Global Warming & Uncertainty: Sensible Policy Responses

1. Global Warming & Uncertainty: Sensible Policy Responses Harry Clarke La Trobe University Economic Society of Australia, Victorian Branch.

2. Plan • Background science & politics – role of scientific uncertainty. • Core economics of climate policy under uncertainty • Australian policy • Final remarks

3. 1. Climate science • Climate science has developed over 2 centuries in applied & fundamental directions. • Predictions of theory are convincingly supported by evidence.

4. Science – we know… • Warming is occurring. With very high probability due to anthropogenic GGEs. The AGW hypothesis. • Charney Sensitivity. Doubling of CO2 over pre-industrial times (ignoring slower feedbacks) brings ≈ 30C (mgs) temp. increase. More at poles.

5. Science – uncertainty…. • Lots of genuine uncertainty... • Climate sensitivities uncertain & time horizon -variable. Some feedbacks drive higher sensitivities, aerosol cleanup may ‘unmask’ greater heating. Ice sheet melting creates stronger LR responses. Regional effects.

6. IPCC & uncertainty • Uncertainties a focus ofIPCC reports - clouds, aerosols, Antarctic sea ice….etc. • e.g. in Physical Science Basis Report 43 key uncertainties listed.

7. A low weight on AGW scepticism is appropriate Garnaut on Garnaut Review: “…accepted views of mainstream science ‘on a balance of probabilities’. There is a chance that it is wrong. But it is just a chance. To heed instead the views of the small minority of genuine sceptics in the relevant scientific communities would be to hide from reality. It would be imprudent beyond the normal limits of human irrationality.”

8. Is human activity significantly changing temperatures? Doran-Zimmerman (2009) 75/79 climatologists said yes.

9. Doran-Zimmerman conclusion 1. The debate on the authenticity of AGW largely nonexistent in science. 2. The challenge, is to communicate this to policy makers & to a public that continues to mistakenly perceive a debate among scientists.

10. Politics • 1957 Revelle & Suess - heating a policy concern – CO2 emissions - “large scale geophysical experiment”. • Unanimity of policy concern led to 1992 Climate Convention & ongoing role for IPCC. • But late 1980’s marked the birth of climate change delusionism.

11. Delusionism • An influential political movement rejecting science & seeking to sow ‘seeds of doubt’’ regarding AGW. George C. Marshall Institute & the Heartland Institute. • Same groups have denied passive smoking damage, CFCs cause ozone layer hole, SO2 cause acid rain etc.

12. More... • Delusionism fostered by press balance ideas – ‘right’ to equal treatment. • Science has addressed delusionist claims but claims get repeated (‘warming stopped in 1998’).

13. More… • As an economist I refuse to debate the science. • No more reason to question validity of science than to take seriously the views of physicists who push crank money theories.

14. 2. Climate change economics • Ambitious – seeks to determine opportunity costs of mitigating & not-mitigating GGEs. • Complex – irreversibility, nonlinear responses, threshold effects thrown together in dynamic setting with system & ethical uncertainties. • Some simplification from relatively small role macroeconomic role of energy sector.

15. Evaluating via CBA a ‘real options’ task: • Risk/uncertainty - Valuation of costs/benefits stochastic processes. • Dynamics – stock pollutant & learning dynamics • Irreversibility – sunk cost & ecological/ environmental.

16. CBA Methodology • Use use CBA with uncertainty, irreversibility & dynamics. • Many issues…...

17. Intertemporal valuations • Low discount rates make sense. • Intra-generational attitudes. • Discount factor convex in discount rate.

18. Promptness or ‘wait-to-learn’ • Increasing costs of abatement create incentives to act now. Technology might provide an offset. • Differing irreversibilities tug analysis in opposite directions. • Sunk cost irreversibilities – delay to learn –offset by ‘no regrets’ options. • Catastrophic irreversibilities – act decisively now – increased flexibility via backstop options.

19. Convexity of damages • Forecasts of 3oC mean increase in temps, will cause moderate damage (5-10% of GDP). • 3oC = mean(2oC& 4oC) = mean (00C & 6oC) • In last case, no warming, no damage. But equal probability of 60C warming, a catastrophe. • More uncertainty strengthens case for decisive action.

20. Catastrophic uncertainties • Given various possible states of world but one where: Catastrophic costs occur with non-negligible probability. • Should act to avoid that state irrespective of discount rates or strategic issues. Favours unilateralism & taking prompt action.

