ACE1037: ECONOMIC DEVELOPMENT & THE GLOBAL ENVIRONMENT
1. Climate Change
2 Economic Effects - The Stern Report etc.
3 The Social Cost of Carbon.
1. Climate Change -
the critical
challenge to the Global Economy
The Issues:
- Is climate change happening
or likely to happen?
- If so, is human
activity the cause?
- What are the possible consequences if we do nothing
about it?
- What can be done to mitigate CC, and what are the costs?
- What are the costs (and benefits) of simply coping with
it?
- What, then, should we be doing?
- Why are we not doing this already and what needs to
change or be
changed for the appropriate social and human response?
The science :
Notwithstanding the complexity, and hence essential unpredictability of
the global climate and feedback systems, the UN International Panel on
Climate Change (IPCC) reports (from the IPCC's 5th Assessment Report,
2014, (AR5) Summary for Policymakers) that:
- Warming of the climate system is unequivocal, as is now evident
from observations of increases in global average air and ocean
temperatures, widespread melting of snow and ice, and rising global
average sea level;
- Observational evidence from all continents and most oceans shows
that many natural systems are being affected by regional climate
changes, particularly temperature increases.
- Global GHG emissions due to human activities have grown since
pre-industrial times, with an increase of 70% between 1970 and 2004
- Global atmospheric concentrations of CO2,
methane (CH4) and nitrous oxide (N2O)
have increased markedly as a result of human activities since 1750 and
now far exceed pre-industrial values determined from ice cores spanning
many thousands of years. "About half of the anthropogenic CO2 emissions
between 1750 and 2011 have occurred in the last 40 years (high
confidence)"
- Most of the observed increase in globally-averaged temperatures
since the mid-20th century is extremely
likely due to the observed increase in anthropogenic GHG
concentrations. It is likely there has been significant anthropogenic
warming over the past 50 years averaged over each continent (except
Antarctica)
- "Globally, economic and population growth continued to be the most important drivers
of increases in CO2 emissions from fossil fuel combustion. The
contribution of population growth between 2000 and 2010 remained
roughly identical to the previous three decades, while the contribution
of economic growth has risen sharply. Increased use of coal has
reversed the long‐standing trend of gradual decarbonization (i.e.,
reducing the carbon intensity of energy) of the world’s energy supply
(high confidence)"
Source: AR5 Summary, Figure SPM 3.
In addition:
- Anthropogenic warming and sea level rise would continue for
centuries due to the time scales associated with climate processes and
feedbacks, even if GHG
concentrations were to be stabilised.
- Anthropogenic warming could lead to some impacts that are abrupt or irreversible,
depending upon the rate and magnitude of the climate change.
- However, many impacts can be reduced, delayed or avoided by
mitigation. Mitigation efforts and investments over the next two to
three decades will have a large impact on opportunities to achieve
lower stabilisation levels.
- But: delayed emission reductions significantly constrain the
opportunities to achieve lower stabilisation levels and increase the
risk of more severe climate change impacts.
The IPCC
report includes assessments of the consequences (see report,
p10ff), some of which may be positive (e.g. increased cereal
productivity in the temperate latitudes for at least a limited degree
of warming, though declines for more substantial (>3oC
warming)), but mostly negative c.f. present conditions. It also warns
of the increased possibilities of abrupt and irreversible changes, such
as melting of the Greenland (and West Antarctic) icecaps, raising sea
levels by 6-7 metres, and exacerbating warming to + 5 - 6oC,
or, less likely but possible, the elimination of the Gulf Stream.
The answers to questions 1 & 2 are definitely yes and yes, according
to the
IPCC and many others.
Projections for the future are encapsulated in Fig SPM5, p9 of Summary for Policy Makers:
"Cumulative emissions of CO2 largely determine global mean surface
warming by the late 21st century and beyond. Projections of greenhouse
gas emissions vary over a wide range, depending on both socio-economic
development and climate policy.
Anthropogenic GHG emissions are mainly driven by population size,
economic activity, lifestyle, energy use, land use patterns, technology
and climate policy. The Representative Concentration Pathways (RCPs),
which are used for making projections based on these factors, describe
four different 21st century pathways of GHG emissions and atmospheric
concentrations, air pollutant emissions and land use.
The RCPs include a stringent mitigation scenario (RCP2.6),
two intermediate scenarios (RCP4.5 and RCP6.0)
and one scenario with very high GHG emissions (RCP8.5).
Scenarios without additional efforts to constrain emissions (’baseline
scenarios’) lead to pathways ranging between RCP6.0 and RCP8.5 (Figure
SPM.5a). RCP2.6 is representative of a scenario that aims to keep
global warming likely below 2°C above pre-industrial temperatures. The
RCPs are consistent with the wide range of scenarios in the literature
as assessed by WGIII" (SPM, p8)
NOTE: The RCPs cover a wider range
than the scenarios from the Special Report on Emissions Scenarios
(SRES) used in previous assessments, as they also represent scenarios
with climate policy. In terms of overall forcing, RCP8.5 is
broadly comparable to the SRES A2/A1FI scenario, RCP6.0 to B2 and
RCP4.5 to B1. For RCP2.6, there is no equivalent scenario in SRES. As
a result, the differences in the magnitude of AR4 and AR5 climate
projections are largely due to the inclusion of the wider range of
emissions assessed.
[The IPCC scenarios (SRES)
depicting world growth and development trajectories (published in 2000, and not updated since) - the major ones are:
- A1. Very rapid economic growth, global population that peaks in
mid-century and declines thereafter, and the rapid introduction of new
and more efficient technologies. Major underlying themes are
convergence among regions, capacity building and increased cultural and
social interactions, with a substantial reduction in regional
differences in per capita income. The A1 scenario family develops into
three groups that describe alternative directions of technological
change in the energy system. The three A1 groups are distinguished by
their technological emphasis: fossil intensive (A1FI), non fossil
energy sources (A1T), or a balance across all sources (A1B) (where
balanced is defined as not relying too heavily on one particular energy
source, on the assumption that similar improvement rates apply to all
energy supply and end use technologies). (A2. Self reliance and preservation of local identities.
