Graham Floater
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 Risk
ii. Ethics
iii. International Action
2
SRES Scenario Emissions
Total Emissions (CO2 Equivalent)
160.0
140.0
120.0
100.0
80.0
Population, technology,
production, consumption
IS92a
A1T
A1FI
B2
B1
A2
A1B
Emissions
60.0
40.0
Atmospheric concentrations
20.0
0.0
1990
2010
2030
2050
2070
Cumulative CO2 Emissions
Working with Uncertainty
2090
Radiative forcing
Temperature rise and global
climate change
Temperature Increase
% Change in Cereal
Production
0
-2
0
1
2
3
4
-4
Direct impacts (e.g. crops,
forests, ecosystems)
-6
-8
-10
-12
Without Carbon Fertilisation
With Carbon Fertilisation
Socio-economic impacts
Probability
% Change in Global Cereal Production
‘Non-Market’
Market
Projection
Limit of coverage
of some studies,
including
Mendelsohn
Socially
contingent
None
Some studies,
e.g. Tol
Bounded
risks
None
System
change/
surprise
Limited to
Nordhaus and
Boyer/Hope
None
None
Models only have partial coverage of impacts
Values in the literature are a sub-total of impacts
Source: Watkiss, Downing et al. (2005)
Projected impacts of climate change
0°C
Food
Water
Global temperature change (relative to pre-industrial)
1°C
2°C
3°C
4°C
5°C
Falling crop yields in many areas, particularly
developing regions
Falling yields in many
Possible rising yields in
developed regions
some high latitude regions
Small mountain glaciers
disappear – water
supplies threatened in
several areas
Significant decreases in water
availability in many areas, including
Mediterranean and Southern Africa
Sea level rise
threatens major cities
Ecosystems
Extensive Damage
to Coral Reefs
Rising number of species face extinction
Extreme
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Weather
Events
Risk of Abrupt and
Increasing risk of dangerous feedbacks and
Major Irreversible
abrupt, large-scale shifts in the climate system
Changes
5
Stabilisation and eventual change in
temperature
5%
400ppm CO2e
95%
450ppm CO2e
550ppm CO2e
650ppm CO2e
750ppm CO2e
Eventual temperature change (relative to pre-industrial)
0°C
1°C
2°C
3°C
4°C
5°C
6
Likelihood (in %) of exceeding a
temperature increase at equilibrium
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
Source: Hadley Centre: From Murphy et al. 2004
•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)
7
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
8
Estimates of climate sensitivity
from IAMs compared to GCMs
FUND 2.8
DICE/RICE-99
PAGE2002 (100%)
IPCC AR4 ‘likely’ range (66%)
Meinshausen (90%)
Eventual temperature change (relative to pre-industrial)
0°C
1°C
2°C
3°C
4°C
5°C
9
The modelled costs of climate change
with increasing global temperatures
4
Percent of world GDP
2
Hope
0
-2 0
1
2
3
4
5
6
Mendelsohn
Nordhaus, output
-4
Nordhaus, population
-6
Tol, output
-8
Tol, equity
-10
-12
Global mean temperature
10
Delaying mitigation is dangerous and
costly
100
450ppm CO2e
90
500ppm CO2e (falling to
450ppm CO2e in 2150)
Global Emissions (GtCO2e)
80
70
550ppm CO2e
60
50
Business as Usual
40
50GtCO2e
30
65GtCO2e
20
70GtCO2e
10
0
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
Source: Stern Review
11
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.
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.
13
Reducing emissions requires action
across many sectors
14
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
15
McKinsey bottom-up approach
2030
Cost of abatement
EUR/tCO2e
40
30
20
10
0
-10 0
-20
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-130
-140
-150
-160
Smart transit
Small hydro
Industrial non-CO2
Airplane efficiency
Stand-by losses
1
2
3
4
5
Industrial
feedstock substitution
Forestation
Livestock/
Wind;
CCS EOR;
soils
low
New coal
Solar
Forestation
pen.
Nuclear
6
7
8
9
Soil
CCS;
coal
retrofit
Avoid
deforestation
WasteAsia
Coal-togas shift
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Cellulose Industrial
ethanol non-CO2
Sugarcane
biofuel
Co-firing
biomass
CCS;
new coal
Avoided
deforestation
America
Industrial motor
systems
Fuel efficient vehicles
Water heating
Industrial
CCS
Abatement
GtCO2e/year
Air Conditioning
Lighting systems
Fuel efficient
commercial
vehicles
• ~27 Gton CO2e below 40 EUR/ton (-46% vs.
•
•
BAU)
~7 Gton of negative and zero cost opportunities
Fragmentation of opportunities
Insulation improvements
16
Reducing emissions from deforestation could be relatively
cheap and effective (McKinsey curve needs updating)
an area the
size of England
Deforestation Ha/year (millions)
14
Deforestation emissions are the same or
higher than China and the US
12
Annual C02
Emissions
(Gigatons)
10
8
UK* (2005)
0.56
China** (2005)
5.1
USA** (2005)
5.8
Deforestation†
5.9
6
4
2
0
Africa
Asia
Latin America
Total
* UK GHG inventory; ** IEA;
†
UNFCCC 4th Assessment
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 CO 2 emissions
a year
FAO (2005), World Bank (2006)
17
Illustrative Distribution of Emission Savings by Technology
Contributions to Carbon Abatement 2025
Efficiency
CCS
Nuclear
Biofuels
dCHP
Solar
Wind
Hydro
Contributions to Carbon Abatement, 2050
Abatement 11 GtCO2
Efficiency
CCS
Nuclear
Biofuels
dCHP
Solar
Wind
Hydro
Abatement 43 GtCO2
Interaction between policy
instruments
Marginal
cost of
producing
electricity
New technology
Learning
through R&D
and
deployment
support
Established technology
Carbon price effect
Market certainty
(regulation)
B
A
Cumulative
installation
19
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
20
The Global Deal
21
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?
22
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
23
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
24
Per capita CO2 emissions (in tonnes)
25
US
20
per capita CO2 emissions (t)
Canada
Australia
15
Russia
UK
10
Germany
Poland
5
China
Brazil
India
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Source: US Department of Energy's Carbon Dioxide Information Analysis Center (CDIAC) for the United Nations Statistics Division.
2000
2001
2002
2003
2004
25
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
26
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
27
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.
28
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
29
Conclusions from Stern analysis
• 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.
30