Econometric forecasting of climate change

Abstract:

This chapter will explain the basics of how the climate system functions; why climate change is occurring; how econometricians forecast in general and in the climate context; and how that compares with the way climate scientists think about uncertainty and make projections about future climate outcomes. Human behavior is the key determinant of climate change, particularly from burning fossil fuels like coal, oil and natural gas, and agriculture that release greenhouse gas emissions (GHGs) such as carbon dioxide (CO2), nitrous oxide (N2O) and methane (CH4), which cumulate in the atmosphere and reflect back radiation. Macroeconometricians are practiced at modeling aggregate human economic behavior which is non-stationary from evolving trends and breaks deriving from many sources including pandemics, wars, technical progress, financial innovation, demography, and economic policy regimes. Many of these have impacts on the climate, so climate data is also non-stationary, and in turn feeds back on economic outcomes. The feedback is experienced acutely through events associated with extreme heat, such as mortality-threatening heat domes, events associated with anomalously high precipitation, such as inland floods from ‘rivers in the sky’ (see Lavers et al., 2018), coastal flooding from sea level rises (see Vitousek et al., 2017), and tropical cyclones (see Martinez, 2020; Bloemendaal et al., 2022), or events associated with anomalously low precipitation, such as droughts (see Trenberth et al., 2014) and wild fires.