Transcript The Economics of Climate Change
THE ECONOMICS OF CLIMATE CHANGE
Daniel De La Torre Ugarte Professor, University of Tennessee Trade, Environment, Climate Change and Sustainable Development Branch, UNCTAD
Environemental Problems According to Area of Influence
Domestic: Local/Regional
Bi-national / Multinational
Global
Sources of emissions
Externalities
Left on its own, the market will not solve the problem in a social optimal way Climate change is an externality: the emitter does not bear the direct costs of their action.
As with any externality without policy interventions, the emitter has little motivation to consider the costs in their decision-making .
Climate Change is a Unique
Externality
” The emission of greenhouse gasses imposes costs on others that are not borne by the emitter. The costs will be felt over a long time period and over the entire world.
But, the exact nature of costs is uncertain: they will be shaped by policies, market mechanisms, & other events.
Those most affected —future generations– cannot speak up for their interests
Basic Policy Approaches For Reducing GHGs
Tax the emitter equivalent to the marginal external social costs Ultimately borne by households, raises revenues that can be used to achieve other goals, provides incentives to economize on the damaging activity The allocation of property rights linked with emissions trading Provides large emitters the flexibility to trade emission rights across sectors.
Direct regulation Tends to place burden on industry (which generally passes on the costs to consumers —if they can/will pay) Provide financial incentives Usually popular, sends clear signals, but often suffers from free rider problem.
Stern Review on the Economics of Climate Change
Author: Economist Sir Nicholas Stern Purpose: Created for the British government to address climate change using economic analysis Length: 700 pages!
Published: October, 2006
The Science
Doubling of pre-industrial greenhouse gases (~ 1900) = 2 ° -5 ° C change in mean global temperatures This doubling will most likely occur between 2030 and 2060, at today ’ s rate of carbon emissions Feedback effects could bring temperatures even higher (permafrost thaw)
Risk
If carbon emissions stabilize at today ’ s rates: 0-2% chance of less than 1 ° temps.
C increase in 2-20% chance of greater than 5 ° temps.
C increase in Risk on high side > risk on low side
Projected impacts of climate change
0
°
C Global temperature change (relative to pre-industrial) 1
°
C 2
°
C 3
°
C 4
°
C 5
°
C Food
Falling crop yields in many areas, particularly developing regions Possible rising yields in some high latitude regions Falling yields in many developed regions
Water
Small mountain glaciers disappear – water supplies threatened in several areas Significant decreases in water availability in many areas, including Mediterranean and Southern Africa
Ecosystems
Sea level rise threatens major cities Extensive Damage to Coral Reefs Rising number of species face extinction
Extreme Weather
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Events Risk of Abrupt and Major Irreversible Changes
Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system
Anticipated Regional Impacts
Latin America: temperatures are predicted to increase by between 0.2- 2 degrees Celsius (low estimate) to 2- 6 degrees Celsius (high estimate) in the next century. El Niño events will increase in frequency and severity during summer months, and some areas will experience hot and cold waves. Africa: greater climate variability, and increasing frequency and intensity of severe weather over the next 50 years. The northern and southern latitudes will become dryer and the tropics will become wetter. Asia: summer and winter temperatures rise by 0.1- 0.2 degrees per decade over the next 10-20 years. Heavy rainfall and cyclone intensity may increase due to disruption of the El Niño cycle and increasing sea surface temperatures. Source: DFID Keysheets on Climate Change and Poverty, http://www.dfid.gov.uk/pubs/files/climatechange/keysheetsindex.asp
Examples of Impacts of Climate Change:
Africa
Source: IPCC, Climate Change 2001: Impacts, Adaptation and Vulnerability p. 45
Examples of Impacts of Climate Change:
Asia
Boreal Asia Arid & Semi-Arid Asia
Expanded agricultural growing season Increased active soil temperatures/ better soil climate Northward shift of agricultural boundary Change to timing of snowmelt and therefore altered flow regime Decrease in dry summer season water flow Exacerbation of threats caused by land use/ cover change & population pressures Significant increase in surface air temperatures Increased evapotranspiration in plants
Temperate Asia
Acute water shortages Significant surface warming & rainfall pattern shifts Increased plant respiration & saturation deficits, decreased agricultural productivity
Tropical Asia
Intensification of climatic hazards (eg floods, droughts, sea level rise, storm surges Changes to hydrological regime Increased flooding, waterlogging, salinity caused by higher runoff in some river basins Decreased surface runoff in some basins due to increased evaporation Changes in freshwater availability in coastal regions Sea level rise, leading to inundation of low-lying areas, shoreline retreat, changes to water table, salinization/ acidification of soil Source: IPCC, Climate Change 2001: Impacts, Adaptation and Vulnerability
Stabilization and Commitment to Warming
5% 400 ppm CO 2 e 95% 450 ppm CO 2 e 550 ppm CO 2 e 650ppm CO 2 e 750ppm CO 2 e 0
°
C Eventual temperature change (relative to pre-industrial) 1
°
C 2
°
C 3
°
C 4
°
C 5
°
C
17
Mean losses in income per capita from scenarios of climate change
2050 2100 2150 2000 0 -5 -10 2200 -5.3
-7.3
-13.8
-15 -20 -25 -30 -35 Baseline Climate, market impacts + risk of catastrophe High Climate, market impacts + risk of catastrophe High Climate, market impacts + risk of catastrophe + non-market impacts -40 • Essential to take account of risk and uncertainty • Models do not provide precise forecasts • Assumptions on discounting, equity, and risk aversion affect results
Taking urgent action makes good economics - delaying is dangerous and costly
100 90 80 70 60 50 40 30 20 10 0 2000 2010 2020 2030 2040 2050 50GtCO2e 65GtCO2e 70GtCO2e 2060 450ppm CO2e 500ppm CO2e (falling to 450ppm CO2e in 2150) 550ppm CO2e Business as Usual 2070 2080 2090 2100 The cost of cutting emissions consistent with a 550ppm CO2e stabilisation trajectory averages
1% of GDP
per year in 2050 – this
can be achieved
by deployment of available technologies and those expected to be commercialised in coming decades Delaying emissions reductions significantly
constrains the opportunities
to achieve lower stabilisation - strong mitigation is
fully consistent with aspirations for growth and development
in poor and rich countries 19
Costs of climate change
A loss of 5% average per capita GDP ‘ now and forever ’ Costs are not evenly distributed Developing nations will pay higher price Sub-Sahara Africa (high non-market costs) India & Southeast Asia (9-13% loss in GDP) Developed nations will vary depending upon geography US (1-1.2% loss in GDP)
What kinds of costs?
