risk and
judgements about the political feasibility of the objective. It is a decision with significant
implications that will rightly be the subject of a broad public and international debate.
13.8 Implications for emissions reductions and atmospheric concentrations
Stabilisation of atmospheric concentrations implies that annual greenhouse-gas
emissions must peak and then fall, eventually reaching the level that the Earth system
can absorb annually, which is likely to be below 5 GtCO2e.
At the moment, annual emissions are over 40 GtCO2e. Chapter 8 showed how, for the range
of stabilisation levels considered here, annual emissions should start falling within the next 20
years, if implausibly high reduction rates are to be avoided later on. Global emissions will
have to be between 25% and 75% lower than current levels by 2050. That illustrates the fact
that, even at the high end of the stabilisation range, major changes in energy systems and
land use are required within the next 50 years.
While annual emissions are likely to rise first and then fall, atmospheric concentrations
are likely to continue to rise until the long-term objective is reached.
For any given stabilisation level, overshooting entails increased risks of climate change, by
increasing the chances of triggering extreme events associated with higher concentration
levels than the goal, and amplifying feedbacks on concentration levels. The expected impacts
on wellbeing associated with any stabilisation level are thus likely to be smaller if
overshooting is avoided. As reducing emissions in agriculture appears relatively difficult, and
that sector accounts for more than 5 GtCO2e per year by itself already, stabilisation is likely
ultimately (well beyond 2050) to require complete decarbonisation of all other activities and
some net sequestration of carbon from the atmosphere (e.g. by growing and burning biofuels,
and capturing and storing the resultant carbon emissions, or by afforestation). Overshooting
and return require that annual emissions can at some stage be reduced for a period below the
level consistent with a stable level of the stock of greenhouse gases. On the basis of the
current economic and technological outlook, that is likely to be very difficult.
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Setting up a long-run stabilisation goal does not, however, preclude future revisions to make it
more ambitious, if either technological progress is more far-reaching than anticipated or the
expected impacts of rises in concentration levels rise. But, equally, unexpected difficulties in
driving technical progress or a downward revision in expected impacts of climate change
would warrant a less challenging goal. Given the pervasive uncertainties about both costs and
benefits of climate-change policies, it is essential that any policy regime incorporate from the
outset mechanisms to update the long-run goal in a transparent fashion in response to new
developments in the science or economics.
The precise trajectory of annual emissions will depend on, among other factors, how climate-
change policy is implemented, the pace of economic growth and the extent of innovation,
particularly in the energy sector. Chapter 9 demonstrated that mitigation is more likely to be
carried out cost effectively if policy encourages ‘what, where and when’ flexibility, so setting a
precise trajectory as a firm intermediate objective is likely to be unnecessarily costly.
Trajectories can nevertheless give a guide as to whether emissions are on course to reach
the long-term goal.
13.9 The social cost of carbon
Calculations of the social cost of carbon have commonly been used to show the price that the
world has to pay, if no action is taken on climate change, for each tonne of gas emitted – as in
Section 13.2. But the concept can also be used to evaluate the damages along a stabilisation
trajectory14.
Choosing a concentration level to aim for also anchors a trajectory for the social cost
of carbon. Without having a specific stabilisation goal in mind, it is difficult to calibrate
what the carbon price should be – or, more generally, how strong action should be.
The social cost of carbon will be lower at any given time with sensible climate-change
policies than under ‘business as usual’.
The social cost of carbon will be lower, the lower the ultimate stabilisation level. The social
cost of carbon depends on the overall strategy for mitigating climate change and can help
support that strategy, for instance by helping to evaluate abatement proposals. But it should
not be seen as the driver of strategy. If the ultimate stabilisation goal has been chosen
sensibly, the social cost of carbon along the stabilisation trajectory should be a good guide to
the carbon price needed to help persuade firms to make the carbon-saving investments and
undertake the research and development that would help deliver the necessary changes and
entice consumers to buy fewer GHG-intensive goods and services. However, as Part IV of
this Review argues, carbon pricing is only part of what needs to be done to bring down
emissions.
If the concentration of carbon in the atmosphere rises steadily towards its long-run
stabilisation level (so there is no overshooting), and expected climate-change damages
accelerate with concentrations, the social cost of carbon will rise steadily over time, too15. An
extra unit of carbon will do more damage at the margin the later it is emitted, because it will
be around in the atmosphere while concentrations are higher, and higher concentrations
mean larger climate-change impacts at the margin16.
The social cost of carbon will be lower at any given time with sensible climate-change policies
than under ‘business as usual’, because concentrations will be lower at all points in time.
