Graham Floater

2

What is the economics of climate change and how does it depend on the science?

Analytic foundations:Climate change is an externality with a difference:• Global• Long-term• Uncertain• Potentially large and irreversible

Hence key roles in the analysis of:i. Economics of Riskii. Ethicsiii. International Action

Working with Uncertainty                            

 

Population, technology, production, consumption

Emissions

Atmospheric concentrations

Radiative forcing

Socio-economic impacts-12

-10

-8

-6

-4

-2

0

0 1 2 3 4

Temperature Increase

% C

hang

e in

Cer

eal

Prod

uctio

n

Without Carbon Fertilisation

With Carbon Fertilisation

SRES Scenario Emissions

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1990 2010 2030 2050 2070 2090

Tota

l Em

issio

ns (C

O2

Equi

vale

nt)

IS92aA1TA1FIB2B1A2A1B

% Change in Global Cereal Production

Cu

mu

lativ

e C

O2

Em

issi

on

s

Temperature rise and global climate change

Direct impacts (e.g. crops, forests, ecosystems)

Pro

ba

bili

ty

Market ‘Non-Market’

Projection

Boundedrisks

System change/ surprise

Socially contingent

Limited to Nordhaus and Boyer/Hope

Limit of coverage of some studies,

including Mendelsohn

None

Some studies, e.g. Tol

None

None

None

Models only have partial coverage of impacts

Values in the literature are a sub-total of impactsSource: Watkiss, Downing et al. (2005)

5

Projected impacts of climate change

1°C 2°C 5°C4°C3°C

Sea level rise threatens major cities

Falling crop yields in many areas, particularly developing regions

FoodFood

WaterWater

EcosystemsEcosystems

Risk of Abrupt and Risk of Abrupt and Major Irreversible Major Irreversible ChangesChanges

Global temperature change (relative to pre-industrial)0°C

Falling yields in many developed regions

Rising number of species face extinction

Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system

Significant decreases in water availability in many areas, including Mediterranean and Southern Africa

Small mountain glaciers disappear – water supplies threatened in several areas

Extensive Damage to Coral Reefs

Extreme Extreme Weather Weather EventsEvents

Rising intensity of storms, forest fires, droughts, flooding and heat waves

Possible rising yields in some high latitude regions

6

Stabilisation and eventual change in temperature

1°C 2°C 5°C4°C3°C

400ppm CO2e

450ppm CO2e

550ppm CO2e

650ppm CO2e

750ppm CO2e

5% 95%

Eventual temperature change (relative to pre-industrial)

0°C

7

•Those who argue e.g. for stabilisation levels of 650ppm CO2e and above are accepting very big risks of a transformation of the planet

•Figures similar to IPCC AR4 (no probabilities in TAR)

Likelihood (in %) of exceeding a temperature increase at equilibrium

Source: Hadley Centre: From Murphy et al. 2004

Stabilisation level (in ppm CO2e) 2°C 3°C 4°C 5°C 6°C 7°C

450 78 18 3 1 0 0

500 96 44 11 3 1 0

550 99 69 24 7 2 1

650 100 94 58 24 9 4

750 100 99 82 47 22 9

8

Sensitivity of total cost of climate change to key model assumptions

Damage function

exponent (γ)

Consumption elasticity of social marginal utility (η)

1 1.5 2

2 10.4 (2.2-22.8) 6.0 (1.7-14.1) 3.3 (0.9-7.8)

2.5 16.5 (3.2-37.8) 10.0 (2.3-24.5) 5.2 (1.1-13.2)

3 33.3 (4.5-73.0) 29.3 (3.0-57.2) 29.1 (1.7-35.1)

Sensitivity of total cost of climate change to damage function exponent and consumption elasticity of social marginal utility in baseline-climate scenario (mean BGE loss, 5-95% confidence interval).

•Costs measured in terms of percentage changes in Balanced Growth Equivalent (Mirrlees and Stern, 1972, JET) between BAU and no climate change. Stabilisation at 550ppm CO2e or below would save big majority of these costs. Model omits many important risks to carbon cycle and is conservative on climate sensitivity

9

Estimates of climate sensitivity from IAMs compared to GCMs

1°C 2°C 5°C4°C3°C

Eventual temperature change (relative to pre-industrial)

0°C

Meinshausen (90%)

PAGE2002

DICE/RICE-99

FUND 2.8

IPCC AR4 ‘likely’ range (66%)

(100%)

10

The modelled costs of climate change with increasing global temperatures

-12

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-8

-6

-4

-2

0

2

4

0 1 2 3 4 5 6

Global mean temperature

Per

cen

t o

f w

orl

d G

DP

Hope

Mendelsohn

Nordhaus, output

Nordhaus, population

Tol, output

Tol, equity

11

Delaying mitigation is dangerous and costly

0

10

20

30

40

50

60

70

80

90

100

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Glo

bal E

mis

sion

s (G

tCO

2e)

450ppm CO2e

500ppm CO2e (falling to450ppm CO2e in 2150)

550ppm CO2e

Business as Usual

50GtCO2e

70GtCO2e

65GtCO2e

Source: Stern Review

Estimating Costs of Mitigation

Expected cost of cutting emissions consistent with 550ppm CO2e stabilisation trajectory averages 1% of GDP per year.

