Climate scientist Susanne Ditlevsen: ‘I am shocked by how bad climate economists are’

Flawed economic forecasts could put the retirement savings of millions of people at risk, Net Zero Investor recently reported.

A small, self-referential group of climate economists, who don’t peer review their studies with climate scientists, have so grossly underestimated the financial cost of climate risk that the whole global financial system could be planning for scenarios that are illusory, the think tank Carbon Tracker warns. 

 The reported incompetence is so engrained that even the “Financial Stability Board” predicts only a 3% to 10% drop in asset prices if temperatures rose by 4 degrees.

To shed some light on the issue, Net Zero Investor spoke with leading climate scientist Professor Susanne Ditlevsen, whose paper on a possible Atlantic Meridional Overturning Circulation (AMOC) collapse this century recently grabbed headlines.

Ditlevsen specialises in stochastic processes, which involve elements of randomness and uncertainty. They are used to model a wide range of seemingly “chaotic” natural phenomena, such as weather systems, stock markets, and biological systems.

Their ability “to calculate the probabilities of different events in an unpredictable future” make stochastic processes particularly useful for predicting the effects of climate change, Ditlevsen said.

What advice would you give to pension funds and other asset owners?

Don’t listen to mainstream economists! They’ve got it all wrong. The Carbon Tracker and University of Exeter reports did well to expose the inadequacies of current climate-related economic forecasts.

I am shocked by how naïve and bad these models are. They make it sound like it's still good business to invest in fossil fuels. Even the business-as-usual forecasts result in a minimal dip in global GDP. But these nonsense predictions haven’t been reviewed by real climate scientists. There is actually a much bigger disconnect between climate economists and climate scientists than you might think.

What have they got so terribly wrong?

They seem only to look at temperature changes, without taking into account other factors, such as changes in precipitation patterns, more extreme weather events, rising sea levels, mass migrations, and an increase in uninhabitable parts of the world. Their understanding of tipping points is especially flawed.

They don’t even take into account that climate change will have a massive impact on energy distribution.

In the midst of all this uncertainty, what should asset owners do?

First, they can distinguish between asset allocation decisions based on short-term economic incentives and decisions based on what is best for the climate. If asset owners align their portfolios with current economic forecasts, they will invariably make very risky investments, on account of the aforementioned inadequacy of mainstream climate-related economic models.

The problem is that wrong investments make things worse. Climate change affects the economy but investments in the economy also affect climate change. While it is unclear how many pension funds actually use these flawed economic models is unclear. But if the world’s supposed authorities on financial stability, such as the Financial Stability Board, say that passing a certain tipping point might only result in a 1% GDP loss, it sets a terrible precedent.

What can asset owners do to improve their economic models?

I am not an economist, but it is definitely necessary to incorporate more realistic scenarios of the effects of climate changes into their models. The first thing to do is get climate scientists involved!

How can probability theory help predict the effects of climate change? For example, the chaos theoretician Benoit Mandelbrot famously analysed financial markets, which he described as “wild randomness”.

Probability theory and randomness are absolutely necessary in any model that aims at predicting the effects of climate change. It is essential for understanding uncertainties and variability, and to provide realistic risk assessments.

What is your vision of ideal policymaking?

We are cheating ourselves when we say we can have green growth in the west. Some form of degrowth is a necessity, not an option. The planet has a limited carrying capacity. It’s an illusion to think that we Westerners can carry on living as we have and technology will save us.

There has to be a planned contraction of certain parts of the economy and ultimately a reduction in consumerism to put the West back within the planetary boundaries. This might be tricky to achieve in practise. There is already an unfortunate amount of separation among different groups in society. Policymaking needs to include everyone. Having a small distinguished group of enlightened intellectuals deciding on the new rules and values may simply generate further political turmoil and in-fighting. We need a broad consensus to save the planet.

Human rights should also play an important role in safeguarding the future. For example, right to access to clean water or the right to a healthy climate. The recent Montana ruling is a great example of how the recognition of such rights can create positive legal precedents for climate change action.