This document discusses the economics of climate change. It notes that climate change is a unique externality as greenhouse gas emissions impose costs globally over long periods of time on future generations who cannot represent their own interests. The basic policy approaches for reducing emissions include taxing emitters, emissions trading, regulation, and incentives. Delaying emissions reductions will significantly constrain opportunities to stabilize the climate at lower levels and increase mitigation costs.

1. THE ECONOMICS OF
CLIMATE CHANGE
Daniel De La Torre Ugarte
Professor, University of Tennessee
Trade, Environment, Climate Change and Sustainable
Development Branch, UNCTAD

2. Environemental Problems According
to Area of Influence
Domestic: Local/Regional
Bi-national / Multinational
Global

4. Sources of emissions

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.

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

15. Examples of
Impacts of
Climate
Change:
Africa
Source: IPCC, Climate Change 2001: Impacts, Adaptation and Vulnerability p. 45

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

28. 28
$9,000/capita (PPP)
“development threshold”
Income and Capacity
National income distributions showing capacity (in green) as fraction of
income above the development threshold
India China US

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

40. http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/sternreview_index.htm
Stern Review on the Economics of Climate Change
Thanks !
daniel.de.la.torre.ugarte@unctad.org
danieltu@utk.edu