See European Commission (2005).
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However, this increases levels of NOx, an important local air pollutant. Other measures to
improve fuel efficiency and CO2 performance, such as reducing aircraft weight, have benefits
for local air pollution. And there are complex relationships between gases emitted at altitude –
there are suggestions, for instance, that more modern engines have a greater tendency to
produce condensation trails, which intensify warming effects (see Box 15.6, Chapter 15).
Further technological advances in aircraft construction will be important in meeting both
climate change and air pollution objectives simultaneously.
Policies to meet air pollution and climate change goals are not always compatible. But if
governments wish to meet both objectives together, then there can be considerable cost
savings compared to pursuing both separately.
12.5 The role of pricing and regulatory reforms in the energy markets
Pricing and regulatory reforms in the energy markets are important both for effective
climate change policy, and for long-term productivity and efficiency
Many countries have a long history of subsidising particular fuels: coal, oil, nuclear power,
electricity for rural areas, and more recently renewable energy. With the important exceptions
of support mechanisms for R&D and innovation (see Chapter 16), these are a source of
economic distortion and loss. Furthermore there has been a strong historical bias toward the
more polluting fuels. The liberalisation of energy markets that began to take place in many
countries in the late 1980s and early 1990s was seen as a means of reducing these
subsidies, which in some cases had reached extraordinary proportions. By 1998 they had
declined worldwide, but still amounted to nearly $250 billion per year, of which over $80 billion
were in the OECD countries and over $160 billion in developing countries (see Table 12.1).
These transfers are on broadly the same scale as the average incremental costs of an
investment programme required for the world to embark on a substantial policy of climate
change mitigation over the next twenty years (see Chapter 9). The IEA estimate that world
energy subsidies were still $250 billion in 2005, of which subsidies to oil products amounted
to $90 billion26.
Table 12.1
Energy Subsidies by Source $ billion (data for 1995-1998 period)
Coal
Oil
Gas
All fossil fuels
Electricity
Nuclear
Renewables and energy efficiency
Cost of bankruptsy bail-out
Total
OECD
Countries
30
19
8
57
–
16
9
0
82
Countries not in OECD
23
33
38
94
48
?
?
20
162
Total
53
52
46
151
48
16
9
20
244
Source: de Moor (2001) and van Beers and de Moor (2001). Another perspective on subsidies is provided by
Myers, N. and J. Kent (1998) 'Perverse Subsidies: Tax $s Undercutting our Economies and Environment Alike',
Winnipeg, IISD.
Applied in the form of tax credits and incentives for innovation, subsidies can and do serve an
economic purpose. However, the prevailing subsidies are for the most part not applied to this
end. The inefficiencies associated with subsidies have been reviewed by economists many
times over the past decades, and can be simply stated:
• subsidies stimulate unnecessary consumption and waste, and more generally are a
source of economic inefficiency in that the low price is associated with low benefits on
the margin relative to the cost of production;
26
IEA (in press).
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•
•
•
•
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tend to benefit the middle and higher income groups, so impacting income distribution
in a negative way, particularly in developing countries where poor people lack access
to energy;
by undermining the capacity of the industry to earn returns directly on the basis of
cost-reflecting prices, subsidies undermine the managerial (or ‘X‘) efficiency of the
industry, and also its capacity to finance its expansion;
lead to wasteful lobbying and rent-seeking by groups trying to maintain or increase
subsidies;
when applied to fossil fuels, subsidies discourage the development of and investment
in low carbon alternatives, including investment in carbon capture and storage.
To the extent that climate change policy triggers wider energy reform, it would have great
supplementary benefits, as long as the transition is well managed. And for carbon price
signals to work well, it is essential that the energy market also works well.
An example of the costs of energy market inefficiencies, and the way in which reforms can
deliver environmental and other goals, is given in Box 12.5 for India.
Box 12.5
Fuelling India’s growth and development
India’s economic growth is constrained by an inadequate power supply that results in frequent
blackouts and poor reliability. Subsidised tariffs to residential and agricultural consumers,27
low investment in transmission and distribution systems, inadequate maintenance, and high
levels of distribution losses, theft and uncollected bills place the State Electricity Boards
(SEBs, which form the basis of India’s power system) under severe financial difficulties.28
These losses and subsidies are a significant drain on budgets and can result in public
spending on vital areas such as health and education being crowded out. Annual power
sector losses associated with inefficiencies and theft are estimated at over $5 billion – more
than it would cost to support India’s primary health care system.29
The demand shortages facing India – 56% of Indian households have no electricity supply –
create incentives for getting generation plants on line as rapidly as possible. These priorities
in turn favour reliable, conventional, coal-fired units.30 The use of coal for the bulk of electricity
generation presents particular challenges. Coal mining is dangerous, and its transportation
creates environmental problems of its own. Coal also produces pollutants such as sulphur
dioxide that damage local air quality, causing further problems for human health and the
environment. These issues are exacerbated by the low energy efficiency of India’s coal-fired
power plants, combined with India’s policies of high import tariffs on high-quality coal and
subsidies on low-quality domestic coal. The use of CCS technology will be an important way
to reconcile the cost and convenience advantages of coal with environmental goals.
The Government of India has set out an energy policy to help address these constraints and
concerns. The broad objective of this policy is to reliably meet the demand for energy services
of all sectors at competitive prices, through “safe, clean and convenient forms of energy at the
least-cost in a technically efficient, economically viable and environmentally sustainable
manner”.31 With sufficient effort made in improving energy efficiency and conservation, for
example, the Government of India has stated that it would be possible to reduce the country’s
energy intensity by up to 25% from current levels.32 Progress in achieving the goals and
objectives of their energy policy, ranging from improving energy efficiency to promoting the
27
The tariff structure, for example, violates the fundamental principle of economics whereby tariffs should reflect the
actual cost of service. In practice, industry is charged the highest tariff despite having the least cost of supply, whilst
agriculture has the lowest tariff and the highest cost of service.
28
29
30
31
32
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use of renewables, will also make a significant contribution to reducing future GHG emissions
from India.
12.6 Climate change mitigation and environmental protection
This section looks at the links between climate change and broader environmental protection
goals. One area where these links are particularly strong is deforestation. Policies that
prevent deforestation can have significant benefits for communities dependant on forests, for
water management and biodiversity. Some of these are set out in Box 12.6.
Box 12.6
Co-benefits of ending deforestation
Protection/Preservation of biodiversity: Tropical forests house 70% of the Earth’s plants
and animals. Without forest conservation, many of the world’s plant and animal species face
extinction this century. Essential natural resources are found in frontier forests that cannot be
recreated.
Research and development: Frontier forests in Brazil, Colombia and Indonesia are home to
the greatest plant biodiversity in the world. Destroying these forests destroys the source of
essential pharmaceutical ingredients; 40-50% of drugs in the market have an origin in natural
products33, with 42% of the sales of the top 25 selling drugs worldwide either biologicals,
natural products, or derived from natural products34.
Indigenous peoples and sustainability: About 50 million people are believed to be living in
tropical forests, with the Amazonian forests home to around 1 million people of 400 different
indigenous groups. Forest conservation affects people beyond those who inhabit them. Over
90% of the 1.2 billion people living in extreme poverty depend on forests for some part of their
livelihoods35.
Tourism: Forests provide opportunities for recreation for an increasingly wealthy and
urbanised population. Brazil had a five-fold increase in tourists between 1991 and 1999, with
3.5m people visiting Brazil’s 150 Conservation Areas.
Consequences for vulnerability to extreme weather events: Forests systems can play an
important role in watersheds, and their loss can lead to an increase in flooding. In November
2005 a flash flood occurred in Langkat, Indonesia that killed 103 people with hundreds more
missing. The Mount Leuser National Park had lost up to 22% of its forest cover due to logging
and, combined with high rainfall, had caused a landslide to occur36.
