This document discusses the need to act on climate change through the lens of economics and risk analysis. It summarizes the views of several economists who argue that implementing a modest carbon price starting soon, even as low as $15-55 per tonne increasing over time, is the most cost-effective approach according to neoclassical economics. It also notes that economic models are limited and tend to underestimate climate risks and damages. The document concludes that given the potential catastrophic consequences of climate change, it is prudent to take action to reduce emissions and transition away from fossil fuels, especially since doing so has additional economic and national security benefits.

1. Why we should act
Jonathan G. Koomey, Ph.D.
Project Scientist, LBNL
Consulting Professor, Stanford University
April 9th, 2010
1

2. What responsibility do we have
to the future?
2

3. A personal view of insurance
3

4. Key points about climate
4

5. If we don’t alter course, we’ll end up where we’re headed
MIT (Sokolov et al.) 2009
Global average surface
temperature is heading well
outside the range experienced
during the tenure of Homo
IPCC 2007 scenarios to
sapiens on Earth (slide courtesy 2100 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐>
of John P. Holdren, Harvard
University, modified by JK).
Year 2000
concentra/ons
5

6. One example: in a warming world,
summers will get a LOT hotter
6
Derived from data and analysis in Hayhoe et al. 2008

7. Long residence time of CO2 means big
reductions needed to stabilize temps.
Change in T (degC) relative to preindustrial levels
4.5 30
Annual carbon emissions (GtC/year)
4.0
25
3.5
3.0 20
2.5
15
2.0
1.5 10
Stabiliza/on case Stabiliza/on case
1.0
5
0.5
0.0 0
2000 2050 2100 2000 2050 2100
Change in world temperatures World C emissions
Con/nued growth and flat emissions scenario are taken from the IIASA GGI database (A2r and B2, respec/vely). Stabiliza/on
case is adapted from the B2 480 ppm scenario. hTp://www.iiasa.ac.at/web‐apps/ggi/GgiDb/ 7

8. The longer we wait, the harder the
task will be
Area under both curves is the
same, corresponding to the
same emissions budget.
Stabiliza/on curve is the same
as in the previous slide.
8

9. Most capital existing in 2050 will
be built between now and then
Percentage of total stock in 2050
Assumes growth in electricity use, GDP, and population from IEA’s World Energy Outlook 2009. Lifetimes 9
of capital stock 50 years for power plants and comml bdgs, 30 yrs for industrial, and 100 years for residences.

10. Lomborg claims he’s bringing
economic reasoning to the
climate issue.
10

11. That’s a worthy goal.
11

12. What does the neoclassical
economics literature say?
12

13. Analyzing a pollution externality:
the standard approach
Op/mal tax
4/9/10 13

14. Nordhaus of Yale says…
• “Global warming is a serious problem that will
not solve itself…There is no case for delay.
The most fruitful and effective approach is for
countries to put a harmonized price–perhaps
a steep price–on greenhouse gas
emissions…” (optimal price = $7.40/tonne
CO2 in 2005 rising between 2 and 3% real
each year to account for rising damages)
W. Nordhaus, A Question of Balance, pp.28-29
(p.15-16 for optimal price).
14

15. Yohe of Wesleyan says…
• “Simple economics tells you that the most
cost-effective way of responding is to start
now.”
• “We should start with a price for carbon in,
say, 2008…at $15 per ton increasing at
the rate of interest.”
– Quoted in Scientific American online,
November 26, 2007. David Biello was the
interviewer.
15

16. Anthoff, Tol, and Yohe say
• “We show that the social cost of carbon lies
anywhere in between 0 and $120,000/tC.
However, if we restrict these two parameters
to match observed behavior, an expected
social cost of carbon of $60/tC ($16/tCO2)
results. If we correct this estimate for income
differences across the world, the social cost
of carbon rises to over $200/tC ($55/tCO2).”
–Anthoff et al. 2008, Risk Aversion, Time
Preference, and the Social Cost of Carbon
16

17. Galiana and Green say…
• “Our technology-led policy also includes a
variant on carbon pricing…a $5 charge
levied on each tonne of CO2 emitted…
[that] would be allowed to gradually rise,
doubling, say, every 10 years.”
– Lane et al. 2009. Copenhagen Consensus
on Climate: Advice for Policy Makers.
Copenhagen: Copenhagen Consensus
Center. <http://www.fixtheclimate.com>
17

18. Lomborg’s conclusions from
Copenhagen Consensus: Wait
and see, no (or tiny) carbon
taxes, no other climate policies,
only R&D on mitigation
technologies and
geoengineering.
18

