Even before the pandemic hit, the nature of the discussion on the federal government’s fiscal space and the scope of action needed to address the climate crisis had shifted. Economists, including former Treasury Secretary Larry Summers, former Council of Economic Advisers Chair Jason Furman, and former International Monetary Fund Chief Economist Olivier Blanchard, published widely discussed articles suggesting that—especially given the continued downward trend in real interest rates in the United States and around the world in recent decades—near-term increases in public debt may carry substantially lower risks than previously assumed.5 Moreover, a wide range of economists have made the case since the pandemic began that deficit fears should not stand in the way of large-scale, unpaid-for economic stimulus.6
On the climate side, recent analyses have also brought greater clarity around the immense potential costs of climate change from following a business-as-usual course. The IPCC’s report on warming of 1.5 degrees Celsius, or 2.7 degrees Fahrenheit, and the Fourth National Climate Assessment, both published in 2018, offered a comprehensive picture of the broad array of human, economic, and environmental costs that climate change presents. Combined with a growing literature on the economics of climate change—typified by the American Climate Prospectus published in 2015—these reports emphasized how, as stated in the Fourth National Climate Assessment, continued warming will “cause substantial net damage to the U.S. economy throughout this century, especially in the absence of increased adaptation efforts.”7
Yet fiscal analysis as traditionally conducted by CBO and OMB has not taken into account the economic, fiscal, and distributional consequences of business-as-usual emissions or how climate policy might change that trajectory. In other words, this analysis has typically been conducted under the implicit assumption that climate change—and, in turn, measures to address it—is trivial in the broader scheme of the long-term economic and fiscal outlook. And while fiscal scoring efforts are ostensibly designed to bring longer-term policy impacts and trade-offs into relief, they are primarily focused on a 10-year window, while climate policy operates largely on a longer timeline several decades into the future. Moreover, most fiscal forecasts focus on the single, central estimate at the middle of the probability distribution, with relatively little attention paid to the consequences of less likely, but still plausible, outcomes at the tails of the distribution. Finally, to the extent that budget scorekeepers share information on the other consequences of climate legislation on economic and human well-being, they tend to do so on an ad hoc basis, offering less information and less specificity around these other effects.
Examining these features of the budget scoring process in light of the risks of catastrophic climate change is not at odds with the principles that underpin responsible federal budgeting. Indeed, the basic idea behind a politically insulated, expertise-driven budget scorekeeping process is to provide tools that encourage political leaders to consider, and be accountable for, choices they make on policy that may have long-term consequences for the American people. Back in 1976, Alice Rivlin, the first director of CBO, in outlining the workings of her new office to Congress, said, “Like planning, the new congressional budget process is aimed at improving the rationality of decision making. In its role as an analytic arm to this new process, the Congressional Budget Office undertakes analyses that seek to raise the level of budget decision-making rationality by keeping track of the present budget effect flowing from past decisions, by explaining the future impact of current budgetary alternatives, and by outlining how projections of future events affect present options.”8 Yet as a senior official at the Government Accountability Office (GAO) noted in December 2019 in testimony to Congress, “[T]he effects of climate change have already posed and will continue to pose risks that can create fiscal exposure across the federal government, and this exposure will continue to increase. The federal government does not generally account for such fiscal exposure to programs in the budget process, and it has not undertaken strategic efforts to manage significant climate risks that could reduce the need for far more costly steps in the decades to come.”9 Just as the pandemic has exposed that an economy and society that are less prepared for a public health shock can experience outsize fiscal pain as a result, the climate crisis calls into question whether a failure to invest in resilience upfront could result in substantial cost down the line.
If climate change has the potential to upend American society, the economy and, in turn, the federal budget, it is worth asking how federal methods of fiscal analysis should appropriately take those climate risks into account. This section outlines some of the detailed questions that should be asked.
How should climate be incorporated into the baseline?
