include climate change. If nothing is done to prevent climate-related crises, the federal government will be forced to deal with them later — from property losses to public health crises to emergency aid. These huge risks are not currently in official future estimates or federal budget plans.
To cover those costs, we will have to increase the deficit; raise taxes; or significantly cut spending on defense, our social safety net, and public investment including infrastructure, education and basic research. Which means that, whatever your public policy views, whether you care about our national debt and deficits, our tax rates, or government investment in everything from national security to job creation, you should care about the costs of coping with climate-related damage. By forcing policymakers to recognize likely future expenditures — and the trade-offs required to make them — we may increase the political appetite for policy changes now.
Second, investors should demand that companies disclose their exposure to climate risks, including the impact that climate change could have on their businesses and assets, the value of their assets that could be stranded by climate change, and the costs they may someday incur to address their carbon emissions. Former New York mayor Michael Bloomberg, who was a co-chair of the “Risky Business” report, and former Securities and Exchange Commission chairwoman Mary Schapiro are leading an effort to encourage businesses to incorporate such reporting into their quarterly disclosures, but it is still considered optional by the SEC. I believe that such disclosures should be considered material and mandated by the SEC, not just requested by investors. If companies were required to highlight their exposure to climate-related risks, it would change investor behavior, which in turn would prod those companies to change their behavior.
Third, I believe that gross domestic product — the current standard measure of national economic health — is inadequate and misleading, because it fails to account for significant externalities, beginning with climate change. Others might think we should incorporate additional externalities beyond climate impacts, and that’s a good discussion to have. But we should start with a parallel GDP that incorporates the impact of greenhouse gas emissions. Without that, we are using an incomplete measure of economic output to inform policy decisions. Currently, GDP simply reflects the goods and services produced by our economy. However, it does not account for the present and future damage resulting from the emissions involved in producing those goods and services. And bad data leads to bad policy.
We do not face a choice between protecting our environment or protecting our economy. We face a choice between protecting our economy by protecting our environment — or allowing environmental havoc to create economic havoc. And a major step toward changing the debate is to change the way we measure the health of our economy, our fiscal conditions, and the health of individual companies and businesses to better reflect the world as it will be.