Hence, for given assumptions about discounting and the other relevant factors, the social cost
of carbon associated with sensible emissions strategies is likely to be considerably lower than
14
The social cost of carbon is well defined along any specific emissions trajectory, not only stabilisation trajectories,
as the usual calculations of ‘business as usual’ SCCs illustrate.
15
wellbeing) and global mean temperature increases outweighs the declining marginal impact of increases in
concentration on temperature as concentration rises.
16
the economy, apart from the greenhouse-gas externality, affected by emissions. The shadow-price path over time will
depend on the precise dynamics of expected growth, climate-change impacts, the rate of removal of CO2 from the
atmosphere, discount rates and the marginal utility of income. The social cost of carbon is likely to rise faster, the
higher is expected economic growth, the higher the rate at which total impacts rise with concentrations, the higher the
decay rate of the greenhouse gases, and the higher the pure rate of time preference.
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estimates reviewed in the recent DEFRA study, which were based on various ‘business as
usual’ scenarios17.
The social cost of carbon will also be lower if the efficiency of emissions-abatement methods
improves rapidly and new low-carbon technologies prove to be cheap and easy to spread
around the world. In that case, it would be worthwhile undertaking more mitigation and a
lower stabilisation level would be appropriate. The lower stabilisation level and path drive
down the SCC – better technology is a means to that end. Policy nevertheless has to be
strong enough to bring about the changes in technology and energy demand necessary to
stabilise at the chosen level.
Compared with the assumptions lying behind the estimates of the social cost of carbon
reported in the DEFRA study, there are a number of aspects of this Review’s framework of
analysis that tend to push up the implied social cost of carbon. These include:
•
•
•
•
•
•
The adoption of a full ‘expected utility’ approach to valuation of impacts, allowing risk
aversion to give more weight to the possibility of bad outcomes
Greater weight given to ‘non-market’ outcomes, especially life chances in poor
countries18
The use of a low pure rate of time preference, reflecting the view that this rate should
be based largely on the probability that future generations exist, rather than their
having some more lowly ethical status19
Equity weighting
The weight given to recent work on uncertainty about climate sensitivity
The weight given to recent work on amplifying-feedback risks within the climate
system to global temperatures and the risks of extreme events
Policy should ensure that abatement efforts intensify over time. Emissions reductions
should be driven to the point where their marginal costs keep pace with the rising
social cost of carbon.
Firms and individuals are likely to undertake abatement activities up to the point where the
marginal costs of reducing carbon emissions are equal to the carbon price, given by the social
cost of carbon associated with the desired trajectory. Anticipated improvements in the overall
efficiency of emissions reductions should be reflected in quantity adjustments – lower
emissions – not a fall in the price of carbon. The rising SCC is driven by the rising
atmospheric concentration of greenhouse gases and the marginal abatement costs are
brought into equality with the SCC by firms’ and households’ reactions to the carbon price.
This is illustrated in Box 13.2.
Marginal abatement costs are a measure of effort. If in any region or sector they fall below the
estimated social cost of carbon, not enough is being done – unless emissions have ceased.
Over time, it may become much easier to reduce emissions in some sectors. Some models
suggest an eventual fall in marginal abatement costs in the energy sector, for example, as a
result of technological progress. If that does happen, the sector can become completely
decarbonised. But elsewhere, where complete decarbonisation will not have taken place – for
example, transport – efforts should increase over time and the marginal abatement cost
should continue to rise. But policy-makers should foster the development of technology that
can drive down the average costs of abatement over time.
17
18
Watkiss et al. (2005)
While we have counselled against excessively formal monetary approaches to the value of life, losses of life from
climate change nevertheless should weigh heavily in any assessment of damages from climate change.
19
Chapter 2 and its appendix).
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Box 13.2
reductions
Social cost of
carbon
Time
Emissions
reductions
Marginal abatement
costs
Part III: The Economics of Stabilisation
The relationship between the social cost of carbon and emissions
Technical
progress in
abatement
lowers the
marginal cost
curve
Up to the long-run stabilisation goal, the social cost of carbon will rise over time because
marginal damage costs do so. This is because atmospheric concentrations are expected to
rise and damage costs are expected to be convex in temperature (i.e. there is increasing
marginal damage); these effects are assumed to outweigh the declining marginal impact of
the stock of gases on global temperature at higher temperatures.
The price of carbon should reflect the social cost of carbon. In any given year, abatement will
then occur up to this price, as set out in the right-hand panel of the diagram above. Over time,
technical progress will reduce the total cost of any particular level of abatement, so that at any
given price there will be more emission reductions.
The diagram reflects a world of certainty. In practice, neither climate-change damages nor
abatement costs can be known with certainty in advance. If the abatement-cost curve
illustrated in the right-hand panel were to fall persistently faster than expected, that would
warrant revising the stabilisation goal downwards, so that the path for the social cost of
carbon in the left-hand panel would shift downwards.
