Economic damage assessments should differentiate between risk types and ideally use biophysical models rather than relying on aggregate econometric methods.
Biophysical models can be integrated into macroeconomic frameworks, facilitating bottom-up policy analysis in a general equilibrium context. Even so, macroeconomic analysis can miss relevant social impacts, and some of the most critical risks are not explicitly considered as they defy easy quantification.
- Biophysical models use the principles of physics, chemistry, and biology to forecast responses of natural systems to climatic changes, with global circulation models (GCMs) as foundational inputs.
- Assessing economic damages from physical climate risks econometrically captures large-scale trends and economic vulnerabilities based on past experience. However, the approach struggles to account for entirely new climate phenomena or to predict the cascading effects of complex disruptions. By construction, the econometric approach tends to average out effects, removing outliers that may be critical to understanding risks.
- Assessing economic damages from physical climate risks through the enumerative approach often relies on biophysical models and is more bottom-up, in that modelers identify and quantify economic losses from specific climate impacts. This offers a detailed picture of potential costs across different sectors, including adaptation and resilience action, and helps develop actionable policy recommendations.
- Differentiating between chronic and acute risks and most probable and tail shocks is crucial for crafting suitable policy responses, as these have distinct characteristics and potential impacts.
Using biophysical models in macroeconomic analysis is not a silver bullet for assessing the impact of physical climate risks. Such models may not capture the full range of economic damages from physical climate risk, and macroeconomic analysis focused on national trends and economic indicators can miss relevant social impacts of physical climate risk such as displacement, cultural loss, and mental health burden. Beyond this, some of the risks with the greatest potential for causing disruption and societal instability (e.g., cascading ecosystem collapse, conflicts related to resource scarcity) defy easy quantification in terms of monetary damage or probability of occurrence. Their omission from impact assessments justifies a near-systematic methodological caveat when presenting results.
Developing biophysical models is resource-intensive, particularly in terms of data and time. To avoid expending resources on models with negligible impact on economic forecasts, MoFs may wish initially to use global datasets for climate impact assessments, and only develop biophysical models once the most impactful models for a specific country context have been determined.
Keywords
biophysical modelsbottom-upcombining approachesmodelsphysical risk