19. Lomborg says…
• “Short-term carbon emission reductions
through carbon taxes [even ones as low as
$0.50/ton] are a ‘poor’ response to global
warming [and] cutting carbon through cap-
and-trade would be an even poorer solution.”
– Lomborg’s introduction to Lane et al. 2009.
Copenhagen Consensus on Climate: Advice
for Policy Makers. Copenhagen:
Copenhagen Consensus Center. <http://
www.fixtheclimate.com>
19

20. He also says
• “[Instead of implementing] ambitious, early,
and large carbon-cutting programs…it would
be smarter to act cautiously by implementing
a low carbon tax of about $0.5 per ton…and
increase it gradually through the century .”
–Lomborg, Bjorn. 2009. Beyond the Carbon
Crusade. Copenhagen: Copenhagen
Consensus Center. August. <http://
www.fixtheclimate.com>
20

21. ?
21

22. In addition, neoclassical
economics has its limits…
22

23. Neoclassical economic models
biased towards
• underestimating damages
– Many impacts not convertible to dollars with
precision or at all
– Potential nonlinearities and feedbacks not
represented well or at all
• overestimating mitigation costs
– Using incomplete technology + policy portfolios
– Omitting learning and increasing returns to scale
– Ignoring options that save money and reduce C
23

24. Pascal’s wager for climate
• What if I’m wrong?
– At most a 1-2 year delay of achieving a certain
global GDP level because of costs of action (but
costs will almost certainly be much lower)
– Shift away from fossil fuels, which is good for
other reasons (avoids local air pollution, coal
waste, mining accidents, and oil dependence.
Also allows us to compete better with China)
• What if Lomborg’s wrong?
– Catastrophic, irreversible, and unpredictable
damages to the global life-support systems upon
which we all depend
24

25. Conclusions
• The science about climate risks is clear: our
current path is not sustainable
• Arguments for delay do not reflect current
thinking in neoclassical economics or the
realities of the climate system.
• We buy insurance against catastrophic risks
all the time, and should do the same for
climate by investing in a low carbon future
• We have many proven money saving and
low-cost options, we just need the will to act
– And acting will substantially lower costs because
of learning-by-doing, but we only learn if we DO.
25

26. Our responsibility:
To create the future
26

27. Useful web sites
• Nice summary for lay people of recent issues in the climate
debate: <http://www.chicagotribune.com/news/ct-met-0228-
climate-science-questions-20100302,0,2670932.story>
• Intergovernmental Panel on Climate Change: <http://
www.ipcc.ch/>
• Policy + science: <http://climateprogress.org>
• Climate science: <http://www.realclimate.org/>
• More on science: <http://www.skepticalscience.com/>
• McKinsey on climate: <http://www.mckinsey.com/clientservice/
ccsi/>
• Copenhagen consensus site: <http://
www.copenhagenconsensus.com/>
• The Lomborg Errors site is very thorough: <http://
www.lomborg-errors.dk/>
27

28. Sources cited
• Anthoff, David, Richard S.J. Tol, and Gary W. Yohe. 2008. Risk Aversion, Time Preference, and the Social
Cost of Carbon. Dublin, Ireland: Economic and Social Research Institute (ESRI). Working paper No. 252.
September. <http://www.esri.ie/UserFiles/publications/20080904135651/WP252.pdf>
• Hayhoe, Katharine, Cameron Wake, Bruce Anderson, Xin-Zhong Liang, Edwin Maurer, Jinhong Zhu,
James Bradbury, Art DeGaetano, Anne Marie Stoner, and Donald Wuebbles. 2008. "Regional climate
change projections for the Northeast USA." Mitigation and Adaptation Strategies for Global Change. vol.
13, no. 5-6. June. pp. 425-436.
• IEA. 2009. World Energy Outlook 2009. Paris, France: International Energy Agency, Organization for
Economic Cooperation and Development (OECD). November. <http://www.worldenergyoutlook.org/>
• Lane, Lee, J .Eric Bickel, Isabel Galiana, Chris Green, and Valentina Bosetti. 2009. Copenhagen
Consensus on Climate: Advice for Policy Makers. Copenhagen: Copenhagen Consensus Center.
<http://www.fixtheclimate.com>
• Meinshausen, Malte, Nicolai Meinshausen, William Hare, Sarah C. B. Raper, Katja Frieler, Reto Knutti,
David J. Frame, and Myles R. Allen. 2009. "Greenhouse-gas emission targets for limiting global warming
to 2 degrees C." Nature. vol. 458, April 30. pp. 1158-1162. <http://www.nature.com/nature/journal/v458/
n7242/full/nature08017.html>
• Nordhaus, William D. 2008. A Question of Balance: Weighing the Options on Global Warming Policies.
New Haven, CT: Yale University Press. See especially the excellent introductory chapter for interested
lay people.
• Sokolov, A.P., P.H. Stone, C.E. Forest, R. Prinn, M.C. Sarofim, M. Webster, S. Paltsev, C.A. Schlosser, D.
Kicklighter, S. Dutkiewicz, J. Reilly, C. Wang, B. Felzer, J. Melillo, and H.D. Jacoby. 2009. Probabilistic
Forecast for 21st Century Climate Based on Uncertainties in Emissions (without Policy) and Climate
Parameters. Cambridge, MA: Massachusetts Institute of Technology (MIT) Joint Program on the Science
and Policy of Climate Change. Report #169. January. Latest BAU forecast for the world.
• DOWNLOAD HANDOUT FOR FURTHER READING: http://files.me.com/jgkoomey/iibjd8
28