In 2004, 3000 people died in Haiti after a tropical storm, while only 18 people across the
border in the Dominican Republic died. The difference has been linked to extensive
deforestation in Haiti where political turmoil and poverty have lead to the destruction of 98%
of original forest cover37. Mangrove forests, depleted by 35% (see Millennium Ecosystem
Assessment 2005) play an important role in coastal defence, as well as providing important
nursery grounds for fish stocks. Areas with healthy mangrove or tree cover were significantly
less likely to have experienced major damage in the 2004 tsunami38.
Reducing GHG emissions from agriculture could also have benefits for local environment and
health. For example, in China, nitrous oxide emissions associated with overuse of fertiliser
contributes to acid rain, causes severe eutrophication of the China Sea and damage to health
33
34
35
www.fic.nih.gov/programs/research_grants/icbg/index.htm
CBI (2005).
World Bank (2006): 'Forests and Forestry' available from
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTARD/EXTFORESTS/0,,menuPK:985797~pagePK:14901
8~piPK:149093~theSitePK:985785,00.html
36
37
38
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through contamination of drinking water. Cutting these emissions could help to reduce these
effects39.
However, climate change mitigation may, if poorly implemented, undermine sustainable
development. Chapter 9 discussed the technical potential of biomass to save emissions in the
power, transport, industry and buildings sectors. But if the crops are grown at very large scale
through intensive, large-scale monoculture, then this has the potential to cause serious
environmental impacts. These may include the increased use of pesticides; a loss of
biodiversity and natural habitats40; and social problems and displacement of indigenous
peoples.
Mitigation policies can also sometimes be designed in a way that helps countries cope with
existing climate variability and adapt to future climate change. Better design of building stock,
for instance, can both reduce the demand for space heating and cooling and provide greater
resilience to a changing climate.
While there are important links between mitigation and development, it is important to assess
policy development against the full range of opportunities to meet climate goals and the full
range of options to achieve the Millennium Development Goals (see Michaelowa 2005). As
with other co-benefits, the key is that well designed policy can realise the synergies
between different goals, as well as the limits to this. For example, to improve education levels
in developing countries, schools could be supplied with low emission energy supplies, or
more trained teachers. Both interventions will be associated with a wide range of different
costs and benefits, which should be weighed up when considering which option is preferred.
12.7 Conclusion
Whilst climate change presents clear challenges and costs to the global economy, it also
presents opportunities. Markets for clean energy technologies are set for a prolonged period
of rapid growth, and will be worth hundreds of billions of dollars a year in a few decades’ time.
Companies and countries should position themselves to take advantage of these growth
markets.
It is also important to consider the wider impacts of climate change policy. As well as helping
to root out existing inefficiencies, climate change policy can also help to achieve other policies
and goals, particularly around energy policy and sustainable development.
A full understanding of these interlinkeages is key to designing policy in a way that minimises
the areas of conflict between goals, and to reap the benefits of the opportunities and
synergies that exist.
39
40
Norse (2006).
See, for instance, European Environmental Bureau (2006).
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References
Aghion, P. and P. Howitt (1999): 'On the macroeconomic consequences of major
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Millennium Ecosystem Assessment (2005): 'Ecosystems and Human Well-being: Synthesis'.
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13 Towards a Goal for Climate-Change Policy
Key Messages
Reducing the expected adverse impacts of climate change is both highly desirable and
feasible. The need for strong action can be demonstrated in three ways: by comparing
disaggregated estimates of the damages from climate change with the costs of specific mitigation
strategies, by using models that take some account of interactions in the climate system and the
global economy, and by comparing the marginal costs of abatement with the social cost of carbon.
The science and economics both suggest that a shared international understanding of the
desired goals of climate-change policy would be a valuable foundation for action. Among
these goals, aiming for a particular target range for the ultimate concentration of greenhouse gases
(GHGs) in the atmosphere would provide an understandable and useful guide to policy-makers. It
would also help policy-makers and interested parties at all levels to monitor the effectiveness of
action and, crucially, anchor a global price for carbon. Any long-term goal would need to be kept
under review and adjusted as scientific and economic understanding developed.
However, the first key decision, to be taken as soon as possible, is that strong action is
indeed necessary and urgent. This does not require immediate agreement on a precise
stabilisation goal. But it does require agreement on the importance of starting to take steps in the
right direction while the shared understanding is being developed.
Measuring and comparing the expected benefits and costs over time of different potential
policy goals can provide guidance to help decide how much to do and how quickly. Given
the nature of current uncertainties explored in this Review, and the ethical issues involved, analysis
can only suggest a range for action.
The current evidence suggests aiming for stabilisation somewhere within the range 450 –
550ppm CO2e. Anything higher would substantially increase risks of very harmful impacts but
would only reduce the expected costs of mitigation by comparatively little. Anything lower would
impose very high adjustment costs in the near term for relatively small gains and might not even be
feasible, not least because of past delays in taking strong action.
For similar reasons, weak action over the next 20 to 30 years, by which time GHG concentrations
could already be around 500ppm CO2e, would make it very costly or even impossible to stabilise at
550ppm CO2e. There is a high price to delay. Delay in taking action on climate change would
lead both to more climate change and, ultimately, higher mitigation costs.
Uncertainty is an argument for a more, not less, demanding goal, because of the size of the
adverse climate-change impacts in the worse-case scenarios.
Policy should be more ambitious, the more societies dislike bearing risks, the more they are
concerned about climate-change impacts hitting poorer people harder, the more optimistic
they are about technology opportunities, and the less they discount future generations’
welfare purely because they live later. The choice of objective will also depend on judgements
about political feasibility. These are decisions with such globally significant implications that they
will rightly be the subject of a broad public debate at a national and international level.
The ultimate concentration of greenhouse gases anchors the trajectory for the social cost of
carbon. The social cost of carbon is likely to increase steadily over time, in line with the
expected rising costs of climate-change-induced damage. Policy should therefore ensure
that abatement efforts at the margin also intensify over time. But policy-makers should also
spur on the development of technology that can drive down the average costs of abatement.
The social cost of carbon will be lower at any given time with sensible climate-change policies and
efficient low-carbon technologies than under ‘business as usual’.
Even if all emissions stopped tomorrow, the accumulated momentum behind climate change would
ensure that global mean temperatures would still continue to rise over the next 30 to 50 years.
Thus adaptation is the only means to reduce the now-unavoidable costs of climate change
over the next few decades. But adaptation also entails costs, and cannot cancel out all the
effects of climate change. Adaptation must go hand in hand with mitigation because, otherwise,
the pace and scale of climate change will pose insurmountable barriers to the effectiveness of
adaptation.
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13.1 Introduction
It is important to use both science and economics to inform policies aimed at slowing
and eventually bringing a stop to human-induced climate change.
Science reveals the nature of the dangers and provides the foundations for the technologies
that can enable the world to avoid them. Economics offers a framework that can help policy-
makers decide how much action to take, and with what policy instruments. It can also help
people understand the issues and form views about both appropriate behaviour and policies.
The scientific and economic framework provides a structure for the discussions necessary to
get to grips with the global challenge and guidance in setting rational and consistent national
and international policies.
Reducing the expected adverse impacts of climate change is both desirable and
feasible.
Previous chapters argued that, without mitigation efforts, future economic activity would
generate rising greenhouse gas emissions that would impose unacceptably high economic
and social costs across the entire world. Fortunately, technology and innovation can help rein
back emissions over time to bring human-induced climate change to a halt. This chapter first
makes the case for strong action now, and then discusses how a shared understanding
around the world of the nature of the challenge can guide that action on two fronts: mitigation
and adaptation.
13.2 The need for strong and urgent action
The case for strong action can be examined in three ways: a ‘bottom-up’ approach,
comparing estimates of the damages from unrestrained climate change with the costs
of specific mitigation strategies; a ‘model-based’ approach taking account of
interactions in the climate system and the global economy; and a ‘price-based’
approach, comparing the marginal costs of abatement with the social cost of carbon.