Agriculture Water Temperature Increased flooding / droughts Extreme weather events Mortality Heat Malnutrition Disease Infrastructure Storm damage Coastal Protection Species Loss
Other potential cost factors
Non-market impacts Environment & human health Amplified feedback effects Methane release & loss of carbon sinks Correct weighting of poor regions If these factors are taken into account, total costs are potentially as high as 20% of world GDP
Economics of Stabilization
Today ’ s Carbon level: 430 ppm Pre-industrial level: 280 ppm ‘ Business as usual ’ : 550 ppm by 2035 and 700 ppm by 2100 creating temperature changes unseen in human experience
Sources: National differences
Direct relationship between per capita income and carbon emissions.
U.S. emits five time the world average for per person carbon emissions As populations increase, carbon emissions will increase As the large populations in Asia (India & China) continue to develop economically, carbon emissions will continue to increase.
Stabilization Goal
Stabilization defined: A balance whereby emissions are equal to the Earth ’ s natural capacity to remove the gases.
Carbon Goal to obtain stabilization: 450-550 ppm Cut of 25% of current emissions levels by 2050 Cost of abatement: Approximately 1% of world GDP Consistent with continued growth & development
Emergency Pathways
Global emissions peak in 2015. Drop by 50 - 80% by 2050 Risk of exceeding 2 ºC Delaying the peak, or slowing the subsequent rate of reductions, increases the risk of exceeding 2 ºC
What does the Emergency Pathway mean for Southern development?
80% global reductions by 2050 What ’ s left for the South?
90% by 2050 in the North Greenhouse Development Right Framework
Income and Capacity
National income distributions showing capacity (in green) as fraction of income above the development threshold India China US $9,000/capita (PPP) “ development threshold ” 28
Cost of delay
Mitigating carbon emissions is a slow process Once abatement proceeds, peak emissions will still not occur for ten or more years The longer the wait, the greater the risk factors associated with drastic climate change The longer the wait, the greater the costs associated with abatement
Abatement Opportunities I
Reduce non-fossil fuel emissions Land use (deforestation) Halt deforestation especially in tropics Plant new forests Require enforcement & regulatory costs Require aid from developed world Agriculture Change tilling practices Produce bioenergy crops
Abatement Opportunities II
Reduce Demand for Emission-intensive goods Primarily energy use in heating, transport, & electricity Pricing signals via taxes. Costs to atmosphere should be included in purchase of offending products Change preferences via information
Abatement Opportunities III
Improve energy efficiency Power generation Energy use Efficient appliances & vehicles Greatest abatement potential may lie here.
Abatement Opportunities IV
Switch to lower carbon emitting energy production Wind Wave & tidal Solar Carbon capture Hydrogen Nuclear Hydroelectric Bioenergy
Policy requirements
Successful policy requires three elements: 1. Carbon pricing 2. Technology policy 3. Remove barriers to change
Carbon Pricing
The cost of carbon emissions must be included in the pricing of carbon emitting goods This will result in: Less of the offending activity Incentives to find non-emitting alternatives Types of pricing Taxes Pros: creates revenues Cons: unpopular, does not directly control amount of emissions Carbon trading (cap & trade) Pros: efficient, directly controls amount of emissions Cons: does not create revenue
Technology Policy
Public investment in R&D R&D subsidies encourage private firms to invest in risky technology Creation of new technologies become public goods which can be dispersed globally
Remove barriers to change
Standards Where carbon pricing proves ineffective, regulatory standards may be useful Education Understanding of climate change and its consequences can shape future policy
Adaptation Strategies
High-quality climate information Rainfall & storm patterns critical Land-use standards Infrastructure should account for climate change Climate sensitive public goods Natural resource & coastal protection Emergency readiness Social safety nets Those who are most vulnerable and cannot afford protection (insurance)
Collective Action
Climate change is a global problem which will require: Building of effective institutions Shared understanding of long-term goals Leadership and trust
Thanks !
Stern Review on the Economics of Climate Change
http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/sternreview_index.htm