1. THE ECONOMICS OF
CLIMATE CHANGE
Daniel De La Torre Ugarte
Professor, University of Tennessee
Trade, Environment, Climate Change and Sustainable
Development Branch, UNCTAD
5. 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.
6. 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
7. 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.
8.
9.
10. 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
11. 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)
12. Risk
If carbon emissions stabilize at today’s rates:
0-2% chance of less than 1° C increase in
temps.
2-20% chance of greater than 5° C increase in
temps.
Risk on high side > risk on low side
13. Projected impacts of climate change
1°C 2°C 5°C
4°C
3°C
Sea level rise
threatens major cities
Falling crop yields in many areas, particularly
developing regions
Food
Water
Ecosystems
Risk of Abrupt and
Major Irreversible
Changes
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
Weather
Events
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Possible rising yields in
some high latitude regions
14. 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
16. Examples of Impacts of Climate Change: Asia
Boreal 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
Arid & Semi-Arid
Asia
Exacerbation of threats caused by land use/ cover change & population
pressures
Significant increase in surface air temperatures
Increased evapotranspiration in plants
Acute water shortages
Temperate Asia Significant surface warming & rainfall pattern shifts
Increased plant respiration & saturation deficits, decreased agricultural
productivity
Intensification of climatic hazards (eg floods, droughts, sea level rise, storm
surges
Tropical Asia 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
17. Stabilization and Commitment to
Warming
1°C 2°C 5°C
4°C
3°C
400 ppm CO2e
450 ppm CO2e
550 ppm CO2e
650ppm CO2e
750ppm CO2e
5% 95%
Eventual temperature change (relative to pre-industrial)
0°C
17
18. -5.3
-7.3
-13.8
-40
-35
-30
-25
-20
-15
-10
-5
0
2000 2050 2100 2150 2200
%
loss
in
GDP
per
capita
High Climate, market impacts + risk of catastrophe +
non-market impacts
Baseline Climate, market impacts + risk of catastrophe
High Climate, market impacts + risk of catastrophe
• Essential to take account of risk and uncertainty
• Models do not provide precise forecasts
• Assumptions on discounting, equity, and risk aversion affect results
Mean losses in income per capita from
scenarios of climate change
19. Taking urgent action makes good
economics - delaying is dangerous and
costly
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
0
10
20
30
40
50
60
70
80
90
100
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Global
Emissions
(GtCO2e)
450ppm CO2e
500ppm CO2e (falling to
450ppm CO2e in 2150)
550ppm CO2e
Business as Usual
50GtCO2e
70GtCO2e
65GtCO2e
19
20. 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)
21. What kinds of costs?
Agriculture
Water Temperature
Increased flooding / droughts
Extreme weather events
Mortality
Heat
Malnutrition
Disease
Infrastructure
Storm damage
Coastal Protection
Species Loss
22. 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
23. 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
24. 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.
25. 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
26. Emergency Pathways
Global emissions peak in 2015. Drop by 50 - 80% by 2050
Delaying the peak, or slowing the subsequent rate of reductions,
increases the risk of exceeding 2ºC
Risk of exceeding 2ºC
27. What does the Emergency Pathway mean
for Southern development?
80% global reductions by 2050
90% by 2050
in the North
What’s left
for the South?
Greenhouse Development Right Framework
29. 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
30. 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
31. 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
32. Abatement Opportunities III
Improve energy efficiency
Power generation
Energy use
Efficient appliances & vehicles
Greatest abatement potential may lie here.
33. Abatement Opportunities IV
Switch to lower carbon emitting energy production
Wind
Wave & tidal
Solar
Carbon capture
Hydrogen
Nuclear
Hydroelectric
Bioenergy
34. Policy requirements
Successful policy requires three elements:
1. Carbon pricing
2. Technology policy
3. Remove barriers to change
35. 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
36. 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
37. 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
38. 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)
39. Collective Action
Climate change is a global problem which will
require:
Building of effective institutions
Shared understanding of long-term goals
Leadership and trust