The ‘bottom-up’ approach was adopted in Chapters 3, 4 and 5 of this Review for the
heterogeneous impacts of climate change, and in Chapters 8 and 9 for the scale and costs of
possible mitigation strategies. If global temperatures continue to rise, there will be mounting
risks of serious harm to economies, societies and ecosystems, mediated through many and
varied changes to local climates. The impacts will be inequitable. It is not necessary to add
these up formally into a single monetary aggregate to come to a judgement that human-
induced climate change could ultimately be extremely costly. Chapter 7 showed that, without
action, greenhouse-gas emissions will continue to grow, so these risks must be taken
seriously. But Chapter 9 showed that it is possible to identify technological options for
stabilising greenhouse gas concentrations in the atmosphere that would cost of around 1% of
world gross world product – moderate in comparison with the high cost of potential impacts.
The options considered there are not the only ways of tackling the problem, nor necessarily
the best. But they do demonstrate that the problem can be tackled. And there will be valuable
co-benefits, such as reductions in local air pollution.
The ‘model-based’ approach was illustrated in Chapter 6 for the impacts, and Chapter 10 for
the costs, of mitigation. Models make it easier to consider the quantitative implications of
different degrees of action and can build in some behavioural responses, both to climate
change and the policy instruments used to combat it. But they do so at the cost of
considerable simplification. They also require explicit decisions about the ethical framework
appropriate for aggregating costs and benefits of action. The model results surveyed in this
Review point in the same direction as the ‘bottom up’ evidence: the benefits of strong action
clearly outweigh the costs.
In broad brush terms, spending somewhere in the region of 1% of gross world product
on average forever could prevent the world losing the equivalent of 5 – 20% of gross
world product for ever, using the approach to discounting explained in Chapters 2 and
6.
This can be thought of as akin to an investment. Putting together estimates of benefits and
costs of mitigation through time, as in Figures 13.1 and 13.2, shows how incurring relatively
modest net costs this century (peaking around 2050) can earn a big return later on, because
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of the size of the damages averted. These charts are quantitative analogues to the schematic
diagram in Figure 2.4 comparing a ‘business as usual’ trajectory with a mitigation path. They
are drawn assuming mitigation costs to be a constant 1% (Figure 13.1) and 4% (Figure 13.2)
of gross world product and taking a ‘business as usual’ scenario with baseline climate
scenario, some risk of catastrophes and a rough-and-ready estimate of non-market impacts.
As explained in Chapter 6, this is now likely to underestimate the sensitivity of the climate to
greenhouse gas emissions. Also, the charts focus on impacts measured in terms of how they
might affect output, not wellbeing; in other words, they do not reflect the more appropriate
approach to dealing with risk, as advocated in Chapter 2. But the range between the 5th and
95th percentiles of the distribution of possible impacts under the specific scenario is shown.
Figure 13.1 ‘Output gap’ between the ‘550ppm C02e and 1% GWP mitigation cost’
scenario and BAU scenario, mean and 5th – 95th percentile range
45
40
35
30
25
20
15
10
5
0
2000
2020
2040
2060
2080
2100
2120
2140
2160
2180
2200
Percentage point difference Gross World Product
2000
2020
2040
2060
2080
2100
2120
2140
2160
2180
2200
-5
Figure 13.2 ‘Output gap’ between the ‘550ppm C02e and 4% GWP mitigation cost’
scenario and BAU scenario, mean and 5th – 95th percentile range
40
Percentage point difference Gross World Product
35
30
25
20
15
10
5
0
-5
-10
The ‘price-based’ approach compares the marginal cost of abatement of emissions with the
‘social cost’ of greenhouse gases. Consider, for example, the social cost of carbon – that is,
the impact of emitting an extra unit of carbon at any particular time on the present value (at
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that time) of expected wellbeing or utility1. The extra emission adds to the stock of carbon in
the atmosphere for the lifetime of the relevant gas, and hence increases radiative forcing for a
long time. The size of the impact depends not only on the lifetime of the gas, but also on the
size of the stock of greenhouse gases while it is in the atmosphere, and how uncertain
climate-change impacts in the future are valued and discounted. The social cost of carbon
has to be expressed in terms of a numeraire, such as current consumption, and is a relative
price. If this price is higher than the cost, at that time, of stopping the emission of the extra
unit of carbon – the marginal abatement cost – then it is worth undertaking the extra
abatement, as it will generate a net benefit. In other words, if the marginal cost of abatement
is lower than the marginal cost of the long-lasting damage caused by climate change, it is
profitable to invest in abatement.
The ‘price-based’ approach points out that estimates of the social cost of carbon along
‘business as usual’ trajectories are much higher than the marginal abatement cost today. The
academic literature provides a wide range of estimates of the social cost of carbon, spanning
three orders of magnitude, from less than £0/tC (in year 2000 prices) to over £1000/tC (see
Box 13.1), or equivalently from less than $0/tCO2 to over $400/tCO2. This is obviously an
extremely broad range and as such makes a policy driven by pricing based on an estimate of
the social cost of carbon difficult to apply. The mean value of the estimates in the studies
surveyed by Tol was around $29/tCO2 (2000 US$), although he draws attention to many
studies with a much lower figure than this.
The modelling approach that was illustrated in Chapter 6 of this Review also indicates the
sensitivities of estimates of the social cost of carbon to assumptions about discounting, equity
weighting and other aspects of its calculation, as described by Tol, Downing and others.
Preliminary analysis of the model used in Chapter 6 points to a number around $85/tCO2
(year 2000 prices) for the central ‘business as usual’ case, using the PAGE2002 valuation of
non-market impacts. It should be remembered that this model is different from its
predecessors, in that it incorporates both explicit modelling of the role of risk, using standard
approaches to the economics of risk, and makes some allowance for catastrophe risk and
non-market costs, albeit in an oversimplified way. In our view, these are very important
aspects of the social cost of carbon, which should indeed be included in its calculation even
though they are very difficult to assess. We would therefore point to numbers for the ‘business
as usual’ social cost of carbon well above (perhaps a factor of three times) the Tol mean of
$29/tCO2 and the ‘lower central’ estimate of around $13/tCO2 in the recent study for DEFRA
(Watkiss et al. (2005)). But they are well below the upper end of the range in the literature (by
a factor of four or five). Nevertheless, we are keenly aware of the sensitivity of estimates to
the assumptions that are made. Closer examination of this issue – and a narrowing of the
range of estimates, if possible – is a high priority for research.
The case for strong action from the perspective of comparing the ‘business as usual’ social
cost of carbon and the marginal abatement cost is powerful, even if one takes Tol’s mean or
the Watkiss lower benchmark as the value of the former, when one compares it with the
opportunities for low-cost reductions in emissions and, indeed, for those that make money
(see Chapter 9). It is still more powerful if one takes higher numbers for the social cost of
carbon, as we would suggest is appropriate, and also recognises that the SCC will increase
over time, because of the current and prospective increases in the stock of greenhouse gases
in the atmosphere.
All three of these approaches would lead to exactly the same estimate of the net benefits of
climate-change policies and the same extent of action if models were perfect and policy-
makers had full information about the world. In practice, these conditions do not hold, so the
three perspectives can be used to cross-check the broad conclusions from adopting any one
of them.
1
The social cost of carbon and carbon price discussed here are convenient shorthand for the social cost (and
corresponding price) for each individual greenhouse gas. Their relative social costs, or 'exchange rate', depend on
their relative global warming potential (GWP) over a given period and when that warming potential is effective, as the
latter determines the economic valuation of the damage done. Suppose there were a gas with a life in the
atmosphere one tenth that of CO2 but with ten times the GWP while it is there. The social cost of that gas today
would be less than the social cost of CO2, because it would have its effect on the world while the total stock of
greenhouse gases was lower on average, so that its marginal impact would be less in economic terms.