Delay in taking action on climate change will increase total costs and raise the whole
trajectory for the social cost of carbon. The difference between the social cost of carbon on
the ‘business as usual’ trajectory and on stabilisation trajectories reflects the fact that a tonne
of greenhouse gas emitted is more harmful and more costly, the higher concentration levels
are allowed to go. Delay allows excessive accumulation of greenhouse gases, giving
decision-makers a worse starting position for implementing policies.
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Box 13.3
Part III: The Economics of Stabilisation
The social cost of carbon and stabilisation
Pearce (2005)20 reports a range of estimates of the social cost of carbon on ‘optimal’ paths
towards stabilisation goals. The approach of Nordhaus and Boyer (2000) is perhaps closest in
spirit to ours. They derive an estimate of only $2.48/tCO2 (converted to CO2, year 2000
prices) for 2001-2010. But they have a low ‘business as usual’ scenario, do not apply equity
weighting and use a discount rate of 3%, which is a little higher than our approach would
usually imply.
Further work on what social cost of carbon corresponds to potential stabilisation levels is
needed. Current studies disagree about the values and use different methods to tie down the
trajectory through time. The US CCSP review reports values of $20/tCO2, $2/tCO2 and
$5/tCO2 in 2020 for a stabilisation level of 550ppm CO2e in the three studies covered.
Edenhofer et al. report estimates of the social cost of carbon ranging from 0 to around
$12/tCO2 in 2010 for the same stabilisation level (year 2000 prices). Most of the models
reviewed envisage the social cost of carbon rising over time, with the level and rate of growth
sufficient to pull through the required technologies and reductions in demand for carbon-
intensive goods and services.
Preliminary calculations with the model used in Chapter 6 suggest that the current social cost
of carbon with business as usual might be around $85/tCO2 (year 2000 prices), taking the
baseline climate sensitivity assumption used there, if some account is taken of non-market
impacts and the risk of catastrophes, subject to all the important caveats discussed in
Chapter 6. But along a trajectory towards 550ppm CO2e, the social cost of carbon would be
around $30/tCO2 and along a trajectory to 450ppm CO2e around $25/tCO2e. These numbers
indicate roughly where the range for the policy-induced price of emissions should be if the
ethical judgements and assumptions about impacts and uncertainty underlying the exercise in
Chapter 6 are accepted.
It would only make sense to have chosen a 550ppm CO2e target in the first place if a carbon-
price path starting at $30/tCO2 had been judged likely to be sufficient (together with other
policies) to pull through over time the deployment of the technological innovations required.
Similarly, it would only make sense to have chosen a 450ppm CO2e target if a price path
starting at $25/tCO2e had been judged sufficient to bring through the technology needed.
The social cost of carbon21 can be used to calculate an estimate of the benefits of climate-
change policy. The gross benefits of policy for a particular year can be approximated by
(SCCH x EH) – (SCCS x ES)
where SCC denotes the social cost of carbon, E the annual level of emissions, the subscript
H the high ‘business as usual’ trajectory and the subscript S the stabilisation trajectory22. This
is the net present value of the flow of damages from emissions on the high path less the net
present value of the flow of damages on the lower path. With sensible policies ensuring that
marginal abatement costs equal the social cost of carbon along the stabilisation trajectory,
and assuming for simplicity’s sake that marginal abatement cost is equal to average
abatement cost23, the annual costs of abatement can be approximated by
SCCS x (EH – ES)
Hence benefits less costs are equal to
(SCCH x EH) – (SCCS x ES) – (SCCS x (EH – ES)) = (SCCH – SCCS) x EH
Thus an approximation of the net present value of the benefits of climate-change policy in any
given year can be obtained by multiplying ‘business as usual’ emissions by the difference
between the social costs of carbon on the two trajectories. Calculations for this Review
suggest that the social cost of carbon on a reasonable stabilisation trajectory may be around
one-third the level on the ‘business as usual’ trajectory, implying that the net present value of
applying an appropriate climate-change policy this year might be of the order of $2.3 – 2.5
trillion. This is not an estimate of costs and benefits falling in this year, but of the costs and
benefits through time that could flow from decisions this year; many of these costs and
benefits will be in the medium- and long-term future. It is very important, however, to stress
that such estimates reflect a large number of underlying assumptions, many of which are very
tentative or specific to the ethical perspectives adopted.
20
Pearce (2005)
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13.10 The role of adaptation
Adaptation as well as mitigation can reduce the negative impacts of future climate
change.
