September 22, 2023

Climate change

Treasury is missing the big picture on climate

By Zacharias Szumer
Image of Jim Chalmers, gesturing with one hand

Treasurer Jim Chalmers speaks at the National Press Club of Australia in Canberra, after the release of the 2023 Intergenerational Report, August 24, 2023. Image © Mick Tsikas / AAP Images

The economic models underpinning the Intergenerational Report don’t adequately measure the risks of climate change

Judging by the response to this year’s Intergenerational Report, it looked as if Canberra’s economists were finally taking the threat of climate change seriously. Previous editions of the report – which projects the nation’s economic trends over the over the next 40 years – had been criticised for playing down the threat of climate change. In this year’s report, Treasury didn’t just highlight the threat, but actually costed it, meaning there were dollar figures that politicians and newspapers could throw around.

“If the catastrophic impacts on human health & Nature aren’t enough to get governments to act with more ambition on climate, maybe the $423 BILLION price tag over 40 years will,” Senator David Pocock tweeted. “For years they said ‘climate action costs too much’. The truth is that the cost of inaction is staggering … $423bn,” teal MP Zali Steggall wrote on the same platform. A Guardian Australia headline said the report warned of “massive economic pain”. The Monthly’s Schwartz Media stablemate The Saturday Paper expressed relief that the latest report was “finally … honest about the scale of the crisis”.

But was it?

Let’s start with the headline figure of $423 billion. That’s the upper estimate of how much lost labour productivity could cost the Australian economy by 2063. The lower limit is $135 billion. “That sounds like a lot, but it’s a cumulative impact over the next forty years,” Timothy Neal from the University of New South Wales Institute for Climate Risk & Response told The Monthly. If you take the midpoint of those two numbers and divide it by the number of years until 2063, that’s a $7 billion average annual hit to the economy – about 0.3 per cent of annual GDP today. Not ideal, sure. But a massive emergency requiring a wartime-level mobilisation of society’s resources? Hardly. “This is nothing, in the grand scheme of things. The projected impact is miniscule,” Neal says.

Neal doesn’t doubt the urgency of fighting climate change. He doubts Treasury’s numbers. The “economic models these reports rely on have very unrealistic assumptions,” said Neal. “These assumptions have caused the models to very heavily skew the projected impacts of climate change towards zero,” Neal said. He says he first became interested in this subject because of the “jarring contrast” between what the physical scientists and the economists were saying about the risk of severe climate change.

He isn’t the only one with concerns.

Australian economist Steve Keen, now based at the University College London, told The Monthly the report “made Willy Wonka look like a pessimist. It’s fantasy.” The climate impacts “section of the report alone should be thrown into the garbage bin,” he says. This isn’t new territory for Keen. He’s spent the past few years telling anyone who’ll listen that the mainstream economic work on climate change impacts is “easily the worst work” he’s encountered in his 50 years in the field. “Scientists describe anything under 1.5 degrees as ‘dangerous’, 3 degrees as ‘catastrophic’ and 5 degrees as ‘unknown’, implying beyond catastrophic, including existential threats,” Keen says. “$423 billion in damages isn’t even in the real ballpark.”

It’s fair to say that Treasury never claims that the $135–$423 billion figure is the whole picture, but even this number span alone may be an underestimate. That range is solely reflective of the effect of heat on labour productivity under scenarios in which global temperatures increase by up to 3 or over 4 degrees by 2100. Essentially, people don’t work so fast when it’s hot, especially if they’re outside or in non-airconditioned spaces and, thus, labour productivity decreases by 0.2–0.8 per cent by 2063. “That would be one year of lost labour productivity growth in a 40-year period. That’s very, very small,” says Neal. And that 0.2–0.8 per cent drop is what may happen “without adaptive changes to current ways of working”. So, if we mechanise more heat-exposed work – or do some “strategic planting of trees or altering building designs to enhance passive cooling”, as Treasury suggests – we can cut this number down even further.

