The Economics of Climate Change

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The Economics of Climate Change

• A summary of the Stern Review

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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

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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 todays rate of carbon emissions
• Feedback effects could bring temperatures even
  higher (permafrost thaw)

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Result of higher temperatures

• Increased risk of droughts / floods
• Intensify existing water shortages
• Increased intensity of storms
• Higher risk of large-scale changes
• Weather patterns
• Sea level changes

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Risk

• If carbon emissions stabilize at todays 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 gt risk on low side

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Source IPCC 2001
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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)

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What kinds of costs?

• Agriculture
• Water Temperature
• Increased flooding / droughts
• Extreme weather events
• Mortality
• Heat
• Malnutrition
• Disease
• Infrastructure
• Storm damage
• Coastal Protection
• Species Loss

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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

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Economics of Stabilization

• Todays 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
• Source of Carbon emissions
• 1 Power generation (24)
• 2 Deforestation (18)
• 3 Agriculture / Industry / Transportation
  (14 each)

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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.

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Stabilization Goal

• Stabilization defined A balance whereby
  emissions are equal to the Earths 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

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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

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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

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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

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Abatement Opportunities III

• Improve energy efficiency
• Power generation
• Energy use
• Efficient appliances vehicles
• Greatest abatement potential may lie here.

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Abatement Opportunities IV

• Switch to lower carbon emitting energy production
• Wind
• Wave tidal
• Solar
• Carbon capture
• Hydrogen
• Nuclear
• Hydroelectric
• Bioenergy

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Policy requirements

• Successful policy requires three elements
• 1. Carbon pricing
• 2. Technology policy
• 3. Remove barriers to change

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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

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Technology Policy

• Public investment in RD
• RD subsidies encourage private firms to invest
  in risky technology
• Creation of new technologies become public goods
  which can be dispersed globally

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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

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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)

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Collective Action

• Climate change is a global problem which will
  require
• Building of effective institutions
• Shared understanding of long-term goals
• Leadership and trust