Adaptation reduces the damage costs of climate change that does occur (and allows
beneficial opportunities to be taken), but does nothing direct to prevent climate change and is
in itself part of the cost of climate change. Mitigation prevents climate change and the
damage costs that follow. Stabilisation at lower levels would entail less spending on
adaptation, because the change in climate would be smaller. That needs to be taken into
account when considering how total costs change with changes in the ultimate stabilisation
level. Similarly, for lower stabilisation levels, a given increase in spending on adaptation is
likely to have a bigger effect in lowering the costs of climate change than the same increase
at higher concentration levels (because of declining returns to scale for adaptation
activities)24.
There are important differences between adaptation and mitigation that differentiate
their roles in policy.
First, while those paying the costs will often capture the benefits of adaptation at the local
level, the benefits of mitigation are global and are experienced over the long run. Second,
because of inertia in the climate system, past emissions of greenhouse gases will drive
increases in global mean temperature for another several decades. Thus mitigation will have
a negligible effect in reducing the cost of climate change over the next 30-50 years:
adaptation is the only means to do so.
Adaptation can efficiently reduce the costs of climate change while atmospheric
concentrations of greenhouse gases are being stabilised.
A stabilisation goal facilitates adaptation by allowing a better understanding to develop of
what ultimately societies will have to adapt to. Work using Integrated Assessment Models
(IAMs, discussed in Chapter 6) has identified significant opportunities to reduce damage costs
through adaptation. There are many reasons other than assumptions about adaptation why
the predictions of one model differ from another25. It is nevertheless intuitive that those
models with the most comprehensive adaptation processes estimate the lowest damage
costs and highest adaptation benefits26. Studies at a more local level of the costs and benefits
of adaptation usually point to net benefits, so some is likely to take place, although policy
measures are often required to overcome barriers (see Part V). Adaptation will have a
particular role to play in low-income regions, where vulnerability to climate change is higher.
In such regions, there are strong complementarities between development policies in general
and adaptation actions in particular.
There are further examples of complementarities:
•
•
21
Mitigation reduces the likelihood of dangerous climate change, which makes
adaptation either infeasible or very costly;
Mitigation reduces uncertainty about the range of possible climate outcomes requiring
adaptation decisions. Uncertainty is a clear impediment to successful adaptation.
The social cost of carbon has to be expressed in terms of some numeraire. Typically the change in consumption
that brings about the same impact on the present value of expected utility is used. But that depends on the level of
consumption one starts with, so the numeraire differs when comparing significantly different paths. Hence these
calculations are strictly valid only if consumption along one or other of the two paths (or some weighted average) is
used as numeraire for the calculation of both SCCs.
22
insensitive to the variation of emissions in a single year.
23
average abatement cost to be lower than the marginal abatement cost, with dynamic returns to scale reducing them
over time, so this simplification gives an underestimate of the benefits of climate-change policy.
24
less effective as global temperatures rise further.
25
26
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In the longer run, both adaptation and mitigation will be required to reduce climate-
change damage in cost-effective and sustainable ways.
They should not be regarded as alternatives. Part II outlined why the damage costs of climate
change are likely to increase more rapidly as global mean temperatures increase. As Part V
explains in more detail, attempts at adaptation would not be an adequate response to the
pace and magnitude of climate change at high global mean temperatures compared with pre-
industrial levels. Ecosystems, for instance, cannot physically keep pace with the shifts in
climatic conditions implied. The adaptation that remains viable is likely to be very costly.
Without mitigation, little can reduce the underlying acceleration in climate-change impacts as
temperatures rise. This is why promoting development in developing economies, while vital in
its own right and helpful in building the capacity to adapt, is not an adequate response by
itself. Mitigation is the key to reducing the probability of dangerous climate change, given the
scale of the challenge. A strategy of mitigation plus adaptation is superior to ‘business as
usual’ plus adaptation, and requires less spending on adaptation.
13.11 Conclusions
This chapter has considered in broad terms what climate-change policy should aim to
achieve, given the evidence about the risks of serious damages from climate change and the
costs of cutting greenhouse-gas emissions. The first priority is to strengthen global action to
slow and stop human-induced climate change and to start undertaking the necessary
adaptation to the change that will happen before stability is established. The benefits of doing
more clearly outweigh the costs. Delay would entail more climate change and eventually
higher costs of tackling the problem. The nature of the uncertainties in the science and
economics warrants more action not less.
Once the case for stronger global action is accepted, the question arises, how much? We
have argued the merits of organising the discussion of this problem around the idea of a goal
for the ultimate concentration of greenhouse gases in the atmosphere. Choosing a specific
level or range for such a goal should help to make policies around the world more consistent,
coherent and cost-effective. In particular, choosing a goal helps to define and anchor a path
for the carbon price, a key tool for implementing climate-change policy. The next part of this
Review examines in more detail the types of policy instruments that need to be used to
reduce greenhouse-gas emissions cost-effectively and on the scale required.
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