Central to both fiscal and climate modeling is a basic question: What will things look like in the future, absent any changes in policy or behavior? In budgeting, this concept is called a baseline, and it is central to the analytical work of budget scorekeepers. For both CBO and OMB, the baseline serves as the starting point for any fiscal analysis, whether of the entirety of a budget or a specific proposal. That baseline projects a set of economic conditions into the future and, on the basis of those conditions and the laws currently in place, estimates future revenues, spending, and deficit and debt levels. For policymakers, the baseline serves two primary purposes. First, it provides context around the expected fiscal and economic environment as policymakers engage in planning for the future. Ideally, policymakers should make decisions with an eye toward current expectations about the course of the nation’s economic and fiscal trajectory, whether they are looking to next year or to several decades in the future. Second, a baseline serves as a starting point for evaluating the impact of any new policy. When the president or a legislator offers a new proposal, identifying how much it will change spending levels, revenues, or the macroeconomy requires first answering the question: Compared to what? Baseline projections are designed to aid in exactly that exercise, creating a starting point against which any new policy changes can be evaluated.
Likewise, climate modeling requires a similar exercise: projecting what, absent major changes in policy, will happen to emissions and ultimately warming. Recognizing the inherent uncertainties in projecting well into the future, most major modeling exercises offer a range of scenarios—often referred to as representative concentration pathways (RCPs), given that they estimate outcomes at different concentrations of greenhouse gases in the atmosphere. Often, climate analyses explore pathways that range from the low-emissions RCP 2.6 scenario to the high-emissions RCP 8.5 scenario, with more intermediate pathways in between. (The former scenario refers to 2.6 watts per meter squared of radiative forcing at the end of 2100, a measure of the combined effect of various greenhouse gases and other particles on trapping heat in the atmosphere, while the latter reflects 8.5 watts per meter squared of radiative forcing.)10
Looking at these two exercises in tandem—and, in particular, taking seriously the latest science about the climate crisis—leads to a clear conclusion: There is no longer a credible case that budget baselines can be climate-ignorant. There are enough data to show that climate change is already shaping macroeconomic growth and the government’s fiscal exposure in meaningful ways, and it paints a clear enough picture that those impacts will grow over time. The only remaining question is how budget baselines should take into account climate change—not whether they should.11
In particular, policymakers need to consider how the baseline should be adjusted in the following ways.
Incorporating the macroeconomic impacts of climate change into the baseline: Fiscal projections are shaped by assumptions around future macroeconomic conditions. A faster-growing economy will result in higher revenues and reduced spending on income-based programs such as Medicaid, unemployment insurance, or food and housing assistance. Moreover, many economists look to measures of fiscal sustainability that compare debt or interest payments with the size of the economy—which means that fiscal health can be improved by increasing growth, as well as by directly addressing growth in the debt itself.
Economists have estimated that climate change could affect future economic growth through several channels, including the following few examples:
- Lower labor productivity due to hotter temperatures: There is a wide body of research that shows how workers are less productive at extreme temperatures, which can affect “endurance, fatigue, and cognitive performance, all of which can contribute to diminished ‘work capacity’ and mental task ability as well as increased accident risk.”12
- Lower labor supply due to illness: Not only can hotter temperatures make workers less productive, but the health consequences of climate change will have the effect of reducing labor supply, as fewer workers are healthy enough to stay in the workforce. The American Climate Prospectus project estimated that labor supply in sectors where workers are at high risk from higher temperatures, such as construction, would decrease 0.8 percent to 2.4 percent by the late 21st century under the high-emissions RCP 8.5 scenario and by 0.2 percent to 1.1 percent under the lower-emissions RCP 4.5 scenario.13
- Reduced agricultural income as a result of lower yields: As the National Climate Assessment noted, “Climate change has the potential to adversely impact agricultural productivity as local, regional, and continental scales through alterations in rainfall patterns, more frequent occurrences of climate extremes (including high temperatures or drought), and altered patterns of pest pressure.”14 Similar risks exist not only for farming, but for fishing and timber production as well as industries that rely on agricultural products.
