Impact of Climate Change – An Economic Perspective Hong Kong Polytechnic University

Hong Kong Polytechnic University
Impact of Climate Change –
An Economic Perspective
Dr. K.S. Lam
Climate Change
?1980  !2007
Warming of the climate system is
by IPCC, 2007
Stern Review
on the Economics of Climate Change
• by: Sir Nicholas Stern
• U.K. Government Economic Service
Climate change
Economic Impact
Three methods:
Disaggregate techniques
Economic models
Compare current and future ‘social cost of carbon’ with the
marginal abatement cost.
• Method 1
Method 1 – Resource Costs Analysis
• Impacts:
• Melting glacier will initially increase flood risk and then
strongly reduce water supplies, threatening 1/6 of the world’s
• More intense precipitation
• Declining crop yields.
• Coastal flooding.
• Cold related deaths will decrease, heat related deaths will
• Vector borne diseases become more widespread.
• Ecosystems – 15% to 40% of species facing extinction at 2C.
• Ocean acidification.
Past experience on Costs (developing
• Global losses from weather related disasters amounted to a total
of around $83b during the 1970s, $440b in the 1990s.
• Number of great natural catastrophic events increase from 29 to
74 from 1970 to 1990.
• IMF estimates costs of over 5% of GDP per large disaster on
average in low-income countries between 1997 and 2001.
• In 1991-92, the logistical costs of importing cereal into drought
affected southern African countries were $500m.
• In 1991-92, drought in Zimbabwe, increase deficit from 6% to
12% of GDP. By the end of 1992, real GDP has fallen by 9%
and inflation increased to 46%, food prices increased by 72%.
• In 1998, the reconstruction costs after Hurricane Mitch in
Honduras was equivalent to $1250 per capita.
Method 1 – Costs of Developed countries
• Major costs:
– USA, a 5 or 10% increase in typhoon wind speed is
predicted to double annual damage costs. Sep 2005,
Hurricane Katrina, 1836 death, $81.2b lost.
– UK, annual flood losses alone could increase from
today 0.1% of GDP to 0.2% to 0.4% of GDP when
temp rises by 3 to 4C.
– Europe, 2003 heat waves caused 35000 death and
agricultural losses of $15 million.
Results of Resource-cost analysis
• At 2050, temperature will rise by 2 to 3C.
• The technology-based analysis identifies one set of
ways in which total GHG emissions could be reduced
to ¾ of current levels by 2050.
• The costs amount to under $1 trillion.
• Equate to around 1 ± 2½ % of annual GDP.
• Able to tackle climate change at low cost.
• Method 2
Method 2
Modeling Climate Change from emissions to impacts
Population, technology,
production, consumption
CO2 concentrations
Global climate
Regional climate
and weather
Direct impacts
food, water, health, eco
Socio-economic impacts
Method 2 – IPCC future scenarios
Method 2 – Integrated Assessment model
• Model future emissions by sector
Method 2 – Integrated Assessment model
• Model future climate
– Calculate impacts by superimposing climate change
onto a future world and compare it to the same
future world without climate change.
• Aggregate over consequences
– within generations
– over time
– according to risk
• Quantitative in comparing consequences of different
kinds and for different people.
Method 2 – Integrated Assessment model
modeled 3 categories of economic impact
1. includes only the impacts of ‘gradual climate
change’ on market sectors of the economy.
2. includes the risk of market sector and catastrophic
climate impacts at higher temperatures.
3. includes market impacts, the risk of catastrophe
and direct, non-market impacts on human health
and the environment.
Method 2 – Integrated Assessment model
• The model assumes GHG can be cut in 4 ways:
Reducing demand
Increased efficiency
Action on non-energy emissions: stop deforestation.
Switch to low-carbon technologies: vehicles, power plants,
Method 2 – Resource costs
• Results:
– Resource costs estimates suggest that an upper bound for the
expected cost of reductions is likely to be around 1% (-1%
to +5%) of GDP by 2050 (stabilization at 550 ppm CO2e).
– Energy efficiency has the potential to be biggest single
source of emissions savings in the energy sector.
– Prevent further deforestation would be relatively cheap
among the non-energy emissions.
– Large scale uptake of clean power, heat and vehicles is
required for radical emission cuts. We need to cut 60 to 75%
– It is unlikely that any single technology will deliver the
necessary cut.
– It is uncertain which technologies will be cheapest.
Previous Macroeconomic models
• Results:
– Also came up with the cost of stabilization at 500 – 550
ppm CO2e were center on 1% GDP (-2% to 5%) by 2050.
• Method 3
Method 3 – Analyzing the costs and
• Methodology:
– comparisons of the current level and future
trajectories of the ‘social cost of carbon’ SCC with
the ‘marginal abatement cost’ MAC.
– the total damage from now into the indefinite future
of emitting an extra unit of GHG now.
– the cost of reducing emissions by one unit.
The optimum degree of abatement in a
given period
Method 3 – Analyzing the costs and
• Costs and benefits:
– Social cost of carbon today is $85 per tonne of CO2.
– Well above marginal abatement costs in many
• Results:
– Net benefit in net present value terms would be of
the order of 2.5 trillion.
• Climate change –
• Future Target Level of GHG
All 3 methodologies require a target
level of future GHG
– Todate, 2.7 trillion barrels of oil equivalent of oil
gas and coal have been used up. At least 40t remain
in the ground, of which 7t are economically
recoverable. Reserves last comfortably up to 2050.
– The world is already irrevocably committed to
further climate changes.