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Box 13.1
Part III: The Economics of Stabilisation
Estimates of the social cost of carbon
Downing et al (2005), in a study for DEFRA, drew the following conclusions from the review of
the range of estimates of the social cost of carbon:
•
•
•
The estimates span at least three orders of magnitude, from 0 to over £1000/tC (2000
£), reflecting uncertainties in climate and impacts, coverage of sectors and extremes,
and choices of decision variables
A lower benchmark of £35/tC is reasonable for a global decision context committed to
reducing the threat of dangerous climate change. It includes a modest level of
aversion to extreme risks, relatively low discount rates and equity weighting
An upper benchmark for global policy contexts is more difficult to deduce from the
present state of the art, but the risk of higher values for the social cost of carbon is
significant.
The Downing study draws on Tol (2005), who gathered 103 estimates from 28 published
studies. Tol notes that the range of estimates is strongly right-skewed: the mode was $2/tC
(1995 US$), the median was $14/tC, the mean $93/tC and the 95th percentile $350/tC. He
also finds that studies that used a lower discount rate, and those that used equity weighting
across regions with different average incomes per head generated higher estimates and
larger uncertainties. The studies did not use a standard reference scenario, but in general
considered ‘business as usual’ trajectories. (See also Watkiss et al (2005) on the use of the
social cost of carbon in policy-making and Clarkson and Deyes (2002) for earlier work on the
social cost of carbon in a UK context.)
NB conversion rates:
£100/tC (2000 prices) = $116/tC (1995 prices) = $35.70/tCO2(2000 prices)
13.3 Setting objectives for action
Having made the case for strong action, there remains the challenge of formulating
more specific objectives, so that human-induced climate change is slowed and brought
to a halt without unnecessary costs. The science and economics both suggest that a
shared international understanding of what the objectives of climate-change policy
should be would be a valuable foundation for policy.
The problem is global. Policy-makers in different countries cannot choose their own global
climate. If they differ about what they think the world needs to achieve, not only will many of
them be disappointed, the distribution of efforts to reduce emissions will be inefficient and
inequitable. The benefits of a shared understanding include creating consensus on the scale
of the problem and a common appreciation of the size of the challenge for both mitigation and
adaptation. It would provide a foundation for discussion of mutual responsibilities in tackling
the challenge. At a national and individual level, it would reduce uncertainty about future
policy, facilitating long-term planning and making it more likely that both adaptation and
mitigation would be appropriate and cost-effective.
The ultimate objective of stopping human-induced climate change can be translated
into a variety of possible long-term global goals to give guidance about the strength of
measures necessary.
Table 13.1 below summarises five types of goal, each defining key stages along the causal
chain from emissions to atmospheric concentrations, to global temperature changes and
finally to impacts.
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These different types of goal are not necessarily inconsistent, and some are more suited to
particular roles than others. Public concern focuses on impacts to be avoided, and this is
indeed the language of the UNFCCC, which defines the ultimate objective of the Convention
as “…to achieve…stabilisation of greenhouse gas concentrations in the atmosphere at a level
that would prevent dangerous anthropogenic interference with the climate system. Such a
level should be achieved within a time-frame sufficient to allow ecosystems to adapt naturally
to climate change, to ensure that food production is not threatened and to enable economic
development to proceed in a sustainable manner.”
However, this does not provide a
quantitative guide to policy-makers on the action required. The EU has defined a temperature
threshold – limiting the global average temperature change to less than 2°C above pre-
industrial. This goal allows policy-makers and the public to debate the level of tolerable
impacts in relation to one simple index, but it does not provide a transparent link to the level of
mitigation action that must be undertaken.
The analysis presented in Chapter 8, linking cumulative emissions first to long-run
concentrations in the atmosphere, and then to the probabilities of different ultimate
temperature outcomes, provides an alternative basis for long-term goals. It is one that allows
the level of and uncertainty about both impacts and the costs of mitigation to be debated
together. Once a shared understanding of what the broad objectives of policy should be has
been established, it is useful to go further and translate it into terms that can guide the levels
at which the instruments of policy should be set.
Any operational goal should be closely related to the ultimate impacts on wellbeing that policy
seeks to avoid. But, if it is to guide policy-makers in adjusting policy sensibly over time,
progress towards it must also be easy to monitor. The goal therefore should be clear, simple
and specific; it must be possible to use new information regularly to assess whether recent
observations of the variable targeted are consistent with hitting the goal. Policy-makers must
also have some means of adjusting policy settings to alter the trajectory of the variable
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targeted. Seeing policy-makers adjust policy settings in this way to keep their aim on the goal
would also build the credibility of climate-change policies. This is very important, if private
individuals and firms are to play their full part in bringing about the necessary changes in
behaviour.
A goal for atmospheric concentrations would allow policy-makers to monitor progress
in a timely fashion and, if the world were going off course, adjust policy instrument
settings to correct the direction of travel.
The rest of this chapter focuses on the question of what concentration of greenhouse gases in
the atmosphere, measured in CO2 equivalent, to aim for. Policy instruments should be set to
make the expected long-run outcome for concentration (on the basis of today’s knowledge)
equal to this level. Atmospheric concentration is closer than cumulative emissions in the
causal chain to the impacts with which climate-change policy is ultimately concerned. And,
compared with other possible formulations of policy aspirations such as global temperature
change, observations of atmospheric concentration allow more rapid feedback to policy
settings2.
Such a goal is a device to help structure and calibrate climate-change policy. But it is only a
means to an end – limiting climate change – and it is useful to keep that ultimate objective in
mind. Other intermediate and local goals (for example, national limits for individual countries’
annual emissions or effective carbon-tax rates) may also help to move economies towards the
long-run objective and to monitor the success of policy, given the long time it will take to
achieve stabilisation – as long as they are consistent with, and subsidiary to, the primary goal.
They may also be necessary as stepping-stones towards the adoption of a more
comprehensive and coherent global objective, given the time it is likely to take to reach a
shared understanding of what needs to be done. The danger is that multiple objectives may
reduce the efficiency with which the main one is pursued. Part VI of the Review considers
some of the problems of turning an international objective into obligations for national
governments. This chapter sidesteps those problems in order to focus on what economics
suggests might be desirable characteristics of the set of local, national and supranational
policies that emerge from the political process.
However, the key decision required now is that strong action is both urgent and
necessary. That does not require immediate agreement on a precise stabilisation goal.
It is important to start taking steps in the right direction while the shared understanding is
being developed.
13.4 The economics of choosing a goal for global action
Measuring and comparing the expected benefits and costs over time associated with
different stabilisation levels can provide guidance to help decide how much to do and
how quickly.
Estimates need to take account of the great uncertainties about climate-change damages and
mitigation costs that remain even when a specific stabilisation goal is being considered. The
time dimension is also important. A different stabilisation goal entails a different trajectory of
emissions through time, so analysis should not simply compare the costs and benefits of
extra emission reductions this year. Instead, one needs to compare incremental changes in
the present values of current and future costs and benefits.
The marginal benefits of a lower stabilisation level reflect the expected impact on people’s
wellbeing of achieving a lower expected ultimate temperature change and a reduced risk of
extreme outcomes. Risk will increase along the path towards stabilisation and cannot be
accounted for simply by comparing ultimate stabilisation levels. As Chapter 2 showed, this
requires judgements about how wellbeing is affected by risk, uncertainty and the distribution
of the impacts of climate change across individuals and societies. Subjective assessments
have to be made where objective evidence about risks is limited, particularly those associated
2
Cumulative emissions are closer to the policy-induced emissions reductions that incur the costs of mitigating climate
change. The choice between the two goals comes down to how the costs and benefits of missing the goal by some
amount differ in the two cases, given uncertainty about the relationship between the two variables due to uncertainty
about the functioning of carbon ‘sinks’, etc. This is related to the issue of whether setting greenhouse-gas prices or
quotas is preferable in the face of uncertainty (see Chapter 14); the arguments there imply that, for the long run, a
concentration goal is to be preferred).