- Lower returns to investment as it is shifted to less productive mitigation and repair efforts: Climate change shifts both public and private investment in ways that may be less conducive to future growth, reducing the U.S economy’s long-term potential. As the economist Solomon Hsiang recently testified to Congress, “Hurricanes, floods, tornados, droughts, and fires destroy assets that took communities years to build. Efforts to rebuild then diverts resources away from new productive investments that would have otherwise supported future economic growth.”15
These are only partial examples, and they may understate the economic disruption that could occur as a result of climate change, including from sources such as geopolitical upheaval or mass dislocation. Despite these limitations, economists have tried to quantify the overall impact of climate change using one of two methods: either bottom-up approaches that combine projected impacts from various sectors, or top-down approaches that extrapolate estimates based on past data on the relationship between the climate and the economy.
Fortunately, scorekeepers have begun the task of updating their economic projections to incorporate climate. In September, CBO released a long-term budget forecast and an associated working paper that for the first time provided the agency’s estimates of the impact of climate change on economic growth. Using a meta-analysis that attempted to synthesize existing research, CBO estimated that climate change, from the beginning of the 21st century through 2050, is responsible for a 1.0 percent reduction in its projected level of gross domestic product (GDP) in 2050.16 While CBO did not report the numerical impact that combined effect would have on revenues, spending, or debt, its consideration of climate impacts in its economic baseline implicitly means the agency’s long-term forecasts now do include some reflection of the macro impacts of climate change on the budget.
However, CBO’s estimates may provide a too conservative estimate for how climate change may affect the macroeconomy. A recent analysis performed by the Rhodium Group’s Trevor Houser—a co-author of the American Climate Prospectus—projected an annual GDP impact of climate-driven changes in temperature and hurricane activity of between 1.2 percent and 1.4 percent by 2030 and between 1.8 percent to 2.4 percent by 2050.17 Estimates of this magnitude imply significant budgetary impacts due to climate change even within a shorter time frame. For example, CBO’s rules of thumb concerning the relationship between GDP and revenues, spending, and deficits suggest that a 1.4 percent reduction in GDP in 2030 is associated with increased deficits of about $60 billion a year—with that effect presumably growing over time.18
It is also important to note that even as these estimates show a substantial impact from climate change in the aggregate, that impact will be uneven across different parts of the country, across different sectors of the economy, and, ultimately, among different socioeconomic and racial groups. As Hsiang testified, “Research indicates that low-income individuals tend to bear greater cost than wealthier individuals when both are subject to the same climatic stress. In addition, many locations that are poorer today are projected to experience greater economic harms.”19 Like other economic shocks in the past—for example, due to globalization or technological change—the disruption caused by climate change will not be equally felt across the United States, and policy solutions that ignore that fact will leave many people and communities substantially worse off.
To offer one example, Houser estimates that because poorer counties tend to be hotter, “The poorest 10 percent of counties in the United States face likely damages of 9 to 20 percent of income, while the richest 10 percent see between a 3 percent loss and a 0.4 percent gain” by the end of the century due to climate change under the high-emissions RCP 8.5 scenario.20 As a result, climate change on its current course is likely to be regressive. As policymakers better incorporate the overall impact of climate change into their baselines and their estimates of a given policy’s impact, they should pay close attention to how a business-as-usual approach might affect communities differently—and how the benefits of action might disproportionately accrue to those most at risk.
Assessing costs for existing programs: Under long-term budget protections, a large and growing share of projected spending falls under the mandatory side of the budget—spending that, rather than being dictated by the annual appropriations process, results from statutory criteria. This includes not only Social Security, Medicare, and Medicaid, but also a set of other programs ranging from flood insurance to crop subsidies. All these programs, absent future legislation, will continue to pay out each year in the future according to criteria already set by Congress.