Fertility
patterns across regions converge very slowly, which results in
continuously increasing population. Economic development is primarily
regionally oriented
and per capita economic growth and technological change more fragmented
and slower) [= RCP 8.5]
- B1. A convergent world with the same global population, that
peaks in midcentury and declines thereafter, as in A1, but with rapid
change in economic structures toward a service and information economy,
with reductions in material intensity and the introduction of clean and
resource efficient technologies. The emphasis is on global solutions to
economic, social and environmental sustainability, including improved
equity, but without additional climate initiatives. [=RCP4.5] -> global temp increase of 2C or more
- B2. Local solutions to economic, social and environmental
sustainability. It is a world with continuously increasing global
population, at a rate lower than A2, intermediate levels of economic
development, and less rapid and more diverse technological change than
in B1 and A1. While the scenario is also oriented towards environmental
protection and social equity, it focuses on local and regional levels. [=RCP6.0] -> global temp increase of 3.5C or more]
The major sources of GHG emissions: (from wg3-ar5-chapter 1)
where AFOLU - agriculture, forestry and other land uses - shows
up as a major source, but not related to fuel consumption, and largely
static over time. By sector, the largest sources of greenhouse gases
were the sectors of energy production (34%, mainly CO2 from fossil fuel
combustion), and agriculture, forestry and land-use (AFOLU) (24%,
mainly CH4 and N2O)
Globally, emissions of all greenhouse gases increased by about 75%
since 1970. Over the last two decades, a particularly striking pattern
has been the globalization of production and trade of manufactured
goods. In effect, high-income countries are importing large embodied
emissions from the rest of the world, mainly the upper middle-income
countries. Overall, per-capita emissions in the highly industrialized
countries are roughly flat over time and remain, on average, about 5
times higher than those of the lowest income countries whose per-capita
emissions are also roughly flat. Per-capita emissions from upper-middle
income countries have been rising steadily over the last decade:
"One way to decompose the factors contributing to total emissions is by
the product of population, GDP per capita, energy intensity (total
primary energy supply per GDP) and the carbon intensity of the energy
system (carbon emitted per unit energy). ..(the ‘Kaya Identity’ (Kaya, 1990)...
[GHG emissions = popn. x GDP/hd x Energy/GDP x GHG/energy unit]
"The analysis reveals enhanced growth in the 2000s of global income,
which drove higher primary energy consumption and CO2 emissions." (ibid, p 128).
"(That pattern levelled around 2009 when the global recession began to
have its largest effects on the world economy.) Also notable is carbon
intensity: the ratio of CO2 emissions to primary energy. On average,
since 1970 the world’s energy system has decarbonized. However, in the
most recent decade there has been a slight re-carbonization. In the
portions of the global economy that have grown most rapidly, low-carbon
and zero-carbon fuels such as gas, nuclear power and renewables have
not expanded as rapidly as relatively high-carbon coal.
Interpreting the Kaya Identity using global data masks important
regional and local differences in these drivers. For example, the
demographic transition in China is essentially completed while in
Africa population growth remains a sizable driver. Technology—a
critical factor in improving energy and carbon intensities as well as
access to energy resources—varies greatly between regions. The recent
re-carbonization is largely the result of expanded coal combustion
in developing countries driven by high rates of economic growth, while
across the highly industrialized world carbon intensity has been
declining due to the shift away from high carbon fuels (notably coal)
to natural gas, renewables, and also to nuclear in some countries. The
simple Kaya identity relies on broad, composite indicators that neither
explain causalities nor explicitly account for economic structures,
behavioural patterns, or policy factors, which again vary greatly
across regions. Technological change might allow for radically lower
emissions in the future, but the pattern over this four-decade history
suggests that the most important global driver of emissions is economic
growth." (ibid, p 129)
See, also, the IEA Energy Atlas, for trends in CO2/gdp etc.
Gillingham, Nordaus et al: “Modeling Uncertainty in Climate Change: A Multi‐Model Comparison” (Cowles Foundation, Sept. 2015) provide
a recent comparison of the results of the Integrated Assessment Models
(IAMs) used to estimate the effects and potential damages. The "Key
Results"(p 41 - 43):
- central projections of the IAMs are remarkably similar at
the modeler’s baseline parameters (possibly reflecting the fact that
models have been used in model comparisons and may have been revised to
yield similar baseline results). However, the projections diverge
sharply when alternative assumptions about the key uncertain parameters
are used, especially at high levels of population growth, productivity growth, and equilibrium climate sensitivity.
- Despite these differences across models for alternative parameters, the distributions of the key output variables are remarkably similar across models
with different structures and levels of complexity. To take year 2100
temperature as an example, the quantiles of the distributions of the
models differ by less than ½ °C for the entire distribution up to the
95th percentile.
- Climate‐related variables are characterized by low uncertainty relative to those relating to most economic variables.
(e.g) the model‐average coefficient of variation for carbon dioxide
concentrations in 2100 is 0.28, while the coefficient of variation for
climate‐change damages is 1.29. The social cost of carbon has an
intermediate CV within models, but when model variation is included the
CV is close to that of output and damages.
- (There is) much greater parametric uncertainty than structural (across model) uncertainty for all output variables except the social cost of carbon.
For example, in examining the uncertainty in 2100 temperature increase,
the difference of model means (or the ensemble uncertainty) is
approximately one‐quarter of the total uncertainty, with the rest
driven by parametric uncertainty. While looking across six models by no
means spans the space of methods, the six models examined here are
representative of the differences in size, structure, and complexity of
IAMs. This result is important because of the widespread use of
ensemble uncertainty as a proxy for overall uncertainty and highlights
the need for a re‐orientation of research towards examining parametric
uncertainty across models.
- We find a lack of evidence in support of fat tails in the distributions of emissions, global mean surface temperature, or damages. Population
growth, total factor productivity growth, and climate sensitivity are
very likely to be three of the key uncertain parameters in climate
change. Yet, based on both informal and formal tests, the models
as currently constructed find that the tails are relatively thin.
(These) results do not rule out fat tails,
but they do provide empirical evidence against fat tails in outcomes
investigated in this study for the current set of models and the
distributions of the three uncertain variables considered here. These
results tend to support the use of expected benefit‐cost analysis for
climate change policy, in contrast to suggestions by some authors that
neglect of fat tail events may vitiate standard analyses (Weitzman
2009).
- Sixth,... uncertainty about productivity growth has a major impact on the uncertainty of all the major output variables.
The reason for this is that the uncertainty of productivity growth from
the expert survey compounds greatly over the 21st century and induces
an extremely large uncertainty about output, emissions, concentrations,
temperature change, and damages by the end of the century."
2. Economic Effects of Climate Change
The Social Science?
- The Stern
Review: (full report available here) The Economics of Climate Change, 2006, is probably the most
prominent "CBA" ever conducted, to examine the issue of what should be
done about Climate Change. The
Stern Review drew implications and conclusions from existing
research, rather than conducting new research. Furthermore, it is
a government report, rather than a traditional scientific study, and
was produced very quickly (for what it is). As Nordhaus (below) notes:
"it is not a standard analysis" but a government report
which emphasises the facts and evidence (including previous research)
which supports the required conclusion - to do something about climate
change, and was not subject to the usual scientific processes of
peer review prior to publication, nor is strictly reproducable (the
analysis is not sufficiently
elaborated as to be replicable) - in part, because it is a 'review' and
not a stand-alone, independent analysis. It has drawn a considerable
amount of criticism and 'peer review' since publication. The
following notes distill the key aspects from some of the reviews:
- What are the possible consequences if we do nothing
about it?
- What can be done to mitigate CC, and what are the costs?
- What are the costs (and benefits) of simply coping with
it?
- What, then, should we be doing?
- Why are we not doing this already and what needs to
change or be
changed for the appropriate social and human response?