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with more extreme climate change. These assessments should adopt a consistent approach
towards risk and uncertainty, reflecting the degree of risk aversion people decide is
appropriate in this setting.
The marginal costs of aiming for a lower stabilisation level reflect the need to speed up the
introduction of mitigation measures, such as development of low-carbon technologies and
switching demand away from carbon-intensive goods and services. Stabilisation, however,
requires emissions to be cut to below 5 GtCO2e eventually, to the Earth’s natural annual
absorption limit, whatever the specific GHG stock level chosen (Chapter 8).
Figure 13.3 illustrates the approach sketched here. The figure shows in schematic fashion
how the incremental or marginal benefits and costs of a programme of action change through
time (in terms of present values) as successively lower goals are considered. As explained in
Chapter 2, the benefits (and the costs) of action should be thought of in terms of the expected
impacts on wellbeing over time, appropriately discounted, not simply monetary amounts. That
allows for risk weighting, risk aversion and considerations of fairness across individuals and
generations to be incorporated in the analysis. For simplicity, two ‘marginal benefits’ curves
are drawn to remind the reader of the huge uncertainties. In practice, people differ about the
weights they attach to different sorts of climate-change impacts. There is scope for legitimate
debate about how they should be aggregated to compare them with the costs of mitigation.
Figure 13.3 Schematic representation of how to select a stabilisation level
Marginal cost of
mitigation (including
adaptation costs),
over time, from
tightening the
Marginal
benefits
(including
benefits from
adaptation),
over time, from
tightening the
stabilisation
target
Range for the target
High
estimates of
impacts
Low
estimates of
impacts
stabilisation target
High estimates
of mitigation
costs
Low
estimates
of
mitigation
costs
Marginal
costs and
benefits,
measured in
terms of the
present
value of
expected
discounted
utility
`
Stabilisation target for ultimate atmospheric
concentration of greenhouse gases
The costs of mitigation, too, should be thought of in terms of their impact on broad measures
of wellbeing. It matters on whom the costs fall, when they are incurred and what the
uncertainties about them are. Figure 13.2 shows two curves, for high and low estimates of the
incremental costs of tougher action to curb emissions. They are drawn with the costs rising
more sharply as the stabilisation level considered becomes lower and lower. The ideal
objective is where the marginal benefits of tougher action equal the marginal costs. Given the
uncertainty about both sides of the ledger, this approach cannot pin down a precise number
but can, as the chart indicates, suggest a range in which it should lie. The range excludes
levels where either the incremental costs of mitigation or the incremental climate-change
impacts are rising very rapidly.
Uncertainty is an argument for setting a more demanding long-term policy, not less,
because
of the asymmetry
between
unexpectedly
fortunate
outcomes
and
unexpectedly bad ones.
Suppose there is a probability distribution for the scale of physical impacts associated with a
given increase in atmospheric concentrations of greenhouse gases. As one moves up the
probability distribution, the consequences for global wellbeing become worse. But, more than
that, the consequences are likely to get worse at an accelerating rate, for two reasons. First,
the higher the temperature, the more rapidly adverse impacts are likely to increase. Second,
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the worse the outcome, the lower will be the incomes of people affected by them, so any
monetary impact will have a bigger impact on wellbeing3.
There is a second line of reasoning linking uncertainty with stronger action. There is an
asymmetry due to the very great difficulty of reducing the atmospheric concentration of
greenhouse gases. Increases are irreversible in the short to medium run (and very difficult
even in the ultra-long run, on our current understanding). If new information is collected that
implies that climate-change impacts are likely to be worse than we now think, we cannot go
back to the concentration level that would have been desirable had we had the new
information earlier. But if the improvement in knowledge implies that a less demanding goal is
appropriate, it is easy to allow the concentration level to rise faster. In other words, there is an
option value to choosing a lower goal than would be picked if no improvements in our
understanding of the science and economics were anticipated. The ‘option value’ argument is
not, however, clear-cut4. There is also an option value associated with delaying investment in
long-lived structures, plant and equipment for greenhouse gas abatement. Investments in
physical capital, like cumulative emissions, are largely irreversible, so there is an option value
to deferring them. That argues for a higher level of annual emissions than otherwise
desirable.
Some of the parameters that modellers have treated as uncertain, such as discount
factors and equity weights, reflect societies’ preferences. In the process of agreeing an
international stabilisation objective, or at least narrowing its range, discussions have
to resolve, or at least reduce disagreement over, the issues of social choice lying
behind these uncertainties.
As explained in Chapter 2 and its appendix, this Review argues for using a low rate of pure
time preference and assuming a declining marginal utility of consumption as consumption
increases across time, people and states of nature. However, the magnitude of the risks
described in Part II of this Review suggests that a broad range of perspectives on these two
issues indicates the need for strong action to mitigate emissions.
Given this framework, the evidence on the costs and benefits of mitigation reviewed in the
chapters above can give a good indication of upper and lower limits that might be set for the
extent of action, as argued below. The policy debate should seek some indication of where
within these limits international collective action should aim5. But it is vital that, while a shared
understanding permitting agreement on a common goal is being developed, initial actions to
reduce emissions are not delayed.
There is room for debate about precisely how fast emissions need to be brought down,
but not about the direction in which the world now has to move.
13.5 Climate change impacts and the stabilisation level
Expected climate-change impacts rise with the atmospheric concentration of
greenhouse gases, because the probability distributions for the long-run global
temperature move upwards. The evidence strongly suggests that 550ppm CO2e would
be a dangerous place to be, with substantial risks of very unpleasant outcomes.
Figure 13.3 illustrates how the risk of various impacts occurring is associated with different
stabilisation levels6 (see also Box 8.1 for frequency distributions of the range of temperature
increases associated with various stabilisation levels in a selection of climate models). The
top section shows the 5 – 95% probability ranges of temperature increases projected at
different stabilisation levels; the central marker is the 50th percentile point. The bottom section
3
More formally, we take impacts to be convex in atmospheric concentration and note that the expected utility of a
range of outcomes is lower than the utility of the expected outcome, if marginal utility declines with income. This is
discussed further in Chapter 2.
4
5
a point goal can be hit precisely, it should be within these upper and lower limits. It would also be desirable if the
zone were considerably narrower than the span of those limits, so as not to weaken substantially the discipline on
policy-makers to adjust policy settings if it looks as if the goal is not going to be met. Too wide a target zone also
increases the risk of different policy-makers around the world choosing policy settings that are inconsistent with each
other.
6
relationship between greenhouse gas concentration and temperatures.
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shows the projected impacts. At some point, the risks of experiencing some extremely
damaging phenomena begin to become significant. Such phenomena include:
•
•
•
•
Irreversible losses of ecosystems and extinction of a significant fraction of species.
Deaths of hundreds of millions of people (due to food and water shortages, disease
or extreme weather events).
Social upheaval, large-scale conflict and population movements, possibly triggered by
severe declines in food production and water supplies (globally or over large
vulnerable areas), massive coastal inundation (due to collapse of ice sheets) and
extreme weather events.
Major, irreversible changes to the Earth system, such as collapse of the Atlantic
thermohaline circulation and acceleration of climate change due to carbon-cycle
feedbacks (such as weakening carbon absorption and higher methane releases) – at
high temperatures, stabilisation may prove more difficult, or impossible, because such
feedbacks may take the world past irreversible tipping points (chapter 8).