The direct and indirect effects of climate change have the potential to change expected spending under these existing programs—and indeed, research shows how natural disasters such as hurricanes can cause a substantial increase in nondisaster government transfers, including unemployment insurance and health spending.21 In 2016, OMB released a report on the potential fiscal risks of climate change, in which it estimated the effect of different warming scenarios on selected areas of the federal budget.22 In the case of crop insurance and health care costs due to air quality-related illnesses, the report attempted to—based on current law and spending in these areas—evaluate how federal costs might increase over timing due to climate change.
OMB estimated that by 2100, reduced air quality as a result of unmitigated climate change would increase spending in federal health programs by $8 billion a year, in 2015 dollars, due to higher Medicare, Medicaid, and Veterans Affairs health care costs as a result of more nonfatal heart attacks, more respiratory and cardiovascular hospital admissions, and more asthma emergency room visits.23 That figure alone would be only a very small portion of federal health spending, but it is best understood as an illustrative example rather than an indicator of the broader ways in which climate change could shape federal health spending. Indeed, that figure ignores the impact on federal subsidies for private health insurance, including through Affordable Care Act (ACA) subsidies and tax expenditures that subsidize health care, as well as follow-on consequences from health impacts on labor force participation or productivity.
More importantly, diminished air quality only reflects one potential health consequence of climate change among many. As the Fourth National Climate Assessment described, “Climate change affects human health by altering exposures to heat waves, floods, droughts, and other extreme events; vector-, food- and waterborne infectious diseases; changes in the quality and safety of air, food, and water; and stresses to mental health and well-being.”24 Consider each of the following examples noted in the National Climate Assessment:
- More frequent and extreme hot days increase hospital admissions and emergency room visits as a result of cardiovascular and respiratory complications, renal failure, kidney stones, and negative impacts on fetal health.
- Climate change increases the range and distribution of vector-borne illnesses such as Lyme disease, West Nile virus, dengue, and Zika, introducing these diseases into new parts of the United States.
- Increased water temperatures raise the risk of waterborne pathogens and toxic algae blooms, while flooding and extreme participation result in sewage overflows that spread viral and bacterial contamination.
- Climate change alters exposure to foodborne pathogens such as salmonella and disrupts food availability, while rising carbon dioxide concentrations decrease nutrients such as iron and zinc in crops and seafood.
- A higher prevalence of flood, drought, or hurricanes results in increased anxiety, stress, depression, and post-traumatic stress disorder, while hotter days lead to more aggressive behavior.
In any of these cases, more prevalent, more chronic, and more severe illnesses will mean higher health care costs, including for the federal programs that—under law—cover a significant, and rising, share of those costs nationwide. Absent a fuller consideration of how climate change affects these health costs, a baseline scenario might understate the federal spending under the status quo.
Similarly, OMB estimated that by the late 21st century, crop insurance premium subsidies would rise by a mean estimate of $4.2 billion per year in 2015 dollars under unmitigated climate change, using an approach that calculated how forecasted changes in crop yields would affect payments under the existing crop insurance program. But again, this is likely a very conservative picture of the impact of climate change on agriculture, given warnings of more catastrophic disruptions to farming and fisheries both in the United States and around the world.
Response and mitigation costs: A second category of federal spending that might be included in a climate-adjusted baseline would incorporate the expected costs, outside existing programs, from responding to and mitigating the physical damage caused by climate change. This includes spending that might be reasonably expected as a result of climate change and its consequences but that would not automatically occur as a matter of current law or policy. In technical terms, this category encompasses discretionary spending—the appropriations that Congress passes on either an annual or emergency basis, rather than being set automatically by statute. Examples of this kind of spending might include disaster relief packages as a result of hurricanes or the costs of repairing or rebuilding public assets such as infrastructure or military installations. Under existing budgeting conventions, the baseline incorporates projected disaster spending simply by extending past expenditures into the future, meaning that any expected increase in the costs of natural disasters is left unaccounted for.