Summary of Stern. (From
the Economist, Nov. 2. 2006
-
my emphasis added) : "Sir Nicholas has tried to assess the future costs
of climate change—drought in Africa, floods in Europe, hurricanes in
America, rising sea levels around the world—and has set them against
the costs of cutting fossil-fuel usage enough to stabilise
carbon-dioxide concentrations in the atmosphere. His answer to the
second part of this calculation is fairly uncontroversial. The
costs of
switching away from carbon should not be huge because of the rise in
fossil-fuel prices and the fall in alternative energy prices. Sir
Nicholas reckons that the world could stabilise concentrations at a
reasonable level at a cost of 1% of GDP by 2050. Many other
economists have looked at the matter, and most agree with Sir Nicholas.
But SR dissents from the general view on the costs of climate
change itself. Most economists who have looked at the matter up
to now reckon that, if greenhouse-gas emissions continue on their
current path, the costs of climate change would be between zero
(where the benefits of warming to cold countries balances out the
costs) and 3% of global output over the next 100 years. SR
thinks they would be a massive 5-20% over the next century or
two: in other words, world output could be up to a fifth lower,
as a result of climate change, than it otherwise would have been.
He justifies these high numbers on two main grounds. First, he says,
the earlier estimates were based on temperature increases of
2-3°C by the end of this century. But the science has moved on. A
better understanding of feedback loops in the climate, such as the
melting of Arctic ice, which increases the region's tendency to
absorb sunlight and therefore reinforces warming, means that, although
2-3°C remains the likeliest increase, scientists now think that
warming of 5-6°C is a real possibility. That would be a massive
jump: 5°C is the difference between the temperature now and in the
last ice age.
Second, he points out, most economists have fed only the likeliest
climate-change scenario into their models and ignored the outlying
possibilities of catastrophe. Sir Nicholas has received plenty of
support from economists (four Nobel prize-winners have endorsed the
report) and a certain amount of criticism. One complaint is that he has
selected the most pessimistic research and ignored more conservative
work. Richard Tol, a professor at Hamburg University and a big noise in
this field, (now at Sussex University) describes the report as “alarmist and incompetent”. Another
criticism is that figures on the economic costs of climate change are
bound to be nonsense because they are based on a cascade of
uncertainties. Nobody knows just how much carbon dioxide the world is
going to produce in future. Nobody knows just what it will do to the
temperature. Nobody knows just how temperature rises will affect the
world economy. These numbers are therefore too uncertain to act on. Sir
Nicholas may well err on the gloomy side. And it is certainly
impossible to predict precisely what effect climate change will have
had on the world economy in a century's time.
But neither point
invalidates Sir Nicholas's central perception—that governments should
act not on the basis of the likeliest outcome from climate change but
on the risk of something really catastrophic (such as the melting of
Greenland's ice sheet, which would raise sea levels by six to seven
metres). Just as people spend a small slice of their
incomes on
buying insurance on the off-chance that their house might burn down,
and nations use a slice of taxpayers' money to pay for standing armies
just in case a rival power might try to invade them, so the world
should invest a small proportion of its resources in trying to avert
the risk of boiling the planet. The costs are not
huge.
The dangers are."
Critical
Factors
in
assessing/recommending Climate Change policies
- Emissions of CO2 and other
trace gases are almost irreversible
- they stay in the upper atmosphere for centuries, so
reducing
emissions today is very valuable for the distant future, while
continuing emissions generate cumulative damages in
the future -
indicating that we are in a hole, so we should stop digging;
- Global warming is truly global - it is the externality
and public good
(bad) par excellence
- The possible outcomes are highly uncertain.
People (and, perhaps especially their governments and governors) prefer
to avoid risk (and hence are willing to pay for insurance and hold
precautionary stocks of food etc.). This means, in this context,
that we are (likely to be) willing to pay more to avoid, and to be more
concerned about, the possibilities of catastrophe than a 'simple'
evaluation of the mean (average) possible outcome would suggest.
- The outcomes will occur in the distant future - 25
years and more
from now (notwithstanding that more recent science appears to indicate
that the warming effects may happen sooner rather than later) -
requiring special consideration of the appropriate discount rate through which to
compare future costs and benefits (of climate change amelioration) with
today's costs of doing so.
- Inequitable Distribution:
The effects of global warming will be inequitably
distributed -
the poorest countries and people will suffer earliest and most.
Consequences of doing nothing (according to Stern) :
- Permanent cost of 0 - 3% GDP Stern's
assessment of the evidence is, in briefest of outlines, as
follows: The costs of 2-3oC
warming have been
modeled as generating a permanent cost (loss) of 0 - 3% of global GDP compared with no climate change.
- But greater warming - 5-6oC
by 2100 could generate losses of 5 - 10% in global GDP (accounting for
abrupt and large scale effects), with poor countries suffering
more
than 10%. Overall, SR 'estimates' that the impacts and risks of
CC under a
'business as usual' (BAU) scenario, (and discounting future values to
present day terms) "are equivalent to an average reduction in global
per-capita consumption of at least 5% now and for ever" (Exec Summary,
p x). This estimate is
based on an Integrated Assessment
Model
(IAM), specifically in this case the PAGE model**, which is,
essentially,
a macroeconomic growth model with a controllable externality of
endogenous greenhouse warming - the effects of economic growth affect
climate change and vice versa.
** Note: However,
Tol & Yohe point
out (p 237) that this particular model is rather atypical of such
models in two important respects: a) PAGE allows for only a 5%
probability that CC effects are net positive in the short run, while
other models of this type put the probability at closer to 10%; b) PAGE
assumes that vulnerability to CC is
independent of development,
though
we 'know' that adaptive capacity and, thus, net sensitivity to CC is
very site specific and path dependent - it
does depend on development.]
- + 3 More Adjustments: However, there
are (according to SR) three
major factors which
are not properly dealt with in this model, each of which is important
in determining the overall damage which CC can do:
- accounting for the non-market
effects (externalities) of CC on (especially) health
and
environment increases this loss from at least 5% to 11% of
GDP
- including more recent estimates of
climate change effects with
increased feedbacks and more rapid and higher temperature changes adds
a further 3% to the annual loss figure
- adjusting for inequity - the fact that
these effects are
disproportionately imposed on the poorest of the world increases the
overall loss in annual terms to 20% of world GDP (i.e. SR
makes a substantial
allowance for the utility or welfare of the poor being more valuable
than that of the rich by, in effect, adding a further 6% to the overall
cost).
- "In summary, analyses that take into account the full ranges of
both impacts and possible outcomes - that is employ the basic economics
of risk - suggest that BAU climate change will reduce welfare by an
amount equivalent to a reduction in consumption per head of between 5
and 20%. Taking account of the increasing scientific evidence of
greater risks, aversion to possibilities of catastrophe, and of a
broader approach to the consequences than implied by narrow output
measures, the appropriate estimate is likely to be in the upper part of
this range." (Exec. Sum., p x).
Cost of doing something: Stablising
emissions at 550ppm CO2equivalent
(which could limit increasing temperatures to 2-3oC)
requires global emissions to peak in the next 10 - 20 years, and then
fall at at least 1 - 3% per year (from present (2000) emissions of 40Gt
CO2e peaking at about 60, and
then falling to 20 Gt CO2e by
2100.