The expected impacts of climate change on well-being in the broadest sense are likely to
accelerate as the stock of greenhouse gases increases, as argued in Chapter 3. The
expected benefits of extra mitigation will therefore increase with the stabilisation level7. In
Figure 13.2, the marginal benefit curve is therefore drawn as rising increasingly steeply with
the stabilisation level. There are four main reasons:
•
•
•
•
As global mean temperatures increase, several specific climate impacts are likely to
increase more and more rapidly: in other words, the relationship is convex. Examples
include the relationship between windstorm wind-speed and the value of damage to
buildings (IAG (2005)) and new estimates of the relationship between temperature
and crop yields (Schlenker and Roberts (2006));
Different elements of the climate system may interact in such a way that the
combined impacts rise more and more rapidly with temperature;
As global mean temperatures increase several degrees above pre-industrial levels,
existing stresses would be more and more likely to trigger the most severe impacts of
climate change that arise from interactions with societies, namely social upheaval,
large-scale conflict and population movements;
As global mean temperatures increase, so does the risk that positive feedbacks in the
climate system, such as permafrost melting and weakening carbon sinks, kick in.
The uncertainties about impacts make it impossible to quantify exactly where the marginal
impacts of climate change will rise more sharply. However, across the current body of
evidence, two approximate global turning points appear to exist, at around 2 – 3°C and 4 –
5°C above pre-industrial levels:
•
•
At roughly 2 – 3°C above pre-industrial, a significant fraction of species would exceed
their adaptive capacity and, therefore, rates of extinction would rise. This level is
associated with a sharp decline in crop yields in developing counties (and possibly
developed counties) and some of the first major changes in natural systems, such as
some tropical forests becoming unsustainable, irreversible melting of the Greenland
ice sheet and significant changes to the global carbon cycle (accelerating the
accumulation of greenhouse gases).
At around 4 – 5°C above pre-industrial, the risk of major abrupt changes in the
climate system would increase markedly. At this level, global food production would
be likely to fall significantly (even under optimistic assumptions), as crop yields fell in
developed countries.
7
There is, however, considerable uncertainty about how climate-change effects will evolve as temperatures rise, as
many of the hypothesised effects are expected to take place or intensify outside the temperature range experienced
by humankind, and so cannot be verified by empirical observation. One characteristic of the climate physics works in
the opposite direction: the expected rise in temperature is a function of the proportional increase in the stock of
greenhouse gases, not its absolute increase. As a result, some integrated assessment models, for example
Nordhaus’ DICE model, have S-shaped functions to represent the costs of climate-change impacts.
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Figure 13.4 Stabilisation levels and probability ranges for temperature increases
The figure below illustrates the types of impacts that could be experienced as the world
comes into equilibrium with higher greenhouse gas levels. The top panel shows the range of
temperatures projected at stabilisation levels between 400ppm and 750ppm CO2e at
equilibrium. The solid horizontal lines indicate the 5 – 95% range based on climate sensitivity
estimates from the IPCC TAR 2001 (Wigley and Raper (2001)) and a recent Hadley Centre
ensemble study (Murphy et al. (2004)). The vertical line indicates the mean of the 50th
percentile point. The dashed lines show the 5 – 95% range based on eleven recent studies
(Meinshausen (2006)). The bottom panel illustrates the range of impacts expected at different
levels of warming. The relationship between global average temperature changes and
regional climate changes is very uncertain, especially with regard to changes in precipitation
(see Box 3.2). This figure shows potential changes based on current scientific literature.
1°C
2°C
5°C
4°C
3°C
400 ppm CO2e
5%
95%
major world cities, including
London, Shanghai, New
York, Tokyo and Hong Kong
Falling crop yields in many developing regions
Food
Water
major
irreversible
impacts
450 ppm CO2e
550 ppm CO2e
650ppm CO2e
750ppm CO2e
Eventual Temperature change (relative to pre-industrial)
0°C
Rising crop yields in high-latitude developed
countries if strong carbon fertilisation
Yields in many developed regions
decline even if strong carbon fertilisation
Increasing risk of abrupt, large-scale shifts in the
climate system (e.g. collapse of the Atlantic THC
and the West Antarctic Ice Sheet)
Significant changes in water availability (one
study projects more than a billion people suffer
water shortages in the 2080s, many in Africa,
while a similar number gain water
Sea level rise threatens
Small mountain glaciers
disappear worldwide –
potential threat to water
supplies in several areas
Greater than 30% decrease
in runoff in Mediterranean
and Southern Africa
Coral reef ecosystems
extensively and
eventually irreversibly
damaged
Ecosystems
Onset of irreversible melting
of the Greenland ice sheet
Extreme
Weather
Events
Risk of rapid
climate
change and
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Small increases in hurricane
intensity lead to a doubling of
damage costs in the US
Risk of weakening of natural carbon absorption and possible increasing
natural methane releases and weakening of the Atlantic THC
Possible onset of collapse
of part or all of Amazonian
rainforest
Large fraction of ecosystems unable to maintain current form
Many species face extinction
(20 – 50% in one study)
Severe impacts
in marginal
Sahel region
Rising number of people at risk from hunger (25
– 60% increase in the 2080s in one study with
weak carbon fertilisation), with half of the
increase in Africa and West Asia.
Entire regions experience
major declines in crop yields
(e.g. up to one third in Africa)
Few studies have examined explicitly the benefits of choosing a lower stabilisation level.
Generally, those that have done so show that the benefits vary across sectors. For example,
in reducing the stabilisation temperature from 3.5°C to 2.5°C, significant benefits to
ecosystems and in the number of people exposed to water stress have been estimated8.
8
Arnell et al. (2004)
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However, such evidence is strongly model-dependent and, therefore, subject to significant
uncertainties.
Recent integrated assessment models (discussed in Chapter 6) have attempted to capture
some of these uncertainties by representing damage functions stochastically. These cover
several dimensions, including the risk of major abrupt changes in the climate systems (they
do not, however, generally include estimates of the potential costs of social disruption). They
also take account of adaptation to climate change to varying extents. Chapter 6 notes that
such models show a steep increase in marginal costs with rising temperature. The
PAGE2002 model, used in chapter 6, has the advantage of allowing for the uncertainty in the
literature about several dimensions of impacts. It permits a comparison of the probability
distribution of projected gross world product net of the cost of climate change with the
hypothetical gross world product without climate change, for a given increase in global mean
temperature, thus providing an estimate of climate-change costs (see Table 13.2, where
estimates include some measure of ‘non-market’ impacts). The costs of climate change as a
proportion of gross world product are modelled as an uncertain function of the increase in
temperature, among other factors.
Thus, for example, according to PAGE2002, if the temperature increase rises from 2ºC to
3ºC, the mean damage estimate increases from 0.6% to 1.4% of gross world product; but the
‘worst case’ – the 95th percentile of the probability distribution – goes from 4.0% to 9.1%.
These costs fall disproportionately on low-latitude, low-income regions, but there are
significant net costs in higher-latitude regions, too.
The estimates of the costs of impacts suggest that the mean expected damages rise
significantly if the global temperature change rises from 3ºC to 4ºC and even more from 4ºC
to 5ºC. But the damages associated with a ‘worst case’ scenario – the 95th percentile of the
distribution – rise more rapidly still.
On the basis of current scientific understanding, it is no longer possible to prevent all
risk of dangerous climate change.
Box 8.1 showed how the risk of exceeding these temperature thresholds rises at stabilisation
levels of 450, 550, 650, and 750ppm CO2e. This box implies:
•
•
•
Even if the world were able to stabilise at current concentrations, it is already possible
that the ultimate global average temperature increase will exceed 2°C
At 450ppm CO2e, there is already a 18% chance of exceeding 3°C, according to the
Hadley ensemble reported in the table, but a very high chance of staying below 4°C
By 550ppm CO2e, there is a 24% chance that temperatures will exceed 4°C, but less
than a 10% chance that temperatures will exceed 5°C.
It can be seen that a move above 550ppm CO2e would entail considerable additional costs of
climate change, taking into account the further increases in the risks of extreme outcomes.