21. CBA under Knightian uncertainty • If losses large relative to policy costs (the case!) activism sensibly motivated by minimax regret. • A probability-free insurance principle. • In remote case where climate science gets it wrong we will have squandered a small bit of GDP.

22. Technology uncertainty • Substantial on CCS technologies, new nuclear. • Explore a portfolio of technologies (renewables, nuclear) & focus on CCS.

23. General empirical observation • Even with uncertainty there is presumption - cost of active policy low relative to doing nothing. • e.g. Stern & Garnaut Reviews, IPPC (2007), Nordhaus, Weitzman (2009).

24. 3. Australian policy • Australia heavily impacted on by unmitigated climate change. A ‘fringe climate’ society. • Australia a ‘small country’ - our GGEs a small fraction of global total.

25. Policy resolves into focus on: • Adaptation • Mitigation • Policies helping good global response.

26. Adaptation • Plausibly expect 1.8-2oC warming from current GGE concentrations. • So case for adaptation – in agriculture, industry, urban settlements & biodiversity resources.

27. Adaptations not subject to ‘free-rider’ market failure issues of mitigation policies. • Can rely on market-driven responses & policy responses encouraging market-driven responses.

28. Example - agriculture • Policy - provide info & expand technological choices farmers have. Market failures mean info investment & R&D need to be a major focus. • Redesign policies which reduce need to adapt – e.g. drought relief.

29. Mitigation • If only adaptation pursued - a race to collective disaster. • US & China provide 50% of GGEs, but 15 countries provide 80%, another 158 providing 20%. Small countries are important. • & Australia should not provide negative moral suasion.

30. ETS the cheapest way to limit GGEs. Regulation more expensive. Global ETS reduces costs by 20%. A key message for industry. Preferred option - best ETS should charge for GGEs on a consumption basis. Exempt exports & subject imports to BTAs unless exporting country charge carbon production. Eventually all countries should charge carbon production.

31. Australian CPRS will be phased in - unlimited permits @ $10/tCO2 from 2011/12 with full permit auctioning from 2012/13 @ ≈ $29/tCO2. • Revenues returned to households, fuel excise offsets, trade-exposed firms, electricity generators.

32. Main effect - electricity prices will rise 25% in 2012/13 – consumers face substitution effects. • Impacts on brown coal generators but 93% of capacity still in place by 2020. • Potential for nuclear power & renewables – but limited background capacities.

33. Assessment • Should pursue ambitious targets & commit to impose BTAs after 2025 (cf.Waxman-Markey). • Australia gains with CCS initiatives – a sound R&D focus. Agriculture contributes 1/3 of world CO2 & most NO & CH4. Australia should watch NZ. • Need to reduce policy uncertainty by setting up credible climate change institutions.

34. 4. Final Comments • Major parties could not approve CPRS in Senate. Unless the Coalition seeks electoral oblivion the Bill will pass. • Proposed CPRS reasonable – apart from exemptions to electricity sector. • Waiting to 2013 to decide on agriculture - but must eventually be bought into CPRS - carbon sequestration synergies with sustainable agriculture .

35. Australian Government plans will match a comprehensive agreement in Copenhagen. • Sensible conditional & unconditional targets. • Stronger targets not sensible now though they will be.

36. Final words –picked (almost) at random The new climatology of the American south-west…….. Science 25 May 2007:Vol. 316. no. 5828, pp. 1181 – 1184 Model Projections of an Imminent Transition to a More Arid Climate in Southwestern North America Richard Seager,1* Mingfang Ting,1 Isaac Held,2,3 Yochanan Kushnir,1 Jian Lu,4 Gabriel Vecchi,2 Huei-Ping Huang,1 Nili Harnik,5 Ants Leetmaa,2 Ngar-Cheung Lau,2,3 Cuihua Li,1 Jennifer Velez,1 Naomi Naik1 How anthropogenic climate change will affect hydroclimate inthe arid regions of southwestern North America has implicationsfor the allocation of water resources and the course of regionaldevelopment. Here we show that there is a broad consensus amongclimate models that this region will dry in the 21st centuryand that the transition to a more arid climate should alreadybe under way. If these models are correct, the levels of aridityof the recent multiyear drought or the Dust Bowl and the 1950sdroughts will become the new climatology of the American Southwestwithin a time frame of years to decades. Note – broad consensus & imminent!

37. Thank you.