The costs of doing this are estimated "to be around
1% of
GDP by
2050" (p xii) "with a range from -1% (net gains) to +3.5%"
(p xiv) by
2050, estimated from a sectoral consideration of the possibilities for
mitigation, where the net gain results from adopting more efficient
energy use systems and processes, or with "a range of -2% to +5%"
estimated from a meta-analysis of a range of macro-economic models (p
xiv/xv) Furthermore, "There is a high price to delay. Delay in
taking action would
make it necessary to accept both more climate change and, eventually,
higher mitigation costs. Weak action in the next 10-20 years would put
stabilisation at 550ppm beyond reach - and this level is already
associated with significant risks." (p xv)
Bottom line:
costs @ 1% GDP versus benefits of the order of 5 - 20%
GDP = very strong case to do something (a lot) now. CB
ratio of 5 -
20:1.
Key
Points of contention.
- climate change effects are exaggerated
& damage
estimates
are extreme
- costs of mitigation are
substantially underestimated
- the costs and benefits are not
commensurately measured or
considered
- the future is given too much
weight (the discount rate is too low)
The damage of climate change:
SR Estimates $314/tC ($85/tCO2) versus other
estimates ranging from
$50/tC - $360/tC.
[Putting these figures into context, $50/tC is about equivalent to
$12/barrel of oil while $360/tC is about $84/barrel of oil ($200/tC =
$47/barrel) The world oil price has climbed from about $40/barrel
in 2006 ($20 in 2003) to > $100 in 2008, to $120/barrel in January
2012, but has subsequently declined to $45/barrel]
SR has been criticised for taking the most pessimistic
estimates for both the biophysics of climate change and of the human
consequences, and of taking too little account of adaptation to climate
change, or technological developments to cope with change (including
not accounting for developments in existing health and
productivity for, especially, the poor, which are necessary anyway,
regardless of CC).
Further charges are that SR is inconsistent in its
assessment of different sorts of damages and their costs, including
double counting the risk of catastrophic events (hurricane damages
etc.), and presuming that the costs (risks) associated with uncertainty
about actual climate change and its effects do not diminish with time,
as we learn more about the effects and reduce the uncertainty.
In
any event, the damage estimates used by SR are considerably greater
than existing economic assessments of the costs of climate change
(which range between -2% (a net benefit) to +5% GDP) - Tol and Yohe, 2006.
Even given SR's very low discount rate (see
below), SR's damage costs are high - that is, when other estimates are
adjusted to the same low discount rates, other studies report marginal
damage costs of about $200/tC, with a range from about $50/tC to
$360/tC. Without adjusting for the extreme discount rate, SR's estimate
is at the extreme edge of all studies estimates (up to Dec. 2006),
including those which have not been peer reviewed (Tol and Yohe, 2006).
The costs of mitigation:
SR @ 1% GDP
(truncated) versus range of 0 - 7%GDP (permanent).
Tol and Yohe report
that SR's range of emission reduction costs (centering on 1% GDP) is
lower than the range of costs reported (for instance) in the latest
results from the Energy Modeling Forum (EMF21) survey of multiple
models, which range from 0 to 7% GDP, with a mean of 2%. For
2050, EMF21 average cost is 2.2% GDP (though lower at 1.4% if other
GHGs are included as well as CO2).
Furthermore, and perhaps even more importantly, SR truncates the costs
of mitigation at 2050, and does not consider costs beyond this date (by
which emissions are supposed to be stabilized at 550ppm). EMF21
results show average costs rising to 6.4% (4.8%) by 2100.
In fact, the major source used by SR for its cost estimates has
(perhaps worryingly) costs falling from now until 2050 (from $360/tC in 2005 to
$96/tC in 2050). In contrast EMF21 shows these costs rising (and,
incidentally, being much more uncertain) from a very low level to
$360/tC (range 0 - $1850/tC). Coupled with the
discount rate used (see below), this treatment of costs of mitigation
(low underlying costs, declining costs, and truncation of the horizon)
produce substantially lower abatement costs than the other
literature suggests.
Comparability of Costs and Benefits
Tol & Yohe (op cit) note
that SR's estimates of the damage of
climate change are "about eight times those of the CEC (2005)*, while
abatement cost estimates are only about four times as high.
Nonetheless, SR advocates a climate target that is less stringent than does
CEC and devotes no effort to explaining the discrepancy." (T&Y,
p. 240).
* CEC (2005): Winning the
battle against global climate change, Communication from the
Commission to the Council, the European Parliament, the European
Economic and Social Committee of the Regions COM (2005) 35 final,
Commission of the European Communities.
3. The Social Cost of Carbon.
SR reports marginal
damage costs (the Social Cost of Carbon) as $85 per tonne CO2e,
as the
cost of an additional emission of another tonne, which is
equivalent to $314/tC
which is an outlier in the marginal damage cost
literature on
climate change. This cost, SR suggests, starts "in the region of $25-30 per tonne CO2e"
to achieve a target of 500ppm (p xvii), where the "social cost of
carbon is likely to increase steadily over time because the marginal
damages increase with the stock of GHGs in the atmosphere, and that
stock rises over time."
In marked contrast, Nordhaus, 2014, estimates the Social Cost of Carbon (SCC) - see below "as $18.6 per ton of CO2
in 2005 US dollars and international prices for the current period
(2015). For the central case, the real SCC grows at 3% per year over
the period to 2050 [$53.1 per ton]. The major open issues concerning
the SCC continue to be the appropriate discount rate, the potential for catastrophic damages,
the impact of incomplete harmonization of abatement policies, and the
effects of distortionary taxes."
How do we measure the Social Cost of Carbon?
The present value of the differences in the future stream of welfare
(consumption) requires us to discount future gains/losses to the
present (the
discount rate) SR's discount rate is very low (small), cf most others.
Stern applies a Social time
preference rate of 0.1%,
(extremely low by conventional standards - more usually 1 - 2% or
greater), which is then combined with a consumption elasticity of 1
(more typically 2 or 3) and assumed growth rates of 2, 1.8 and 1.3% per
head per annum over the next three centuries respectively, producing
(according to the Ramsey formula below) discount rates of 2.1, 1.9 and
1.4
for the next three centuries respectively (though these rates have
taken some additional enquiry to recover, since they are not actually
made explicit in the SR (see Byatt et al (below), p 212). [Under more
conventional assumptions (e.g.Nordhaus) about the consumption elasticity and social
time preference rates, the discount factor would be more like 4% or 5%]
The Ramsey Formula: Note on
Intergenerational Discounting: It is necessary, in making
judgements between different outcomes over different generations, to
presume a social welfare
function, according to which society's total welfare depends on
(is a function of) consumption (in turn depending on
income and production). If the welfare function is assumed (for
convenience) to exhibit a constant
elasticity of marginal utility of
consumption (see below) , and we also assume a constant
population and a
constant rate of growth of consumption (g) per generation,
then the appropriate social discount
rate, (sometimes referred to as the Utility or
Consumption discount rate) δ,
by which consumption of future
generations (and thus their income and costs) should be discounted is
classically expressed as:
δ = ρ + gη (sometimes known as the
Ramsey equation
after the economist who first derived the expression, in 1928)
- where ρ is the social
rate of time preference (the rate
at which future generation's utility or welfare is discounted against
the present generation, simply because
it is in the future) - note, this is often associated with peoples'
willingness to save for future consumption, though it is explicitly a social, not a personal or individual time preference rate. [SR sets this rate at 0.001, or 0.1%] ["It must be emphasized that the variables
analyzed here (the Ramsey equation) apply to comparisons over the welfare of
different generations and not to individual preferences. The individual
rate of time preference, risk preference, and utility functions do not,
in principle at least, enter into the discussion or arguments at all.