Aside from the potential need for disaster appropriations that provide relief to affected communities, the federal government faces fiscal exposure due to the fact that it owns property and land, from military installations to federal buildings to infrastructure. As OMB notes, the federal government “owns more than 775,000 individual buildings and structures with a total estimated replacement cost of nearly $1.9 trillion.”25 In 2018, according to GAO, Hurricane Florence caused $3.6 billion in damages to Camp Lejeune and other Marine Corps facilities in North Carolina, and Hurricane Michael caused $3 billion in damage to Tyndall Air Force Base in Florida, which is a reflection of the potential exposure to the U.S. Department of Defense’s $1 trillion in domestic and overseas infrastructure.26 GAO separately estimates that “the federal government manages about 650 million acres of land in the United States that could be vulnerable to climate change, including the possibility of more frequent and severe droughts and wildfires.”27 As GAO notes, however, little work has been done to actually assess the total fiscal risk that climate change presents to the buildings and land owned by the federal government.
In its report, OMB did provide an initial indication of the potential scale of the damage from one source of risk: coastal flooding.28 Looking at a subset of the federal government’s inventory with more precise location information, OMB identified 18,000 individual buildings and structures with a total replacement cost of $83 billion located in the current 100-year flood plain, based on Federal Emergency Management Agency flood plain maps. According to the report, those buildings and structures represent “roughly 8 percent of the subset of records and 14 percent of the subset replacement value.” In addition, “Tens of thousands of additional assets, with a total replacement cost of $25 billion, were identified in the current 500-year floodplain.” OMB also identified 12,000 federal buildings or structures—mostly associated with the Defense Department—“with a replacement cost of $62 billion, that would be inundated or severely affected by the average high tide under a six foot sea level rise scenario.” Importantly, OMB made clear that, aside from the modeling challenges associated with identifying flood risks, its estimates were only for a share of federal assets, with $1 trillion in federally owned structures not included in its analysis.
Unlike the mandatory programs described above, disaster relief or repairing and rebuilding federal assets would require Congress to appropriate new funding for those purposes, which future congressional lawmakers could or could not choose to approve. But a more realistic assessment of Congress’ likely behavior in the future would take these costs into account, given the low probability that legislators would decide not to appropriate assistance to disaster-stricken communities or to allow federal properties to go unrepaired.
Incorporating national security risks: The nation’s military and national security experts have, since the 1980s, called attention to the risks that climate change poses to American security, and these concerns have been amplified in recent years.29 In 2015, for example, the Defense Department wrote to Congress that “climate change is an urgent and growing threat to our national security, contributing to increased natural disasters, refugee flows, and conflicts over basic resources such as food and water.”30 Even under the Trump administration, the Worldwide Threat Assessment issued by the Office of the Director of National Intelligence has described the risks climate change poses: “Global environmental and ecological degradation, as well as climate change, are likely to fuel competition for resources, economic distress, and social discontent through 2019 and beyond.”31 Academic research has identified historical connections between climate change and civil conflict; while the direct connection between global warming and armed conflict remains an area of continued study, a recent expert elicitation study that examined the views of top climate scholars from across disciplines estimated a 26 percent increase in conflict risk as a result of warming of 4 degrees Celsius, or 7.2 degrees Fahrenheit—compared with 13 percent under a 2 degrees Celsius, or 3.6 degrees Fahrenheit, warming scenario.32
Defense spending currently equals about 3.5 percent of GDP—and under current budgetary projections, it is expected to fall as a share of the economy over time. But an increase in security risks as a result of climate change—whether due to regional conflicts that arise from resource competition, destabilization caused by climate-induced migration, or a greater need for U.S. military personnel to deliver humanitarian assistance—will likely increase the cost of keeping America safe. In addition to defense spending, the need for and salience of international aid will likely increase as a result of the dislocation and resource deprivation that climate change will cause in many parts of the world.
Given the inherent uncertainty in predicting how climate change will affect global security, calculating a precise estimate for how this risk will affect future defense and international aid spending is a difficult endeavor. But at the same time, ignoring the likelihood that climate change will produce costs in this space understates the fiscal pressure that global warming will cause on the federal budget. As national security experts gain a better understanding of how different warming paths may affect the risks to U.S. and global security, those risks should be priced into expectations of future spending.