All 3 methodologies require a target
level of future GHG
– At present, 430 ppm CO2e.
– 450 ppm CO2e is already almost out of reach,
– the damage will be unreasonably high when it
exceeds 550 ppm CO2e.
– Emissions target is then about 5 GtCO2e per year.
80% reduction from present level.
– Models focus at 450 to 550 ppm CO2e.
• Results of all 3 methods are
Economic impact of Climate Change
• All 3 methods leads to similar conclusions:
• For 2 to 3C rise,
– Risks and costs of the climate change could be 5%
to 20% average reduction in global capita
consumption, now and forever.
– The annual costs of stabilisation at 500-550ppm
CO2e to be around 1% of GDP by 2050 - a level
that is significant but manageable.
• Climate change –
• the Economic Impact
Impact on coastal areas
• 200m people live in coastal floodplains.
• 2m km2 of land and $1 trillion worth of assets less
than 1-m elevation above current sea level.
• 22 out of 50 mega cities in the world are at risk of
flooding from coastal surges: Tokyo, Shanghai, New
York, London, Hong Kong..
• Some estimates suggest 150 – 200 million
environment refugees by 2050 (2% of projected
Impacts on wealth and output
• At 1-m rise in sea level
• PRD,
inundated. Using Hong
Kong’s reclamation cost,
it requires $14 billion
dollar to recover the lost
Impacts on wealth and output
• Energy
– High latitude, reduce winter heating and increase
summer cooling. Save energy.
– mid and low latitudes, increase energy use due to
air conditioning demands.
– For a 3C, Italy winter energy fall by 20%,
summer energy increase by 30%. Hong Kong
increase by 15% per year.
– Risk of energy disruption. Overloading of power
plants due to
• rising temperature of cooling water,
• peak load capacity exceeded during heat wave episode.
Climate change impact on food
Climate change impact on Health
• Significant shift from cold-related death to heat-related
Impacts on Global financial market
• Financial market help moderate costs and impacts.
– insurance to spread lost over society,
– hedge with derivatives to smooth commodity prices,
– insurance premium will rise,
– amount of capital that insurance companies have to hold
also rise.
– If the insurance industry looks to access additional capital
from the securities and bond markets, investors are likely to
demand higher rates of return for placing more capital at risk,
causing a rise in the cost of capital.
– When 3C, storm intensity increases by 6%, insurers’
capital for typhoon increase by 90% in US and 80% in Japan
– an additional $76b in today’s prices.
Impacts on Global financial market
• Financial market might not be helpful to poor
– push up cost of insurance.
– raising deductibles,
– cutting back or restriction on coverage,
– when compensation cost is too high, failure to
– banks might be unable to offer finance for
mortgages or loan in high risk areas.
Impacts on Global financial market
• The costs of extreme weather events are already high
and rising, annual losses $60b since 1990s (0.2%
world GDP), $200b in 2005.
• Insurance industry data show that weather-related
castrophe losses have increased by 2% each year since
Impacts on developed countries
• Less cold-related death, more heat-related death,
overall increase in mortality.
• Tourism may shift northward.
– Glacial related tourism will suffer.
– Australia estimates $32b loss in tourism due to bleaching of
Great Barrier Reef.
• Northward shift in economic activity and population in
the N hemisphere.
New opportunities
– New Markets for low-carbon energy products are likely to
be worth at least $500 bn per year by 2050.
– Carbon trading, emission trading
– new products such as weather derivatives, catastrophe bonds.
– Carbon capture and sequestration.
– Reform of inefficient energy system.
– Reform energy subsidies – currently about $250 bn per year.
– Co-benefits: reduce ill-health, air pollution, preserve
biodiversity, energy security..
• Conclusion
• Global warming is affecting the whole world.
• Its impact is all dimensions:
– the sea, the land and the sky
– the tropics, subtropics, temperate and tundra
• Economic impact of climate change is definite,
negative and astronomical.
• Urgent action is needed now!
• The benefit of strong, early action considerably
outweigh the costs.
• Mitigation can be done in a way that does not cap growth.
• The earlier action is taken, the less costly it will be.
• Ignoring climate change will damage economic growth.
• No action create risk of major disruption to economic and
social activity, later in this century and in the next, on a
scale similar to world wars.
• It will be difficult or impossible to reverse these changes.
• Climate change –
• Caveat
• Uncertainties and risks in the economics
impacts are pervasive.
• Climate change –
• the greatest market failure
Climate change – Market failure
• Global in its causes and consequences
– The incremental impact of an extra tonne of GHG
is independent of where it is emitted.
• Impacts are long term and persistent
– GHG stays for hundreds of years. There are severe
time lag for the earth to respond after which the
economic and social response will follow.
• There is a serious risk of major, irreversible change
with non-marginal economic effects.
Climate change – Market failure
• Those who produce GHG are bringing about climate
• They impose costs on the world and on future
• But they do not face the full consequences of their
actions themselves.
• So emitters do not have to compensate those who
• GHG are an externality, one that is not ‘corrected’
through any institution or market, unless policy
Climate change – Market failure
• Climate is a public good: those fail to pay for it cannot
be excluded from enjoying its benefits.
• One person’s enjoyment of the climate does not
diminish the capacity of others to enjoy it too.
• Markets do not automatically provide the right type of
climate because there are little returns to investors for
doing so.
Climate change – Market failure
• Rich countries produced the majority of GHG
• All countries are affect by climate change but to
different extent.
• Developing countries will be badly hit.
• This is a double inequity.
The End