An individual may have high time preference, or perhaps double
hyperbolic discounting, or negative discounting, but this has no
necessary connection with how social decisions weight different
generations. Similar cautions apply to the consumption elasticity."
Nordhaus, below, p 691]
- g is the projected growth
rate of average consumption - as a measure of the change in
welfare
expected in the future,
- and η is the
elasticity of the social weight
attributed
to a change in consumption - the percentage rate at which marginal
(i.e. extra or additional) utility (welfare) falls for every percentage
increase in consumption - since it is typically argued that an extra or
additional unit of economic welfare is of lower value than the average
value of current consumption (more is better, but not as better as
some). Typically, a value of 2 or 3 is assigned to this elasticity - a
1
point change in the growth rate of consumption (welfare) reduces the
marginal value of consumption (welfare) - the value of the additional
welfare - by 2 to 3 points
Nordhaus, 2014, op cit.
(or, if you are really interested, see here for the full model manual, and here
for the GAMS and Excel codes and specs) provides the following
estimates of the SCC, using the DICE2013 model. (DICE is an acronym for
Dynamic Integrated model of Climate and the Economy).
"The DICE
model views climate change in the framework of economic growth theory.
In a standard neoclassical optimal growth model known as the Ramsey
model, society invests in capital goods, thereby reducing consumption
today, in order to increase consumption in the future (Ramsey 1928;
Koopmans 1965). The DICE model modifies the Ramsey model to include
climate investments, which are analogous to capital investments in the
standard model. The model contains all elements from economics through
climate change to damages. The geophysical equations are simplified
versions derived from large models or model experiments." (p 276.)
In highly simplified terms:
Objective: Maximise Social Welfare = discounted sum of per capita
Cons x popn. (to mimic (simulate) the outcomes of a competitive economy)
Net Income (Y) = C + I
I = S (requiring 'equilibrium' interest rates: "capital accumulates according to an optimized savings rate.")
Y = f(Capital (K), Labour, Energy and Technology) - climate damage (a function of Y) - abatement costs
[Tech change = general change & carbon saving change, encouraged as carbon becomes more expensive]
K depends on Savings, labour depends on population (exogenous)
"The
philosophy behind the DICE model is that the capital structure and rate
of return should reflect actual economic outcomes. This implies that
the parameters should generate savings rates and rates of return on
capital that are consistent with observations. ..The data on rates of return used in the calibration are as follows:
(a) the risk-free real return, generally taken to be US or other prime
sovereign debt, is in the range of 0%–1% per year depending upon
period, concept, and tax status;
(b) the rate of return on risky capital of large corporations in mature
markets, after company taxes but before individual taxes, is in the
range of 5%–8%
per year depending on period, concept, and tax status;
(c) the rate of return on risky investments in illiquid or immature
markets, as well as for poorly capitalized individuals, is generally
much higher than for corporations and ranges from 0% to 100% per year
depending on the circumstances;
(d) it is unclear how much of the difference between the return on
risky capital and the risk-free return is compensation for
nondiversifiable risk (see Mehra 2008), but for the present study I
assume that the equity premium reflects nondiversifiable risks;
(e) the extent to which climate investments are correlated with
systematic consumption risk is an open question, although preliminary
work from Nordhaus (2008) and Gollier (2013) suggest a relatively high
consumption beta. For the present study, I assume that the consumption
beta on climate investments is close to one.
Based on these considerations, I assume that the rate of return
relevant for discounting the costs and benefits of climate-sensitive
investments and damages is 5% per year in the near term and 4.5% per
year over the period to 2100. This is the global average of a lower
figure for the United States and a higher figure for other countries,
and it is therefore consistent with estimates in other studies that use
US data. ..
"With this calibration, we
choose the pure rate of social time preference (ρ) to be 1.5% per year
and the consumption elasticity (α) to be 1.45.” (p279/280)", which results
in a discount rate of 4.5% with growth at 2% per year.
In $/ton CO2
“(Sometimes estimates are given in dollars per ton of carbon. The carbon weight is 1/3.667 times the CO2 weight, so the carbon price is 3.667 times the CO2 price, in this case $18.6 per ton of CO2
is $68 per ton of carbon.) This SCC rises at a real rate of 3% per year
over the period to 2050. The rate of change of the SCC depends upon
several factors, particularly the rate of growth of world output, the
removal rate of atmospheric carbon, and the discount rate” (p 284).
[1 tonne of CO2 is represented by 3.15 barrels of oil]
The Baseline is present global policies (base 2010)
Optimal controls:
" optimizes the time path of emissions reductions and investment" (p
283) - the model represention of competitive markets outcomes
“the marginal damage in early periods is only slightly affected by optimizing emissions.” (p284).
2oC Damage limitation functions:
“More precisely, I assume that the 2°C target reflects a cost-benefit
optimum with a different damage function, which is denoted the
“2-degree-consistent damage function.” This is implemented by
increasing the first-order damage coefficient. .. I did this for two
different cost-benefit solutions. In the first, the cost-benefit
optimum produces a maximum temperature increase for the 2050– 2250
period that is 2°C above the 1900 level. In the second, the
cost-benefit optimum produces average temperature increases for the
2050–2250 period that are 2°C above the 1900 level. The rationale of
the second approach is that many of the damages (such as ice-sheet
melting and sea-level rise) are better approximated by a function of
the average than the maximum temperature.” (p285) “As an interpretive
note, while the implicit damage coefficient associated with the
Copenhagen maximum target is not impossibly high, no credible estimates
in the literature exist to justify such high damage rates. However, the
coefficient associated with the 2°C average is not outside the range of
hypothesized damages estimates.” (p 286) “The conclusion here is as
follows: economic models may not incorporate all the concerns of
scientists and policy makers about the damages of climate change. The
current damage estimates may significantly underestimate the damages
because of impacts that are difficult to monetize (such as ecosystem
effects) or concerns about catastrophic outcomes. If we increase the
damage function so that the economic optimum coincides with the 2°C
target, we find that the SCC rises sharply. The implicit damage
function in the 2°C maximum target is much larger than any estimate
from the damage literature.” (p 286)
Stern Review discounting: “Row
5 in table 1 takes the parameters of the model and only changes the
pure rate of social time preference ( ρ) from 0.015 to 0.001 per year,
the latter being the rate assumed in the Stern Review. The Stern
uncalibrated run has a SCC of $89.8 per ton of CO2—almost five times
the SCC with baseline discounting. (We do not show the SCC along the
optimal path, but it is about one-third smaller because of the larger
damages and lower discounting.)” (p 287)
"Stern Review, (recalibrated) shows the results of recalibrating the model to match market discount rates.