To again give Treasury its due, the report does acknowledge that “the direct impacts of higher temperatures on how we work are just one of the channels through which climate change will impact labour productivity”. And elsewhere in the report, it’s noted that “for severe climate disasters labour productivity is estimated to be around 7 per cent lower after three years”. However, the effect of climate disasters on labour productivity wasn’t included in the modelling that produced the headline figures. Neither was the way that damage to buildings, or deaths, will have flow-on effects to labour productivity. “They’re not modelling how labour productivity will go down when huge natural disasters wipe out whole towns at a much more frequent and severe rate than we’ve seen in the past,” says Neal.

Another section of the report estimates climate-change costs based on how much money the federal government has to spend on disaster relief. It makes a somewhat similar, albeit also acknowledged, omission. It considers bushfires, tropical cyclones, floods and storms, but excludes drought and heatwaves. This omission brings to mind criticism made by Keen in a recent paper released through the UK-based thinktank Carbon Tracker. In that report, he wrote that many economic models ignored the impact of global warming on precipitation, in contrast to the models developed by climate scientists.

According to Nicki Hutley, a specialist in the economic analysis of climate impacts, “climate economists acknowledge that our models don’t include all the costs of climate change because we don’t have accurate ways of forecasting, measuring or including every single outcome in the models.” These limitations are always stated, Hutley says. And it’s true that the Intergenerational Report’s appendix notes that the “analysis is not a full and comprehensive account of all the channels through which physical risk from climate change could affect the Australian economy”. And caveats such as “selected impacts have been examined in this analysis and represent only a partial assessment of the physical impacts of climate change” are sprinkled throughout. Even Treasurer Jim Chalmers, in a Q&A following the report’s release, acknowledged that “there’s more work to do there, and the modelling capacity that we stack up in Treasury will mean that future IGRs can have even more rigorous analysis of the risks”.

Hutley told The Monthly that, regardless of these limitations, it’s still useful to present the costs the models produce because they’re still “enormous, especially in comparison to the cost of investing in climate action. The IGR numbers are just one small portion of the overall costs, which tally in the trillions.” One estimate, produced in 2020 by Professor Tom Kompas at the University of Melbourne, put cumulative losses to climate change in Australia at $2.7 trillion by 2050, although Kompas acknowledges that this number is incomplete. Another report, published by Deloitte in the same year, put losses at $3.4 trillion by 2070. In that report’s forecast, unchecked climate change basically wipes out economic growth by the 2050s, leading to “economic losses on par with Covid, getting worse every single year”.

The question that follows is, why didn’t Treasury produce more significant figures, closer to those numbers? People looking for conspiracy might suspect that the report’s climate impact projections were intentionally watered down to avoid putting Labor’s “steady as she goes” approach to climate policy into stark perspective. After all, it’s certainly true that “the intergenerational report is not some holy document beyond political machinations”, as columnist and former public servant Greg Jericho recently put it. But if Treasury intended to play down the threat of climate change, why was the seemingly gargantuan figure of $423 billion so front and centre in the report? Neither Keen nor Neal think that Treasury has intentionally set out to deceive. The economists within Treasury simply look up to their colleagues in academic departments, “take them as gospel and just quote the numbers without even looking and saying, ‘hang on. What’s going on here?’” Keen says. “None of these issues are the fault of Treasury. It’s not the role of public servants to invent better ways of estimating the damage of climate change. They need to rely on methods established internationally, and the established modelling in this area of economics has a long way to go before being realistic,” says Neal. “Everyone is trying to do their best, including the journalists covering the report.”

Neal is right that there’s certainly no need to attribute any ill-intentions to journalists failing to pick up on questionable numbers. With daily deadlines, most don’t have the time to read beyond the executive summary, let alone the methods in the appendix or the footnoted caveats about the limitations. They’re occupationally accustomed to thinking about angles and hooks, not the validity of economic models. They write up the numbers as provided, with the most stand-out numbers planted in the headlines and lead paragraphs. And so, in a world of “lies, damned lies and statistics”, as the saying goes, it’s often the final category that slips through unquestioned.

Zacharias Szumer

Zacharias Szumer is a Melbourne-based writer whose work appears in OverlandJacobin and elsewhere.

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