The Economics of Climate Change

1. Daniel De La Torre Ugarte Professor, University of Tennessee Trade, Environment, Climate Change and Sustainable Development Branch, UNCTAD The Economics of Climate Change

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 externalitywithout 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 Global temperature change (relative to pre-industrial) 0°C 1°C 2°C 3°C 4°C 5°C Food Falling crop yields in many areas, particularly developing regions Falling yields in many developed regions Possible rising yields in some high latitude regions Water Significant decreases in water availability in many areas, including Mediterranean and Southern Africa Small mountain glaciers disappear – water supplies threatened in several areas Sea level rise threatens major cities Ecosystems Extensive Damage to Coral Reefs Rising number of species face extinction Extreme Weather Events Rising intensity of storms, forest fires, droughts, flooding and heat waves Risk of Abrupt and Major Irreversible Changes Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system

14. Anticipated Regional Impacts

15. Examples of Impacts of Climate Change:Africa

16. Examples of Impacts of Climate Change: Asia

17. Stabilization and Commitment to Warming 400 ppm CO2e 5% 95% 450 ppm CO2e 550 ppm CO2e 650ppm CO2e 750ppm CO2e Eventual temperature change (relative to pre-industrial) 0°C 1°C 2°C 3°C 4°C 5°C 17

18. Mean losses in income per capita from scenarios of climate change • Essential to take account of risk and uncertainty • Models do not provide precise forecasts • Assumptions on discounting, equity, and risk aversion affect results

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 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 PathwaysGlobal emissionspeak in 2015. Drop by 50 - 80% by 2050 Risk of exceeding 2ºC Delaying the peak, or slowing the subsequent rate of reductions, increases the risk of exceeding 2ºC

27. 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

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

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