To recalibrate with a rate of time preference using the Stern Review
value ( ρ = 0.001), we need to raise the rate of inequality aversion
(from α = 1.45 to α = 2.1). The calibration keeps the rate of return at
the baseline average for the first 30 years.
High alternative discount rate.
"This scenario raises the pure rate of time preference to 3.5% per
year. The rate of return is approximately 2 percentage points higher
than the baseline, and the SCC is approximately one-third the baseline
case. The SCC is also much lower." (p287)
In the following charts, a further scenario (Copen) is also included: "Copenhagen Accord.
In this scenario, high-income countries are assumed to implement deep
emissions reductions over the next four decades, with developing
countries following gradually. It is assumed that implementation is
through system of national emission caps with full emissions trading
within and among countries (although a harmonized carbon tax would lead
to the same results). We note that most countries are not on target to
achieving these goals." (DICE manual, p. 25).
DICE CO2 Emissions trajectories (Manual, p 29):
DICE Global Temperature change trajectories (Manual, p. 31)
DICE SCC trajectories (manual, p. 33)
Important Additional Notes: Nordhaus updates (2017 and 2017a) show substantial increases in these estimates of SCC from the 2013R model:
"Perhaps the most dramatic revision has been the social cost of carbon
(SCC). The SCC for 2015 has been revised upwards from $5 to $31 per ton
of CO2 over the last quarter-century. This is the result of several
different model changes as shown in Table 6. While this large a change
is unsettling, it must be recognized that there is a large estimated
error in the SCC. The estimated (5%, 95%) uncertainty band for the SCC
in the 2016R model is ($6, $93) per ton of CO2. This wide band reflects
the compounding uncertainties of the temperature sensitivity, output
growth, damage function, and other factors. Moreover, it must be
recognized that analyses of the social cost of carbon were not
widespread until after 2000. Finally, estimates of the SCC are both
highly variable across model and specification and have increased
substantially over the last quarter-century. If we take early estimates
of the SCC from two other well-known models (PAGE and FUND), these were
close to estimates in the DICE1992 model." (Nordhaus 2017a, p 8-9)
Clearly, the SCC depends very critically on the choice of the discount rate.
Goulder and Williams, 2012, provide a readable discussion of this critical issue (see, also, Arrow et al., 2014). GW argue that the social discount rate "has been used for two very different notions: what we will call the social-welfare-equivalent consumption discount rate (rSW) and the finance-equivalent consumption discount rate (rF)” (p2). "the same (discounting) function serves both as a behavioral function (to indicate how individuals actually would behave under various conditions) and as a social welfare function (to indicate how individuals or societies should behave)” (p 3).
"Ethicists often argue that future utility should not be
discounted—that the well-being of future generations should count as
much as that of the current generation in a social welfare function.
This suggests a value of zero for the social rate of time preference—or
perhaps a very low value to reflect the possibility that, because of a
future exogenous calamity (for example, an asteroid’s hitting the
earth), some future generations might not ever arrive. Using this
logic, the Stern Review employs a value of .001 for the social rate of
time preference, which we designate by ρ. Consumption discount rates,
in contrast, translate values of future consumption into equivalent
values of current consumption. There
is no necessary contradiction between employing a (positive) discount
rate to future consumption and maintaining the view that future
utilities should not be discounted” (p 4)
rSW "serves to convert future
consumption into a level of current consumption that is equivalent in
terms of social welfare...A relevant empirical issue is the extent to
which increments to consumption lead to higher individual well-being. A
relevant ethical question is how much an increment to consumption
should count in the social welfare function”(p 7). "So
long as the sacrifice of current consumption is less than ΔCt /
(1+rSW)t (assuming no other impacts), the policy raises social welfare." (p 10)
rF "is the marginal product (or
marginal opportunity cost) of capital. The rate rF indicates how
consumption levels are connected across time: if society forgoes one
unit of consumption in any given period in order to increase the
capital stock, this will increase the amount available for consumption
in the next period by 1 + rF. If capital is paid its marginal
product (that is, if the capital market is undistorted), then the
market rate of interest will equal rF. Similarly, if the individual
savings/consumption decision is undistorted and individuals are not
liquidity constrained, then individuals will discount consumption at
the rate of interest. If any of these markets are distorted, however,
then individuals may discount consumption at a rate that differs from
rF”(p 8) "rF is appropriate if one wishes to determine
whether the policy would yield a potential Pareto improvement: that is,
whether the winners from the policy could in theory compensate all the losers and still be better off" (p 10)
“Specifically, consider the case in which rSW < rF. In this
circumstance, suppose that a particular climate change policy (with
costs ΔC0 now and benefit ΔCt at time t) has positive discounted net
benefits when using rSW as a discount rate, but negative discounted net
benefits when using rF. In this this
case, the policy increases social welfare. But it also in effect
transfers resources from the present to the future. The
government could achieve a larger increase in social welfare by making
a similar transfer of resources to the future via the capital stock.
Or, put differently, the climate policy is a less efficient way to
transfer resources to the future than a policy that increases the
capital stock. In this case, what action should the government
take on the climate policy? The answer depends on what the options are.
If the choice is simply whether to enact the climate policy or not,
without any other policy changes, then the policy is worth enacting: it
increases social welfare. If the choice is between the climate policy
and a similarly costly transfer to future generations via the capital
stock—one cannot do both—then using the capital stock would be better”
(p 11).
But, if world governments actually do make this choice - to increase
the capital stock to pass on to future generations (instead of a
climate policy), then this " means consuming less and saving more now.
This implies both a higher rSW (since consuming less and saving more
now will increase the rate of growth of consumption over time, thus
increasing rSW) and a lower rF (because increasing the capital stock
will lower the marginal rate of return to capital). At the social
welfare optimum, the two rates will be the same, at values somewhere
above the original value of rSW but below the original value of rF. At
the optimum, both rates give the same answer about whether the
candidate climate policy is worthwhile—that is, the proposed policy
will either pass both the social-welfare-improvement and the
Kaldor-Hicks tests or fail both” (p 11/12)
GW conclude: "As is current practice, the behavioral function can be
parameterized so as to generate plausible behavioral responses and
plausible values for the opportunity cost of capital. Nordhaus, for
example, might wish to stick with the parameters that he arrived at for
the behavioral function in DICE. At the same time, a social welfare
function can be superimposed on the model to evaluate the outcomes that
the behavioral function and other aspects of the model. The social
welfare function would not alter the behavior of the model; it would
only evaluate the outcomes.” (p 13/14) Taking uncertainty about
interest rates (either about the growth rate or about the future
opportunity costs of capital) into account, GW argue, "roughly doubles
the expected discounted benefits from climate mitigation policy" (p 17).
Ken Arrow, 2007, however,
makes the following compelling argument (my emphasis added):
"Many have complained about the Stern Review adopting a value of zero
for ρ, the social rate of time preference. However, I find that the
case for intervention to keep CO2 levels within bounds (say, aiming to
stabilize them at about 550 ppm) is sufficiently strong as to be
insensitive to the arguments about ρ . To establish this point, I draw
on some numbers from the Stern Review concerning future benefits from
keeping greenhouse gas concentrations from exceeding 550 ppm, as well
as the costs of accomplishing this.