What is the right time frame for analysis?
Fiscal and climate analysis, as a matter of practice, tend to operate on different time scales. From both a political and institutional perspective, fiscal analysis at the current moment focuses most frequently on a 10-year time frame. For example, as part of the president’s budget, OMB reports detailed projections of spending, revenues, deficits, and macroeconomic indicators over a 10-year budget window. Likewise, CBO estimates of the fiscal and economic impacts of legislation are typically focused on a 10-year time horizon. These analytical conventions reflect more formal legal and institutional practices: Both statutory and legislative pay-as-you-go rules consider budget impacts five and 10 years in the future, and both budget resolutions and the related reconciliation process typically specify spending, revenue, and deficit levels over a 10-year window. While both CBO and OMB do engage in longer-term budget analysis, they do so less frequently, with less granularity, and typically outside the context of specific legislative proposals.33
Climate analysis, while lacking the same formal conventions as budget scoring, tends to look at a longer timeline, looking toward outcomes at midcentury, 2100, or beyond. This leads to a potential mismatch when considering climate legislation. That is to say, the fiscal impact of legislation might be considered on a 10-year timeline, while its climate outcomes are evaluated, and designed to have impact, over a much longer time horizon. This mismatch is not wholly unique to climate policy. Arguably, other investments, whether in education, research and development, or infrastructure, are designed to pay off over a period that extends well beyond the 10-year budget window. And the conceptual issues at play are not especially new in either the climate or public economics worlds. In both cases, there is a substantial body of both theoretical and empirical research concerning questions about the relative value that should be put on future outcomes compared with current ones. Indeed, a central question in both fields concerns what discount rate should apply when evaluating the preferences that one might have for a given outcome today over one in the future.
Yet within the actual institutions that make climate policy and the analysis accessible to policymakers as they make decisions about legislation, what is mostly absent is serious consideration of how to balance future benefits against present costs. While CBO has, in the past, provided some information about economic outcomes of legislation beyond the 10-year window, the legislative analysis it produces that receives the most attention—and that has a formal role in the budgeting process—focuses almost exclusively on the upcoming decade.34 Effective climate change policy is explicitly designed to incur some near-term costs to avoid much greater expenses in the future. The current mode of fiscal analysis, both in concept and in practice, is likely to far overweight those present costs and underweight future costs in a way that can stack the deck against fiscally prudent action.
How should fiscal analysis consider the potential for catastrophic outcomes?
The need for climate action is predicated on a recognition not only that the most likely scenarios could have significant adverse consequences for the future of humanity, but also that climate change presents smaller but nontrivial risks of much more dire outcomes. That is especially true for two reasons: First is the possibility of feedback loops and self-reinforcing cycles, where physical processes such as the melting of Arctic snow and ice can accelerate warming,35 and second is the potential for bad outcomes to be truly catastrophic, involving consequences that would result in a far greater loss of life or in far larger portions of the United States being uninhabitable than under more likely scenarios. As the economist Martin Weitzman wrote, “A fat tail for rare disasters has the potential to dominate economic calculations like the SCC [social cost of carbon]. Therefore, analysis of a situation that might potentially be catastrophic cannot afford to ignore tail behavior. It is not enough in such situations to look just at measures of central tendency or even just at thin-tailed probability distributions.”36
In considering these uncertainties, it is worth emphasizing that it is not necessary to contemplate especially unlikely climate scenarios to identify the potential for outcomes that most people would fairly describe as catastrophic. The IPCC report notes the risk for “large-scale singular events”—described as “components of the global Earth system that are thought to hold the risk of reaching critical tipping points under climate change, and that can result in or be associated with major shifts of the climate system”—as being “high,” at between 1.6 degrees and 4.6 degrees Celsius warming, with the increase in risk being “disproportionately large,” between 1.6 degrees and 2.6 degrees Celsius.37 The IPCC report notes that the consequences of these large-scale singular events, such as accelerated melting of polar ice sheets, a slowdown in the Gulf Stream, extreme El Nino events, or shifts in the Southern Ocean, are generally under-considered or fully ignored from typical models of climate damage, noting that “further analyses of the potential economic consequences of triggering these large-scale singular events have indicated a two to eight fold larger economic impact associated with warming of 3°C than estimated in most previous analyses, with the extent of increase depending on the number of events incorporated.”38 More broadly, the IPCC report summarizes “one possible storyline among worst-case scenarios” at 3 degrees Celsius warming by 2100—well within the range of business-as-usual forecasts—as including the following consequences:
- “Starting with an intense El Niño–La Niña phase in the 2030s, several catastrophic years occur while global warming starts to approach 2°C. There are major heatwaves on all continents, with deadly consequences in tropical regions and Asian megacities, especially for those ill-equipped for protecting themselves and their communities from the effects of extreme temperatures.”