Our work with the PAGE model suggests that, allowing for uncertainty, if the world stabilises
at 550ppm CO2e, climate change impacts could have an effect equivalent to reducing
consumption today and forever by about 1.1%9. As Chapter 6 showed, this compares with
around 11% in the corresponding ‘business as usual’ case – ten times as high. With
stabilisation at 450ppm CO2e, the percentage loss would be reduced to 0.6%, so choosing
the tougher goal ‘buys’ about 0.5% of consumption now and forever. Choosing 550ppm
instead of 650ppm CO2e ‘buys’ about 0.6%. As with all models, these numbers reflect heroic
9
These figures are based on the ‘broad impacts, standard climate sensitivity’ case among the scenarios considered
in Chapter 6. As such, they do not allow for equity weighting; if they did, the estimates in the text would be higher.
They would also be higher if higher estimates of climate sensitivity, incorporating more amplifying feedback
mechanisms, were used. The valuation of non-market impacts is particularly difficult and dependent on ethical
judgements, as explained in Chapter 6.
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assumptions about the valuation of potential impacts, although, as Chapter 6 explains, they
reflect an attempt to ensure the model calibration reflects the nature of the problem faced.
They also entail explicit judgements about some of the ethical issues involved. In addition, the
PAGE2002 model is not ideal for analysing stabilisation trajectories. Nevertheless, all
integrated assessment models are sensitive to the assumptions and they should be taken as
only indicative of the quantitative impacts, given those assumptions. It should be noted that
the results quoted from Chapter 6 leave out much that is important, and the other models
referred to there leave out more.
13.6 The costs of mitigation and the stabilisation level
The lower the stabilisation level chosen, the faster the technological changes
necessary to bring about a low-carbon society will have to be implemented.
Stabilising close to the current level of greenhouse gas concentration would require
implausibly rapid reductions in emissions, because the technologies currently available to
achieve such reductions are still very expensive10 and the appropriate structures, plant and
equipment are not yet in place. Hitting 450ppm CO2e, for example, appears very difficult to
achieve with the current and foreseeable technologies, as suggested in Chapter 8. It would
require an early peak in emissions, very rapid emission cuts (more than 5% per year), and
reductions by 2030 of around 70%. Even with such cuts, the stock of greenhouse gases
covered by the Kyoto Protocol would initially overshoot, their effect temporarily masked by
aerosols (so that there would be only a very small overshoot in radiative forcing)11. Costs
would start to rise very rapidly if emissions had to be reduced sharply before the existing
capital stock in emissions-producing industries would otherwise be replaced and at a speed
that made structural adjustments in economies very abrupt and hence expensive. Abrupt
changes to economies can themselves trigger wider impacts, such as social instability, that
are not covered in economic models of the costs of mitigation.
Technological change eventually has to get annual emissions down to their long-run
sustainable levels without having to accelerate sharply the retirement of the existing capital
stock, if costs are to be contained. Model-based estimates of the present value of the costs of
setting a tougher stabilisation objective are not widely available in the literature. That reflects,
among other factors, the unavoidable uncertainties about the pace and costs of future
innovation. In principle, such estimates ought to reflect the incidence of the mitigation costs,
which ultimately fall on the consumers of currently GHG-intensive goods and services, as well
as their monetary value (just as the incidence of climate-change impacts matters as well as
their level), but there has been little investigation of this aspect of the problem.
However, there are some estimates to help as a guide. Chapter 9 in effect argued that the
extra mitigation costs incurred by stabilising at around 550ppm CO2e instead of allowing
business to continue as usual would probably be of the order of 1% of gross world product.
Choosing a lower goal would cost more, a higher goal less. Some studies of costs give more
of an indication of their sensitivity to the stabilisation objective. For example, the study by
Edenhofer et al (2006), averaging over five models, provides the following estimates of cost
increases from choosing a lower stabilisation goal:
10
Costs of delivering any particular level of abatement are likely to decline with investment and experience; see
Chapters 9 and 16.
11
included; but aerosols reduce current radiative forcing. The projection reported in the text assumes that the aerosol
affect diminishes over time, but for a period counteracts a temporary rise in Kyoto greenhouse gases above 450ppm
CO2e. As the concentration of greenhouse gases is rising at around 2.5 ppm CO2e per year, and annual emissions
are increasing, 450ppm CO2e could be reached in less than ten years.
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It is important to note that these results are tentative, and that there is still much debate about
the role of induced technological progress, the focus of the study. Nevertheless, the bottom
line in Table 13.3 suggests that the extra mitigation costs from choosing a goal of around
500ppm instead of 550ppm CO2 would be small, ranging from 0.06% to 0.18% of gross world
output, depending on how much future costs are discounted. In terms of a CO2e goal, this is
similar to going from 600 – 700ppm to 550 – 650ppm, depending on what happens to non-
CO2 greenhouse gases (see Chapter 8). The extra costs of choosing a goal of 450ppm CO2
instead of 500ppm CO2would be higher, ranging from 0.25% to 0.58%; this is similar to going
from 550 – 650ppm CO2e to 500 – 550ppm CO2e. None of the discount schemes used are
the same as the one used in Chapter 6 of this Review, as the discount rates are not path-
dependent. However, as stabilisation reduces the chances of very bad outcomes compared
with ‘business as usual’, the discounting issue is less important than when evaluating
potential impacts without mitigation. It is important to note that the studies concerned take the
year 2000 as a baseline. Given the probable cumulative emissions since then, the goals
would now be more difficult and expensive to hit.
The recent US Climate Change Science Program draft report on scenarios of greenhouse gas
emissions and atmospheric concentrations also provides useful estimates, reporting for
various points in time the percentage change in gross world product expected due to adopting
policies to meet four different stabilisation goals12. Again, the studies covered take 2000 as
the base year. The implications for incremental costs (as a fraction of gross world output) of
adopting successively tougher goals are summarised in Table 13.4 below. These studies
were not designed with the objective of this chapter in mind, of course, and the draft is subject
to revision, so the estimates should be regarded as suggestive of magnitudes, not definitive.
Table 13.4 shows in the bottom panel that the extra costs incurred by adopting an objective of
around 820ppm instead of 970ppm CO2e are very small, and, for two of the three models
(MERGE and MiniCAM in the middle panel), aiming for around 670ppm instead of 820ppm
CO2e also costs little. According to the same two models, choosing 525ppm instead of
670ppm CO2e increases costs by around 1% of gross world product, the amount varying
somewhat over time. The most pessimistic model here generates considerably higher
12
US CCSP Synthesis and Assessment Product 2.1, Part A: Scenarios of Greenhouse Gas Emissions and
Atmospheric Concentrations. Draft for public comment, June 26, 2006.
13
exercise.
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estimates for the total yearly costs of mitigation, reflecting its relatively high trajectory for
‘business as usual’ emissions and relatively pessimistic assumptions about the likely pace of
innovation in low-carbon technologies. The studies suggest that mitigation costs start to rise
sharply towards the bottom of the ranges of stabilisation levels considered.
Delay will make it more difficult and more expensive to stabilise at or below 550ppm
CO2e.
All of these studies take as a starting point the year 2000. If it takes 20 years or so before
strong policies are put in place globally, it is likely that the world would already be at
somewhere around 500ppm CO2e, making it very difficult and expensive then to take action to
stabilise at around 550ppm.
13.7 A range for the stabilisation objective
Integrated assessment models have been used in a number of studies to compare the
marginal costs and marginal benefits of climate-change policy over time. But many of
the estimates in the literature do not take into account the latest science or treat risk
and uncertainty appropriately. Doing so would bring down the stabilisation level
desired.
In some cases, the models have been used to estimate the ‘optimal’ amount of mitigation that
maximises benefits less costs. These studies recommend that greenhouse gas emissions be
reduced below business-as-usual forecasts, but the reductions suggested have been modest.