The benefits from mitigation of greenhouse gases are the avoided
damages. The Review provides a comprehensive view of these damages,
including both market damages as well as nonmarket damages that account
for health impacts and various ecological impacts. The damages are
presented in several scenarios, but I consider the so-called
High-climate scenario to be the best-based. Figure 6-5c of the Review
shows the increasing damages of climate change on a “business as usual”
policy. By the year 2200, the losses
in GNP have an expected value of 13.8% of what GNP would be otherwise,
with a .05 percentile of about 3% and a .95 percentile of about 34%.
With this degree of uncertainty, the loss should be equivalent to a
certain loss of about 20%.
The base rate of growth of the economy (before calculating the climate
change effect) was taken to be 1.3% per year; a loss of 20% in the year
2200 amounts to reducing the growth rate to 1.2% per year. In other
words, the benefit from mitigating
greenhouse gas emissions can be represented as the increase in the
growth rate from today to 2200 from 1.2 % per year to 1.3% per year.
We have to compare this benefit with the cost of stabilization.
Estimates given in Table 10.1 of the Stern Review range from 3.4% down
to -3.9% of GNP. (Since energy-saving reduces energy costs, this last
estimate is not as startling as it sounds.) Let me assume then that costs to prevent additional accumulation of CO2 (and equivalents) come to 1% of GNP every year forever.
Finally, I assume, in accordance with a fair amount of empirical evidence, that η, the component of the discount rate attributable to the declining marginal utility of consumption, is equal to 2.
I then examine whether the present value of benefits (from the increase
in the GDP growth rate from 1.2% to 1.3%) exceeds the present value of
the costs (from the 1% permanent reduction in the level of the GDP time
profile).
A straightforward calculation shows that mitigation is better than business as usual — that
is, the present value of the benefits exceeds the present value of the
costs — for any social rate of time preference (ρ) less than 8.5%.
No estimate for the pure rate of time preference even by those who
believe in relatively strong discounting of the future has ever
approached 8.5%. These calculations indicate that, even with higher
discounting, the Stern Review’s estimates of future benefits and costs
imply that current mitigation passes a benefit-cost test. Note that
these calculations rely on the Stern Review’s projected time profiles
for benefits and its estimate of annual costs. Much disagreement
surrounds these estimates, and further sensitivity analysis is called
for. Still, I believe there can be little serious argument over the
importance of a policy of avoiding major further increases in
combustion by-products. "
The
Bottom Line?
In the simplest of terms, burning up fossil fuel
reserves, which took millions of years to lay down, in 3 - 500 years is
clearly going to affect substantially the planet's carbon balances and
cycles. These affects are practically certain to affect the planet's
bio-physical characteristics, and very probably for the worse compared
to our known histories and experience. In effect, the critical choice here is
about precautionary 'investment' behaviour,
rather than speculative
(accumulation) behaviour - in which case we are not concerned with
so-called 'consumption smoothing' (wealth accumulation) calculus, but
much more about 'catastrophe' insurance under extreme uncertainty -
what does the extreme case look like, and how badly do we need to try
and avoid it?
Here, Weitzman (2007) points out that concern over a
highly uncertain future substantially alters the necessary calculus. ["The overarching problem is that we lack a
commonly accepted usable economic framework for dealing with these
kinds of thick-tailed extreme disasters,
whose probability
distributions are inherently difficult to estimate (which is why the
tails must be thick in the first place). But I think progress begins by
recognizing that the hidden core meaning of Stern vs. Critics may be
about tails vs. middle and about catastrophe insurance vs. consumption
smoothing.", Weitzman, below, p 723].
If so, the SR is 'near enough for farm work' - its
concentration on the more extreme possibilities of damage from CC is
justifiable on precautionary grounds, as is the choice of relatively
low discount rates, while the additional weight given to the less
advantaged is also justifiable (not least because these people can be
expected, one way or another, to try and hold the "west" to account,
and the ways they choose, given that they have little to lose, may
prove extremely uncomfortable to the 'west'.)
Action (or not) on Climate Change is:
- a choice about the future versus
the present,
especially
about our childrens' and their childrens' life chances and
opportunities ("the enormously
unsettling uncertainty of a small, but essentially unknown (and perhaps
unknowable), probability of a planet Earth that in hindsight we allowed
to get wrecked on our watch.",
Weitzman, below, p722). Inter-temporal choice (decisions and
actions with effects across time) under
extreme
uncertainty (hardly
even reducible to any sort of 'probability') is at the heart of the
issue.
- a choice about what precautions to take (what insurance to hold),
rather than a choice between alternative productive investments (which
is a perspective that, perhaps, better reflects the rich point of view
rather than that of the less advantaged).
- a choice about distribution
- the spread of costs and benefits amongst people with very different
capacities and capabilities to cope and adjust. Who is affected and how
they can cope is critical. It is, perhaps, commonly assumed that the
richest 20% of the planet's population will be able to cope, albeit at
a cost, with more or less anything that CC can throw at us - we are
rich, inventive and ugly enough to take care of ourselves whatever the
circumstances (- hence the speculative/wealth accumulation
perspective). But this clearly does not hold for the other 80%,
who are likely to be much more concerned about the possibility of
catastrophe).
- a Social
(collective) choice about the externalities of GHG emissions for a quintessential public good (bad) at the global level (our global climate system,
with which we and our children will all have to live) - which requires,
at bottom, a common world
view and associated action, which is, therefore, necessarily a political choice, and
clearly requires global leadership and global governance -> the Paris Agreement, under the United Nations Framework Convention on Climate Change. (see, also, Economist report, Dec 19, 2015, and their Climate Change page). The Paris Agreement focuses on "Intended Nationally Determined Contributions"
(INDCs) as countries publicly outlined post-2020 climate actions they
intend to take under the international agreement, documented by
the World Resources Institute.
KEY References
W. Nordhaus, "Review of Stern Review", Journal of Economic Literature,
XLV, Sept, 2007, 686 - 702
M. Weitzman, "Review of Stern Review", Journal of Economic Literature, XLV, Sept., 2007, 703 - 724.
R.S.J. Tol & G. W. Yohe, "Review of Stern Review", World Economics, 7, (4), Oct - Dec,
2006, 233 - 250
R. M. Carter et al, and I. Byatt et al., "The Stern Review: a Dual
Critique", World Economics, 7,
(4), Oct - Dec, 2006, 165 - 232.
K. Arrow, "Global Climate Change: a Challenge to Policy", The Economist's Voice,
www.bepress.com/ev, June, 2007
See, also, , Tufts GDAE: Economics of Climate change (Jonathan M. Harris, Brian Roach and Anne-Marie Codur)
A World Carbon Tax? Increasing the price (cost) of emitting
GHGs by taxing activities which produce them is the most obvious answer
to the global externality of global warming. Taxing emissions would,
effectively, internalise the externality, and require everyone to take
account of their effects on the climate in all their actions and
activities. But, setting such a tax at an appropriate level to apply
world-wide is practically impossible. As the Stern Review says: "However,
the international harmonisation of carbon taxes can be extremely
difficult in practice. Seeking an internationally uniform tax
would preclude national discretion about ways of implementing
environmental goals; and this may conflict with national sovereignty
and the practical politics of domestic policy formation. There are also
practical and political challenges in creating large-scale flows to
poor countries, to support an equitable distribution of effort, through
public budgets alone." (SR, Chap 22, p 470). See, also,
Economist, 19.09.11 - "Do
economists all favour a carbon tax?"