29. Backup slides
29

30. It is fashionable today to assume that any figures
about the future are better than none. To produce
figures about the unknown, the current method is
to make a guess about something or other–called
an “assumption”–and to derive an estimate from it
by subtle calculation. The estimate is then
presented as the result of scientific reasoning,
something far superior to mere guesswork. This is
a pernicious practice that can only lead to the
most colossal planning errors, because it offers a
bogus answer where, in fact, an entrepreneurial
judgment is required.
— E.F. SCHUMACHER
30

31. Nature op-ed on hacked emails
"Nothing in the e-mails undermines the
scientific case that global warming is real
— or that human activities are almost
certainly the cause. That case is
supported by multiple, robust lines of
evidence, including several that are
completely independent of the climate
reconstructions debated in the e-mails."
31

32. AP on hacked emails
"LONDON — E-mails stolen from climate
scientists show they stonewalled skeptics
and discussed hiding data — but the
messages don't support claims that the
science of global warming was faked,
according to an exhaustive review by The
Associated Press…The AP studied all the
e-mails for context, with five reporters
reading and rereading them — about 1
million words in total…."
hTp://abcnews.go.com/Technology/wireStory?id=9319400
32

33. What do we know about climate?
• “Unequivocal” that the earth’s climate
is warming
• More than 90% certainty that human
emissions of CO2 and other greenhouse
gases are the cause
(Findings from IPCC 2007 WGI, AR4)
33

34. Average global
temperatures*
and sea levels
are up, snow
cover is down
*and the models reproduce
these historical temperature
changes well.
34

35. Dramatic recent
changes in CO2
and CH4
concentrations
“We know humans are responsible for the CO2
spike [since pre‐industrial /mes] because fossil
CO2 lacks carbon‐14, and the drop in
atmospheric C‐14 from the fossil‐CO2 addi/ons
is measurable.”
–John P. Holdren, Harvard University
Source of graphs: IPCC Working Group 1 Summary for Policy
Makers, Fourth Assessment report, 2007.
35

36. McKinsey cost curve
36

37. Significant emissions reductions
possible in US at zero net cost
Actual Base case
57% of 2020
savings from
electricity,
28% from
transport
Advanced case
Brown, Marilyn A., Mark D. Levine, Walter Short, and Jonathan G. Koomey. 2001.
"Scenarios for a Clean Energy Future." Energy Policy (Also LBNL-48031). vol. 29, no.
14. November. pp. 1179-1196. Full report: hTp://www.ornl.gov/sci/eere/cef/
37

38. 2 degrees C warming limit
• Keeps global T within humanity’s experience
• Implies cumulative GHG emissions “budget”
• Limit itself now widely accepted (e.g., G8 in
2009), but implications are not well known
– Global emissions must turn down in a decade,
down 50% by 2050, more soon afterwards
– Waiting has a real cost
– We must act quickly on many fronts
• It’s Sputnik, not Apollo
38

39. 2 deg C and fossil fuel reserves
Source: Meinshausen et al. 2009 . NB this graph uses Gt CO2, not C
39

40. Delaying makes no sense in the
warming limit context
• When we act makes a difference
• Delaying action on climate
– eats up the budget
– makes required reductions more rapid, more
difficult, and more costly later
– sacrifices learning and reduces possibilities for
future action (learning by doing requires that we
DO!)
• Remember, energy techs don’t ∆ fast and
atmospheric residence time of C is ~100 yrs
40