The Economics and Impacts of Climate Change

1. Climate Change—Lecture 2 The Economics and Impacts of Climate Change Major Sources • The economics of climate change, AREC454, Spring 2010, Andreas Lange, University of Maryland • Congressional Budget Office (2003), “The Economics of Climate Change: A Primer” (http://www.cbo.gov/ftpdocs/41xx/doc4171/04-25-ClimateChange.pdf) • http://www.c2es.org/facts-figures/impacts (Center for Climate and Energy Solutions) • USDA (2009), “The Effects of Climate Change on U.S. Ecosystems”

2. Externality • The Stern Review on the Economics of Climate Change • a 700-page report released for the British government on October 30, 2006 by economist Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics • the main conclusion is that the benefits of strong, early action on climate change far outweigh the costs of not acting • although not the first economic report on climate change, it is significant as the largest and most widely known and discussed report of its kind • “Climate change is the biggest market failure the world has ever seen”—GHG emissions are due to an externality

3. The tragedy of the commons • From a country’s perspective, the stock of GHGs in the atmosphere is a public bad, and emission reductions are a public good • Hence, each country has an incentive to understate its willingness to pay (willingness to reduce emissions): if EU reduces emissions, US still benefits! • Makes it hard to agree on international emission reductions (Kyoto Protocol): free-riding behavior leads to agreement with weak targets; collectively desirable international cooperation is difficult

4. If abatement pays off why would we not abate? • Global cost-benefit analysis—Stern-Report (2006): • cost of inaction: 5-20 % of global GDP/year • cost of action: 1% of global GDP/year • But, self-interest impedes cooperation (prisoner’s dilemma)!

5. Non-cooperation is individually rational! • Countries act in their own interest (non-cooperative): • omission of benefit spillovers to other countries • too little abatement as compared to cooperative solution (*) • Collectively rational behavior can not be enforced: • Absence of supranational authority • Lack of credible sanctions • Enhancing cooperation is challenging (side payments……) To achieve efficiency in greenhouse gas mitigations, policy recommendations unanimously point to equalization of marginal mitigation costs across regions with side payments (unilateral transfers) if necessary.

6. MC: marginal cost of abatementMB: marginal benefit of abatement

7. Optimal provision of public good • Aggregate marginal willingness-to-pay should equal marginal costs of providing the public good • Or, sumof marginal benefits must be equal to marginal cost (with private good: individualmarginal benefit must be equal to marginal cost) • This is Samuelson-condition (authored by Paul Samuelson, in the theory of public goods in economics, is a condition for the efficient provision of public goods) Paul Samuelson (1915 –2009): was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences.

8. Potential climate change impacts • Humanity’s greenhouse gas emissions are expected to lead to climatic changes in the 21st century and beyond. These changes will potentially have wide-ranging effects on the natural environment as well as on human societies and economies. Scientists have made estimates of the potential direct impacts on various socio-economic sectors, but in reality the full consequences would be more complicated because impacts on one sector can also affect other sectors indirectly. To assess potential impacts, it is necessary to estimate the extent and magnitude of climate change, especially at the national and local levels. Although much progress has been made in understanding the climate system and climate change, projections of climate change and its impacts still contain many uncertainties, particularly at the regional and local levels.

9. The following 8 slides depict observed impacts from the enhanced greenhouse effect One of the impacts of climate change is an increase in sea level. This figure shows the results of satellite measurements of the change in average global sea level over time. Sea level rise is caused by the expansion of water as it warms up and by melting land ice from glaciers and ice caps. 1. Mean Sea Level Rise

10. This figure compares the average extent of the summer arctic sea ice since 1979 with the extent of the sea ice in summer 2010. Since 1979, the minimum size of the ice cap during the summer has decreased in response to increased air and ocean temperatures. 2. Summer Arctic Sea Ice Decline

11. FYI This figure demonstrates the trend in arctic sea ice extent, as measured in September—the annual summer minimum for sea ice extent—for each reporting year. 3. Late Summer Arctic Sea Ice Decline

12. The top figure shows dryness trend as measured by the Palmer Drought Severity Index (PDSI) from 1900 to 2002 for different regions of the world. For most areas, drier (red and yellow) conditions are now significantly more common than wetter (blue and green) conditions. The bottom figure shows the trend over time of increasing drought, indicating that for much of the world, droughts are more common. 4. Drought

