Graham Floater

2 What is the economics of climate change and how does it depend on the science? Analytic foundations: Climate change is an externality with a difference: Global Long-term Uncertain Potentially large and irreversible Hence key roles in the analysis of: i.Economics of Risk ii.Ethics iii.International Action

Working with Uncertainty Population, technology, production, consumption Emissions Atmospheric concentrations Radiative forcing Socio-economic impacts % Change in Global Cereal Production Cumulative CO2 Emissions Temperature rise and global climate change Direct impacts (e.g. crops, forests, ecosystems) Probability

Market ‘Non-Market’ Projection Bounded risks System change/ surprise Socially contingent Limited to Nordhaus and Boyer/Hope Limit of coverage of some studies, including Mendelsohn None Some studies, e.g. Tol None Models only have partial coverage of impacts Values in the literature are a sub-total of impacts Source: Watkiss, Downing et al. (2005)

5 Projected impacts of climate change 1°C2°C5°C4°C3°C Sea level rise threatens major cities Falling crop yields in many areas, particularly developing regions Food Water Ecosystems Risk of Abrupt and Major Irreversible Changes Global temperature change (relative to pre-industrial) 0°C Falling yields in many developed regions Rising number of species face extinction Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system Significant decreases in water availability in many areas, including Mediterranean and Southern Africa Small mountain glaciers disappear – water supplies threatened in several areas Extensive Damage to Coral Reefs Extreme Weather Events Rising intensity of storms, forest fires, droughts, flooding and heat waves Possible rising yields in some high latitude regions

6 Stabilisation and eventual change in temperature 1°C2°C5°C4°C3°C 400ppm CO 2 e 450ppm CO 2 e 550ppm CO 2 e 650ppm CO 2 e 750ppm CO 2 e 5%95% Eventual temperature change (relative to pre-industrial) 0°C

7 Those who argue e.g. for stabilisation levels of 650ppm CO 2 e and above are accepting very big risks of a transformation of the planet Figures similar to IPCC AR4 (no probabilities in TAR) Likelihood (in %) of exceeding a temperature increase at equilibrium Source: Hadley Centre: From Murphy et al Stabilisation level (in ppm CO 2 e) 2°C3°C4°C5°C6°C7°C

8 Sensitivity of total cost of climate change to key model assumptions Damage function exponent (γ) Consumption elasticity of social marginal utility (η) ( )6.0 ( )3.3 ( ) ( )10.0 ( )5.2 ( ) ( )29.3 ( )29.1 ( ) Sensitivity of total cost of climate change to damage function exponent and consumption elasticity of social marginal utility in baseline-climate scenario (mean BGE loss, 5-95% confidence interval). Costs measured in terms of percentage changes in Balanced Growth Equivalent (Mirrlees and Stern, 1972, JET) between BAU and no climate change. Stabilisation at 550ppm CO 2 e or below would save big majority of these costs. Model omits many important risks to carbon cycle and is conservative on climate sensitivity

9 Estimates of climate sensitivity from IAMs compared to GCMs 1°C2°C5°C4°C3°C Eventual temperature change (relative to pre-industrial) 0°C Meinshausen (90%) PAGE2002 DICE/RICE-99 FUND 2.8 IPCC AR4 ‘likely’ range (66%) (100%)

10 The modelled costs of climate change with increasing global temperatures

11 Delaying mitigation is dangerous and costly Source: Stern Review

Estimating Costs of Mitigation Expected cost of cutting emissions consistent with 550ppm CO2e stabilisation trajectory averages 1% of GDP per year. Macroeconomic models: 1% of GDP in 2050, in range +/- 3%. Resource cost: 1% of GDP in 2050, in range –1% to +3.5%. Costs will not be evenly distributed: Competitiveness impacts can be reduced by acting together. New markets will be created. Investment in low-carbon electricity sources could be worth over $500bn a year by Strong mitigation is fully consistent with the aspirations for growth and development in poor and rich countries.

13 Mitigation policy instruments Pricing the externality - carbon pricing via tax or trading, or implicitly through regulation. Bringing forward lower carbon technology - research, development and deployment. Overcoming information barriers and transaction costs - regulation, standards. Promoting a shared understanding of responsible behaviour across all societies - beyond sticks and carrots.

14 Reducing emissions requires action across many sectors

15 Cost estimates Review examined results from bottom-up (Ch 9) & top-down (Ch 10) studies: concluded that world could stabilise below 550ppm CO 2 e for around 1% of global GDP Subsequent analyses Edenhofer/IPCC top-down have indicated lower figures So too have bottom-up IEA and McKinsey Options for mitigation: McKinsey analysis examines approach of chapter 9 of Review in more detail Starting planning now with clear targets and good policies allows measured action and keeps costs down. Delayed decisions/actions (or “slow ramp”), lack of clarity, bad policy will increase costs

