Cover: The Budgetary Effects of Climate Change and Their Potential Influence on Legislation

The Budgetary Effects of Climate Change and Their Potential Influence on Legislation

Recommendations for a Model of the Federal Budget

Published Sep 27, 2023

by Flannery Dolan, Carter C. Price, Robert J. Lempert, Karishma V. Patel, Tobias Sytsma, Hye Min Park, Felipe De Leon, Craig A. Bond, Michelle E. Miro, Andrew Lauland

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Research Questions

  1. What are the projected effects of climate change on the federal budget?
  2. What are the economic and environmental effects of climate change mitigation policy?
  3. How can budget analysis better represent these effects and their inherent uncertainty?

Climate change will induce increasingly severe and frequent hazards, such as heatwaves, wildfires, droughts, and floods. In turn, these hazards lead to increased spending in such areas as disaster relief, health care, and insurance programs. Climate change will also likely lead to a net reduction in revenue by affecting productivity, labor hours, and total labor force. The combination of these factors results in a substantial net loss to the federal budget because of climate change. However, these losses are currently underrepresented by the methodology used to quantify the costs and benefits of climate policy. In this report, the authors examine the ways that climate change and climate change mitigation policy affect the federal budget. They recommend ways to improve the modeling of such effects and provide an overview of a budget model that can be used to score legislation.

This report is intended for modelers seeking to capture important relationships between climate, federal policy, and the economy. The authors aim to inform the eventual development of such a model. In particular, the report's analysis might be useful for analysts involved in budget modeling at policy research organizations, such as the Congressional Budget Office and Office of Management and Budget, and other policymakers involved with scoring legislation.

Key Findings

  • Climate change will affect federal spending and revenue substantially. Extreme heat will increase morbidity and mortality, which will affect labor hours, productivity, and the overall work force. Health impacts will increase health care spending as revenue decreases, leading to net losses overall.
  • The projected impact of climate change on revenue depends on how climate change damage is modeled and quantified.
  • Climate change mitigation policies will introduce both opportunities and risks to different sectors. Subsidizing renewable energy can promote new employment but lead to job losses in the fossil fuel industry. The timing and intensity of implementation can lead to stranded assets and overall economic losses. Net impacts are also highly dependent on investors: Belief in the success of a mitigation policy can trigger new investments, thus amplifying the policy's ability to reduce emissions.
  • The impacts of climate change mitigation policies are highly dependent on variable population characteristics, such as income and hazard-risk.
  • The efficacy of climate change mitigation policies also depends on where relevant technologies are on the technology-adoption curve.
  • A ten-year timescale for scoring federal legislation captures only a small fraction of a policy's benefits. However, using longer timescales introduces many uncertain factors that can change the impact of a policy.
  • The environmental and economic impacts of climate change differ from other naturally occurring events because extremes are more likely and higher in magnitude. The equilibrium models typically used for the economic impacts of climate change are not well suited to representing these characteristics.

Recommendations

  • Any model or set of models used to model the federal budget will be highly influential in shaping future policy decisions and therefore will affect the quality of life of people both in the United States and around the world. Therefore, all assumptions and implications in such a model should be made transparent and accessible.
  • Climate change models should link the physical and human systems so that decisions made in the economic system lead to changes in emissions and subsequent changes in temperature. Modeling emissions requires both a detailed representation of energy technologies and quantification of higher-level macroeconomic feedbacks.
  • A bottom-up energy model should be coupled with a macroeconomic model of the economy in addition to a climate model. Importantly, many such models are based on a framework that does a poor job of modeling nonlinearities and tipping points in the complex coupled human-Earth system.
  • A model used to quantify risks in the human-Earth system should quantify the impacts of extremes, including compounding and cascading risks.
  • The modeled impacts of policies are dependent on regional and demographic characteristics. A model of the federal budget should represent these distributional characteristics.
  • Longer timescales should be used to evaluate and capture most of the benefits that would be associated with climate change mitigation policies. Modeling multiple baselines to craft policies that are robust to the variety of plausible circumstances can help address the high levels of uncertainty in longer timescales.

Research conducted by

The research described in this report was funded by the Nick and Leslie Hanauer Foundation and conducted by the RAND Education and Labor.

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