13. FYI Increasing temperatures cause a corresponding increase in extreme high temperatures and heat waves. Over the past decade, record high temperatures now occur about twice as often as record lows. In the 1950s this ratio was about one-to-one. 5. Extreme Temperature

14. FYI This figure shows extremes in summer minimum temperatures for the U.S. since 1910. In general, nighttime temperatures are warming faster due to global warming than daytime temperatures. In recent years, warm extremes have vastly outnumbered cold extremes. 6. Summer Minimum Temperature

15. Increased moisture in the atmosphere as a result of warming temperatures increases the risk of extreme precipitation events. In the United States, the frequency of heavy downpours has increased by almost 20 percent on average. This figure shows changes in the number of days with heavy precipitation since 1958 on a regional basis. 7. Extreme Precipitation

16. The top figure shows the size of U.S. wildfires over a 25-year period from 1983 to 2008. Wildfire season is now longer on average and increases in wildfire frequency have been greatest in mid-elevation, Northern Rockies forests where land use histories have little effect on fire risks. (Westerling, 2006) 8. Wildfires The Northern Rockies region includes western portions of Montana and Colorado, northern and central Idaho, and eastern Washington and Oregon.

17. The Effects of Climate Change on U.S. Ecosystems • During the 20thcentury, global average surface temperature increased by about 0.6°C and global sea level increased about 15 to 20 cm. Global precipitation over land increased about 2%during this same period • During the 20th century, the United States warmed and became wetter overall, with changes varying by region. Parts of the South have cooled, while northern regions have warmed—Alaskan temperatures, for example, have increased 2 to 4°C , which is more than four times the global average. Much of the eastern and southern United States now receives more precipitation than 100 years ago, while other areas, especially in the Southwest, receive less.

18. FYI

19. Agriculture: U.S. crops and livestock were valued at about $200 billion in 2002 • Higher temperatures will negatively affect livestock. Warmer winters will reduce mortality, but this will be more than offset by greater mortality in hotter summers. Hotter temperatures will also result in reduced productivity of livestock and dairy animals.

20. Except in the case of rice and beans, the benefits of CO2 rise over the next 20 years largely offset the negative effects of temperature for wheat and other fine grains, soybeans, etc. However, because corn, sorghum, cane sugar, etc. have little response to rising CO2 concentrations, yields will decrease as temperatures rise.

21. Disease pressure on crops and domestic animals will likely increase with earlier springs and warmer winters, through proliferation and higher survival rates of pathogens and parasites. Regional variation in warming and changes in rainfall will also affect spatial and temporal distribution of disease.

22. Land resources • The size and number of forest fires, insect outbreaks, and tree mortality in the interior West, the Southwest, and Alaska have very likely increased because of changing climate, and will continue to do so.

23. Water resources • There is a trend toward reduced mountain snowpack and earlier spring snowmelt runoff peaks across much of the western United States. This trend is very likely attributable at least in part to long-term warming. Where earlier snowmelt peaks and reduced summer and fall low flows have already been detected, continuing shifts in this direction are very likely and may have substantial impacts on the performance of reservoir systems.

24. Biodiversity • Subtropical and tropical corals in shallow waters have already suffered major bleaching events that are clearly driven by increases in sea surface temperature. Increases in ocean acidity, which are a direct consequence of increases in atmospheric carbon dioxide, are calculated to have the potential for serious negative consequences for corals.

25. The problem of risk and uncertainty • Risk vs. uncertainty • risk: we somehow understand the probabilities (e.g., hurricanes in the Gulf) • Uncertainty: we don’t really even understand how likely or unlikely things are (e.g., shut down of Gulf Stream). Most climate consequences. • Scientific and economic uncertainty complicates decisions on climate policy • Abatement costs (today and in future periods) • Sensitivity of the climate system • Assessment of costs/damages/benefits of a changing climate • Future technology options • Population changes; preferences of future generations • Economic growth • Problem of irreversibilities • Today’s emissions stay in the atmosphere (depending on their lifetime) • Investments to reduce emissions will be impossible to recoup if warming is less damaging

26. The problem of risk and uncertainty (con’t) The Unknown As we know, There are known knowns. There are things we know we know. We also know There are known unknowns. That is to say We know there are some things We do not know. But there are also unknown unknowns, The ones we don't know We don't know. D. H. Rumsfeld—Feb. 12, 2002, Department of Defense news briefing Secretary of Defense from 2001 to 2006 under President George W. Bush.