•Macroeconomic models: 1% of GDP in 2050, in range +/- 3%.

•Resource cost: 1% of GDP in 2050, in range –1% to +3.5%.

Costs will not be evenly distributed:•Competitiveness impacts can be reduced by acting together.

•New markets will be created. Investment in low-carbon electricity

sources could be worth over $500bn a year by 2050.

Strong mitigation is fully consistent with the aspirations for growth and development in poor and rich countries.

13

Mitigation policy instruments

• Pricing the externality - carbon pricing via tax or trading, or implicitly through regulation.

• Bringing forward lower carbon technology - research, development and deployment.

• Overcoming information barriers and transaction costs - regulation, standards.

• Promoting a shared understanding of responsible behaviour across all societies - beyond sticks and carrots.

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Reducing emissions requires action across many sectors

15

Cost estimates

• Review examined results from bottom-up (Ch 9) & top-down (Ch 10) studies: concluded that world could stabilise below 550ppm CO2e for around 1% of global GDP

• Subsequent analyses Edenhofer/IPCC top-down have indicated lower figures

• So too have bottom-up IEA and McKinsey

• Options for mitigation: McKinsey analysis examines approach of chapter 9 of Review in more detail

• Starting planning now with clear targets and good policies allows measured action and keeps costs down. Delayed decisions/actions (or “slow ramp”), lack of clarity, bad policy will increase costs

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2030

3 10 11 12 13 14 15 16 17 18 192 20 21 22 23 24 25 26 270

-150

1

-140

-130

-120

-110-100

-10

40

30

20

10

0

987654

-160

-20

-30

-40

-50-60

-70

-80

-90

Cost of abatementEUR/tCO2e

Insulation improvements

Fuel efficient commercial vehicles

Lighting systemsAir Conditioning

Water heatingFuel efficient vehicles

Sugarcanebiofuel

Nuclear

Livestock/soils

Forestation

Industrialnon-CO2

CCS EOR;New coal

Industrial feedstock substitution

Wind;lowpen.

Forestation

Celluloseethanol CCS;

new coal

Soil

Avoided deforestation

America

Industrial motorsystems

Coal-to-gas shiftCCS;

coal retrofit

Waste

Industrial CCSAbatement

GtCO2e/year

AvoiddeforestationAsia

Stand-by losses

Co-firingbiomass

Smart transitSmall hydro

Industrial non-CO2

Airplane efficiency

Solar

• ~27 Gton CO2e below 40 EUR/ton (-46% vs. BAU)

• ~7 Gton of negative and zero cost opportunities• Fragmentation of opportunities

McKinsey bottom-up approach

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Reducing emissions from deforestation could be relatively cheap and effective (McKinsey curve needs updating)

0

2

4

6

8

10

12

14

Africa Asia Latin America Total

Defo

rest

atio

n Ha

/yea

r (m

illio

ns)

an area the size of England

Annual C02

Emissions

(Gigatons)

UK* (2005) 0.56

China** (2005) 5.1

USA** (2005) 5.8

Deforestation† 5.9

* UK GHG inventory; ** IEA; † UNFCCC 4th Assessment

Deforestation emissions are the same or higher than China and the US

FAO (2005), World Bank (2006)

The combination of weak governance and powerful economic incentives to cut forests down result in 13 million Ha destroyed every year, which equates to 5.9 billion tons of CO2 emissions a year

Illustrative Distribution of Emission Savings by Technology

Contributions to Carbon Abatement 2025

Efficiency

CCS

Nuclear

Biofuels

dCHP

Solar

Wind

Hydro

Abatement 11 GtCO2

Contributions to Carbon Abatement, 2050

Efficiency

CCS

Nuclear

Biofuels

dCHP

Solar

Wind

Hydro

Abatement 43 GtCO2

19

New technology

Established technology

Cumulative installation

Marginal cost of producing electricity

Carbon price effect

AB

Learning through R&D and deployment support

Interaction between policy instruments

Market certainty (regulation)

20

Growth, change and opportunity

•Strong mitigation costs around 1% p.a. worldwide•Strong, efficient and co-ordinated mitigation is fully consistent with the aspirations for growth and development in poor and rich countries. Business as usual is not.•Costs will not be evenly distributed•Competitiveness impacts can be reduced by acting together•New markets will be created•Mitigation policy can also be designed to support other objectives:

•energy - energy security and access, efficiency, local air quality•forestry - watershed protection, biodiversity, rural livelihoods

21

The Global Deal

22

Copenhagen – A global deal

• Bali in December 2007 – Important steps made. Bali Action Plan towards Copenhagen.