For example, on the basis of the climate sensitivities and assessments available at the time
the studies were undertaken,
•
•
•
Nordhaus and Boyer (1999) found that the optimal global mitigation effort reduces
atmospheric concentrations of carbon dioxide from 557ppm in 2100 (business-as-
usual) to 538ppm. This reduces the global mean temperature from an estimated
2.42°C above 1900 levels to 2.33°C;
Tol (1997) found that the optimal mitigation effort reduces the global mean
temperature in 2100 from around 4°C above 1990 levels to between around 3.6°C
and 3.9°C, depending on whether countries cooperate and on the costs of mitigation;
Manne et al. (1995) did not use their model to find the optimal reduction in emissions,
but the policy option they explored that delivers the highest net benefits reduces
atmospheric concentrations of carbon dioxide from around 800ppm in 2100 to around
750ppm, reducing global mean temperature from around 3.25°C above 1990 levels to
around 3°C.
However, the optimal amount of mitigation may in fact be greater than these studies have
suggested. Above all, they carry out cost-benefit analysis appropriate for the appraisal of
small projects, but we have argued in Chapter 2 that this method is not suitable for the
appraisal of global climate change policy, because of the very large uncertainties faced. As a
result, these studies underestimate the risks associated with large amounts of warming.
Neither does any of these studies place much weight on benefits and costs accruing to future
generations, as a consequence of their ethical choices about how to discount future
consumption. Manne et al. apply a much higher discount rate to utility than do we in Chapter
6. Nordhaus and Boyer assume relatively low and slowing economic growth in the future,
which reduces future warming. Tol estimates relatively modest costs of climate change, even
at global mean temperatures 5-6°C above pre-industrial levels. Recent scientific
developments have placed more emphasis on the dangers of amplifying feedbacks of global
temperature increases and the risks of crossing irreversible tipping points than these models
have embodied.
Given the paucity of estimates of the appropriate stabilisation level and the
disadvantages of the ones that exist, this chapter does not propose a specific
numerical goal. Instead, it explores how economic analysis can at least help suggest
upper and lower limits to the range for an atmospheric concentration goal. Allowing for
the current uncertainties, the evidence suggests that the upper limit to the stabilisation
range should not be above 550ppm CO2e.
Putting together our results on the valuation of climate-change impacts with the mitigation-
cost studies suggests that the benefits of choosing a lower stabilisation goal clearly outweigh
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the costs until one reaches 550 – 600ppm CO2e. But around this level the cost-benefit
calculus starts to get less clear-cut. The incremental mitigation costs of choosing 500 –
550ppm instead of 550 – 600ppm CO2e are three to four times as much as the incremental
costs of choosing 550 – 600ppm instead of 600 – 650ppm CO2e, according to the numbers in
Edenhofer et al. The higher mitigation costs incurred if 500 – 550ppm is chosen instead of
550 – 600ppm CO2e might be of similar size to the incremental benefits. They would be
bigger if induced technological change were inadequate or ‘business as usual’ emissions
were at the higher end of projections, as in the IGSM projections reported in Table 13.4.
As far as the climate-change impacts are concerned, the incremental benefits might be bigger
than these calculations allow – for example, if policy-makers are more risk-averse than the
PAGE calculations assumed or attach more weight to non-market impacts. Nevertheless, in
choosing an upper limit to the stabilisation range, one needs to consider what is appropriate if
climate-change impacts turn out to be towards the low end of their probability distribution (for
a given atmospheric concentration) and mitigation costs towards the high end of their
distribution. Following broadly this approach, but assuming mitigation costs are brought down
over time by induced technological change, we suggest an upper limit of 550ppm CO2e.
The lower limit to the stabilisation range is determined by the level at which further
tightening of the goal becomes prohibitively expensive. On the basis of current
evidence, stabilisation at 450ppm CO2e or below is likely to be very difficult and costly.
Cost estimates derived from modelling exercises suggest that costs as a share of gross world
product would increase sharply if a very ambitious goal were adopted (see Chapter 10). It is
instructive that cost modelling exercises rarely consider stabilisation below 500ppm CO2e.
Edenhofer et al point out that some of the models in their study simply cannot find a way of
achieving 450ppm CO2e. Even stabilising at 550ppm CO2e would require complete
transformation of the power sector. 450ppm CO2e would in addition require very large and
early reductions of emissions from transport, for which technologies are further away from
deployment. Given that atmospheric greenhouse gas levels are now at 430ppm CO2e,
increasing at around 2.5ppm/yr, the feasibility of hitting 450ppm CO2e without overshooting is
very much in doubt. And it would be unwise to assume that any overshoot could be clawed
back.
The evidence on the benefits and costs of mitigation at different atmospheric
concentrations in our view suggests that the stabilisation goal should lie within the
range 450 – 550ppm CO2e.
The longer action is delayed, the higher will be the lowest stabilisation level achievable. The
suggested range reflects in particular the judgements that:
•
•
•
•
•
Any assessment of the costs of climate change must take into account uncertainty
about impacts and allow for risk aversion. Because of the risk of very adverse
impacts, extreme events and amplifying feedbacks, this implies adopting a tougher
goal than if uncertainty were ignored
Proper weight should be given to the interests of future generations. Future
individuals should be given the same weight in ethical calculations as those currently
alive, if it is certain that they will exist. But, as there is uncertainty about the existence
of future generations, it is appropriate to apply some rate of discounting over time.
That points to the use of a positive, but small, rate of pure time preference (see
Chapter 2 and its appendix)
Proper attention should be paid to the distribution of climate-change impacts, in
particular to the disproportionate impact on poor people
Productivity growth in low-greenhouse-gas activities will speed up if there is more
output from and investment in these activities
The speed of decarbonisation is constrained by the current state of technology and
the availability of resources for investment in low-carbon structures, plant, equipment
and processes.
It is clear that studies of climate-change impacts and of mitigation costs do not yet establish a
narrow range for the level at which the atmospheric concentrations of greenhouse gases
should be stabilised. More research is needed to narrow the range further. There will always
be disagreements about the size of the risks being run, the appropriate policy stance towards
risk, and the valuation of social, economic and ecological impacts into the far future. But the
range suggested here provides room for negotiation and debate about these. And we would
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argue that agreement on the range stated does not require signing up to all of the judgements
specified above. In presenting the arguments, for example, we have omitted a number of
important factors that are likely to point to still higher costs of climate change and thus still
higher benefits of lower emissions and a lower stabilisation goal.
In any case, agreement requires discussion and negotiation about the ethical issues involved.
Chapter 6 demonstrates that taking proper account of the non-marginal nature of the risks
from climate change leads to a higher estimate of risk-adjusted losses of wellbeing than if the
larger risks are ignored or submerged in simple averages. Those who weigh more heavily the
potential costs of the climate change possible at any given stabilisation level will argue for a
goal towards the lower end of the range. Greater risk aversion and more concern for equity
across regions and generations will push in the same direction. But those who are pessimistic
about the direction and pace of technological developments or who believe emissions under
‘business as usual’ will grow more rapidly than generally expected will tend to advocate a goal
towards the upper limit, other things being equal.
The EU has adopted an objective, endorsed by a large number of NGOs and policy think-
tanks, to limit global average temperature change to less than 2°C relative to pre-industrial
levels. This goal is based on a precautionary approach. A peak temperature increase of less
than 2°C would strongly reduce the risks of climate-change impacts, and might be sufficient to
avoid certain thresholds for major irreversible change – including the melting of ice-sheets,
the loss of major rainforests, and the point at which the natural vegetation becomes a source
of emissions rather than a sink. Some would argue that the implications of exceeding the 2°C
limit are sufficiently severe to justify action at any cost. Others have criticised the 2°C limit as
arbitrary, and have raised questions about the feasibility of the action that is required to
maintain a high degree of confidence of staying below this level. Recent research on the
uncertainties surrounding temperature projections suggests that at 450ppm CO2e there would
already be a more-than-evens chance of exceeding 2°C (see Chapter 8). This highlights the
need for urgent action and the importance of keeping quantitative objectives under review, so
that they can be updated to reflect the latest scientific and economic analysis.
Some of the uncertainties will be resolved by continuing progress in the science of climate
change, but ethics and social values will always have a crucial part to play in decision-
making. The precise choice of policy objective will depend on values, attitudes to
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