Carbon Trading? A possibly more
practical alternative is to agree a total global target for GHG
emissions as a global limit - which should be agreed for the
forseeable future. Take, for example, the SR presumption that we
need to aim at reducing global emissions to 20GtCO2e
by the end of this century (SR, Summary for Policymakers, Figure 2, p
xii), from a present total of 40Gt rising to 60Gt by 2020.
Suppose all countries can agree on this overall objective. Countries now need to agree to a
distribution of these global targets over time amongst themselves - not
an easy task, but perhaps more realisable than agreeing a global carbon
tax rate, again possible through progressing the Paris Agreement beyond "nationally determined contributions".
The Principles: Suppose,
as a starting point, we distribute the 2020 target of <60GtCO2e
across countries according to a simple average global per capita target
times each country's population (approx. 9t/head). ("The ‘growth-needs’ approach applied
simplistically suggests distribution on an equal per capita basis"
(SR, Ch 22, p 473/4). We need also to agree how these limits will be
progressively reduced to achieve the target of 20Gt by 2100 (2.2t/hd at
a projected world population of 9 billion). We need to reduce per head
emissions by 7t/head over this century (effectively, given the
time necessary to reach agreement, over 70 - 80 years, or approximately
by 1 tonne per head per ten years). Each country would agree to
the
associated limits on national emissions, progressively reducing as we
approach 2100, and each would be obliged to take the necessary steps to
achieve these targets (subject to international sanctions of various
sorts - such as monetary fines or trade retaliations - and subject to
an international authority charged with monitoring emissions and
developing/implementing a common system of carbon accounting). One
obvious (though not necessarily simple) way any country might do this
is to further allocate their national quota to (in principle) everyone
in the country (establishing a carbon ration for everyone in the
country).
As well as being required to file a tax return every year, each
household could, under this general principle, be required to file a
carbon account every year as well (the organisational and institutional
problems should not be under-estimated!), In effect, every person has a
carbon ration book, and must make their carbon account balance (subject
to penalty). If they exceed their ration, they must get (pay for) some
additional ration. If they have spare rations, they can sell them
to those who need them.
One can imagine a global market in carbon rations - with the rich
buying from the poor, and establishing a market price for carbon in the
process, which would reflect the costs of mitigating emissions to
achieve the global and associated national targets, and encourage
greater efficiency in using carbon.
The Practice? Of course,
such a system would be impossibly difficult (expensive) to contemplate
in practice (except, perhaps, by the end of this century).
However, the bulk of at least CO2
emissions are generated (in the first instance) by power companies and
fuel distributors (as well as by those responsible for the burning or
exploitation of standing forests, wetlands etc.). It is not
beyond possibility that these relatively few and very large players
(businesses) should be required to meet their 'share' of the global and
national quotas and to balance their 'share' of the associated
rations. Once established, these companies would be expected to
trade their emission rights (quota), and so establish a price for
carbon reflecting the costs of achieving the targets, and encouraging
the minimisation of these costs. International emissions trading is
already allowed for and sanctioned under the Kyoto protocol (e.g SR, Ch
22, p 476, which also outlines other emissions trading systems in
operation already, including the EU's emission trading scheme (which
fell foul of the basic error when first introduced that the overall
quota limits were set too high, with the result that the emissions
quotas were virtually valueless - there was no price to be paid for
carbon emission rights). As Stern says:
"A global quantity constraint can be
used to drive intergovernmental trading of emissions quotas, and this
has already been adopted within the current multilateral framework, the
Kyoto Protocol. Moreover, as we explained in Chapter 14, a key benefit
of trading schemes for emissions quotas is that they allow the
cost-effectiveness (via a common price) and distributional equity of
action (via flows based on quota allocations) to be managed separately
but simultaneously. In a global
and comprehensive system of quota trading, the initial
allocation of national limits on emissions affects the distributional
equity of the scheme, but not the equilibrium distribution of emissions
reductions, the market-determined carbon price or the costs of
abatement." (SR, Chap 22, p 471)
"There is no single formula that is likely to capture in a satisfactory
way all relevant aspects of an equitable distribution of effort between
countries across the various dimensions and criteria – but the criteria
tend to point in similar directions" (rich countries taking a greater
share of the costs of mitigation, but not necessarily the same
arrangements or rules for sharing those costs). (SR, Chap 22, p 473 - 4)
"Nevertheless, the concepts underlying the Protocol – in particular,
the aspiration to create a single, efficient carbon price across
countries through the use of emissions trading and the recognition that
mechanisms are required to make finance and technology available to
poor countries on the basis of equity – are very valuable. These are
elements to be strengthened within any future regime for action on
climate change." (SR, Ch. 22, p 478)
How might we get there from here?
This is the critical problem, from this perspective. The next 15 years
are vitally important - which is the time it will take to get the
planet's house in order if we are to meet this global challenge. It is
in this sense, I suggest, that the urgency pervading the Stern Review
(in contrast to the conventional economic prescription of starting
slowly and 'ramping up') is to be understood - as a political problem
rather than a strictly economic problem - the need to convince
politicians, and their constituents, of the urgent need to (plan to) do
something serious.
So, agree on the above outline - essentially the 2030 - 2100 global
totals and distribution of carbon quota, and the principles of carbon
trading, and then agree on a phased transition to this system from now
until 2030 - by, perhaps, an initial quota allocation which progresses
from the indicative Kyoto allocations to the 2030 "equitable"
allocations, which would allow some growth ceilings for developing
countries, but also some hard limits for the developed world. So long
as these limits in the developed world are hard enough to generate a
serious and increasing carbon price, the developed world and its
businesses can be relied upon to develop the necessary carbon trading
systems and practices, and the necessary common carbon accounting
systems that go with them. Once in place, these can then readily
be extended to the rest of the world.
The UK?
The UK Government introduced a Climate
Change Act, 2008, and has committed the UK to carbon reduction (via
the
Energy White Paper, 2007) under its Carbon
Reduction Committment, and now requires all government
appraisals to account for the costs of carbon: "We use the shadow price of carbon (SPC) to
value the increase or decrease
in emissions of greenhouse gas emissions resulting from a proposed
policy. Put simply, the SPC captures the damage costs of climate change
caused by each additional tonne of greenhouse gas emitted, expressed as
carbon dioxide equivalent (CO2e)
for ease of comparison. The new
guidance brings the value of carbon included in appraisals
into line with the Stern Review’s assessment of the social cost of
carbon. The SPC is different from the previously used social cost of
carbon (SCC) in that it takes more account of uncertainty and is based
on a stabilisation trajectory."This paper represents the current (Feb,
2008) position
of the UK government on carbon pricing in government related
assessments of projects and programmes, and includes a schedule of
indicative carbon
emission shadow prices to be attached to carbon emissions
from
2015 to 2035.
Comments and Questions to
David Harvey?
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