• Poznan (Poland) in December 2008

• Copenhagen in December 2009 – A global deal?

23

Commitments: percentages

• G8 Heiligendamm – 50% by 2050 (consistent with stabilisation around 500ppm C02e)

• California (and US under e.g. H. Clinton) - 80% from 1990 levels by 2050

• France – 75% by 2050 (Factor 4), relative to 1990

• EU Spring Council: 60-80% by 2050 and 20-30% by 2020, relative to 1990

• Germany – 40% by 2020, relative to 1990

24

Target: stocks, history, flows

• Current 40-45 GtCO2e p.a. Current stocks around 430ppm CO2e; pre-industrial stocks 280ppm

• The United States and the EU countries combined accounted for over half of cumulative global emissions from 1900 to 2005

• 50% reduction by 2050 requires per capita global GHG emissions of 2-3T/capita (20-25 Gt divided by 9 billion population)

• Currently US ~ 20+, Europe ~10+, China ~5+, India ~2+ T/capita

• Thus 80% reductions would bring Europe, but not US, down to world average. Many developing countries would have to cut strongly too if world average of 2-3 T/capita is to be achieved

25

0

5

10

15

20

25

1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004  

pe

r c

ap

ita

CO

2 e

mis

sio

ns

(t)

US

Canada

Australia

Poland

Germany

UK

Russia

India

Brazil

China

Source: US Department of Energy's Carbon Dioxide Information Analysis Center (CDIAC) for the United Nations Statistics Division.

Per capita CO2 emissions (in tonnes)

26

The GHG ‘reservoir’

• Long-term stabilisation at 550ppm CO2e implies that only a further 120ppm CO2e can be ‘allocated’ for emission, given that we start at 430ppm CO2e (or further 70ppm if targeting 500ppm)

• Can view the issue as the use of a “collective reservoir” of 270ppm (i.e. 550 minus the 280ppm of 1850) over 200 years. Over half of reservoir already used mainly by rich countries. Or could “start the clock” at XT, the stock when problem was first recognised at T (e.g. around 20 years ago)

• Equity requires a discussion of the appropriate use of this reservoir given past history

• Thus convergence of flows does not fully capture the equity story, from emissions perspective

• Equity issues arise also in adaptation, given responsibilities for past increases

27

Key elements of a global deal / framework (I)

Targets and Trade

• Confirm Heiligendamm 50% cuts in world emissions by 2050 with rich country cuts at least 75%

• Rich country reductions and trading schemes designed to be open to trade with other countries, including developing countries

• Supply side from developing countries simplified to allow much bigger markets for emissions reductions: ‘carbon flows’ to rise to $50-$100bn p.a. by 2030. Role of sectoral or technological benchmarking in ‘one-sided’ trading to give reformed and much bigger CDM market

28

Key elements of a global deal / framework (II)

Funding Issues• Strong initiatives, with public funding, on deforestation to

prepare for inclusion in trading. For $10-15 bn p.a. could have a programme which might halve deforestation. Importance of global action and involvement of IFIs

• Demonstration and sharing of technologies: e.g. $5 bn p.a. commitment to feed-in tariffs for CCS coal would lead to 30+ new commercial size plants in the next 7-8 years

• Rich countries to deliver on Monterrey and Gleneagles commitments on ODA in context of extra costs of development arising from climate change: potential extra cost of development with climate change upwards of $80bn p.a.

29

Nature of deal / framework

• Combination of the above can, with appropriate market institutions, help overcome the inequities of climate change and provide incentives for developing countries to play strong role in global deal, eventually taking on their own targets.

• Within such a framework each country can advance with some understanding of global picture.

• Individual country action must not be delayed (as e.g. WTO) until full deal is in place.

• Main enforcement mechanism, country-by-country, is domestic pressure.

• If we argue that, “it is all too difficult” and the world lets stocks of GHGs rise to 650, 700 ppm or more must be clear and transparent about the great magnitude of these risks

30

• Our understanding of the risks of climate change has advanced strongly.

• We understand the urgency and scale of action required.

• We know that the technologies and economic incentives for effective action are available or can be created

• We are in a much better position now to use our shared understanding to agree on what goals to adopt and what action to take.

Conclusions from Stern analysis