16 McKinsey bottom-up approach

17 Reducing emissions from deforestation could be relatively cheap and effective (McKinsey curve needs updating) an area the size of England Annual C0 2 Emissions (Gigatons) UK* (2005)0.56 China** (2005)5.1 USA** (2005)5.8 Deforestation † 5.9 * UK GHG inventory; ** IEA; † UNFCCC 4 th Assessment Deforestation emissions are the same or higher than China and the US FAO (2005), World Bank (2006) The combination of weak governance and powerful economic incentives to cut forests down result in 13 million Ha destroyed every year, which equates to 5.9 billion tons of CO 2 emissions a year

Illustrative Distribution of Emission Savings by Technology

19 New technology Established technology Cumulative installation Marginal cost of producing electricity Carbon price effect A B Learning through R&D and deployment support Interaction between policy instruments Market certainty (regulation)

20 Growth, change and opportunity Strong mitigation costs around 1% p.a. worldwide Strong, efficient and co-ordinated mitigation is fully consistent with the aspirations for growth and development in poor and rich countries. Business as usual is not. Costs will not be evenly distributed Competitiveness impacts can be reduced by acting together New markets will be created Mitigation policy can also be designed to support other objectives: energy - energy security and access, efficiency, local air quality forestry - watershed protection, biodiversity, rural livelihoods

21 The Global Deal

22 Copenhagen – A global deal Bali in December 2007 – Important steps made. Bali Action Plan towards Copenhagen. Poznan (Poland) in December 2008 Copenhagen in December 2009 – A global deal?

23 Commitments: percentages G8 Heiligendamm – 50% by 2050 (consistent with stabilisation around 500ppm C0 2 e) California (and US under e.g. H. Clinton) - 80% from 1990 levels by 2050 France – 75% by 2050 (Factor 4), relative to 1990 EU Spring Council: 60-80% by 2050 and 20-30% by 2020, relative to 1990 Germany – 40% by 2020, relative to 1990

24 Target: stocks, history, flows Current GtCO 2 e p.a. Current stocks around 430ppm CO 2 e; pre-industrial stocks 280ppm The United States and the EU countries combined accounted for over half of cumulative global emissions from 1900 to % reduction by 2050 requires per capita global GHG emissions of 2-3T/capita (20-25 Gt divided by 9 billion population) Currently US ~ 20+, Europe ~10+, China ~5+, India ~2+ T/capita Thus 80% reductions would bring Europe, but not US, down to world average. Many developing countries would have to cut strongly too if world average of 2-3 T/capita is to be achieved

25 Per capita CO 2 emissions (in tonnes)

26 The GHG ‘reservoir’ Long-term stabilisation at 550ppm CO 2 e implies that only a further 120ppm CO 2 e can be ‘allocated’ for emission, given that we start at 430ppm CO2e (or further 70ppm if targeting 500ppm) Can view the issue as the use of a “collective reservoir” of 270ppm (i.e. 550 minus the 280ppm of 1850) over 200 years. Over half of reservoir already used mainly by rich countries. Or could “start the clock” at X T, the stock when problem was first recognised at T (e.g. around 20 years ago) Equity requires a discussion of the appropriate use of this reservoir given past history Thus convergence of flows does not fully capture the equity story, from emissions perspective Equity issues arise also in adaptation, given responsibilities for past increases

27 Key elements of a global deal / framework (I) Targets and Trade Confirm Heiligendamm 50% cuts in world emissions by 2050 with rich country cuts at least 75% Rich country reductions and trading schemes designed to be open to trade with other countries, including developing countries Supply side from developing countries simplified to allow much bigger markets for emissions reductions: ‘carbon flows’ to rise to $50-$100bn p.a. by Role of sectoral or technological benchmarking in ‘one-sided’ trading to give reformed and much bigger CDM market

28 Key elements of a global deal / framework (II) Funding Issues Strong initiatives, with public funding, on deforestation to prepare for inclusion in trading. For $10-15 bn p.a. could have a programme which might halve deforestation. Importance of global action and involvement of IFIs Demonstration and sharing of technologies: e.g. $5 bn p.a. commitment to feed-in tariffs for CCS coal would lead to 30+ new commercial size plants in the next 7-8 years Rich countries to deliver on Monterrey and Gleneagles commitments on ODA in context of extra costs of development arising from climate change: potential extra cost of development with climate change upwards of $80bn p.a.

29 Nature of deal / framework Combination of the above can, with appropriate market institutions, help overcome the inequities of climate change and provide incentives for developing countries to play strong role in global deal, eventually taking on their own targets. Within such a framework each country can advance with some understanding of global picture. Individual country action must not be delayed (as e.g. WTO) until full deal is in place. Main enforcement mechanism, country-by-country, is domestic pressure. If we argue that, “it is all too difficult” and the world lets stocks of GHGs rise to 650, 700 ppm or more must be clear and transparent about the great magnitude of these risks

30 Our understanding of the risks of climate change has advanced strongly. We understand the urgency and scale of action required. We know that the technologies and economic incentives for effective action are available or can be created We are in a much better position now to use our shared understanding to agree on what goals to adopt and what action to take. Conclusions from Stern analysis