- “A hurricane with intense rainfall and associated with high storm surges … destroys a large part of Miami. A two-year drought in the Great Plains in the USA and a concomitant drought in eastern Europe and Russia decrease global crop production, … resulting in major increases in food prices and eroding food security. Poverty levels increase to a very large scale, and the risk and incidence of starvation increase considerably as food stores dwindle in most countries; human health suffers.”
- “Global mean warming reaches 3°C by 2100 but is not yet stabilized despite major decreases in yearly CO2 emissions, as a net zero CO2 emissions budget could not yet be achieved and because of the long lifetime of CO2 concentrations. … The world as it was in 2020 is no longer recognizable, with decreasing life expectancy, reduced outdoor labour productivity, and lower quality of life in many regions because of too frequent heatwaves and other climate extremes. … Droughts and stress on water resources renders agriculture economically unviable in some regions … and contributes to increases in poverty. … Almost all ecosystems experience irreversible impacts, species extinction rates are high in all regions, forest fires escalate, and biodiversity strongly decreases, resulting in extensive losses to ecosystem services. These losses exacerbate poverty and reduce quality of life.”
- “Several small island states give up hope of survival in their locations and look to an increasingly fragmented global community for refuge. … Aggregate economic damages are substantial, owing to the combined effects of climate changes, political instability, and losses of ecosystem services. … The general health and wellbeing of people is substantially reduced compared to the conditions in 2020 and continues to worsen over the following decades.”
Needless to say, the outcomes outlined in this worst-case scenario—one that could still be reasonably described as well within the bounds of plausible outcomes in a business-as-usual world—would pose significantly greater fiscal costs than those contemplated under today’s central projections of climate change. Like any economic modeling, fiscal projections involve considerable uncertainty, and admirably, fiscal scorekeepers such as CBO frequently look back at previous forecasts to identify how much they have missed by.39 CBO also released a recent report on “one-sided bets” to illustrate how the agency tries to evaluate proposals where different outcomes with varying probabilities might result in very different budgetary impacts.40 But taking into account the possibility of catastrophic outcomes—both which will result in far greater costs than the base scenario and which policymakers and the public would likely pay handsomely to avoid—is necessary in order to accurately assess the potential fiscal toll of climate change.
As the economist Michael Greenstone has written, a weakness in current efforts to model the economic effects of climate change is that they treat “climate damages as a known quantity. However, the estimates of climate damages are uncertain for a variety of reasons, including uncertainty about the climate sensitivity parameter, underlying damage estimates, and a variety of other factors. The problem is that people do not like uncertainty, especially when large losses are possible.”41 That is true for individuals fearing whether they might lose their home to a flood, businesses questioning whether to make investments in areas at risk for disasters, or broader communities who do not want to see disruption to their way of life. A fiscally responsible approach to climate policy should at minimum take this principle in mind, acknowledging the possibility of catastrophic outcomes in its forecasts and ideally using an analytical framework that encourages steps that would minimize the possibility of those outcomes. Arguably, fiscal analysis of climate policies today may actually do the opposite: emphasizing the costs of near-term measures that might limit the probability of the most damaging climate outcomes, while minimizing the estimated benefits.