Understanding Climate Change

 

Social and Economic Costs of Climate Change and Mitigation Measures: Highlights from IPCC Working Group III - Climate Change 1995 Economic and Social Dimensions of Climate Change

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Incurring costs to mitigate climate change is economically justified

• The risk of aggregate net damage due to climate change, consideration of risk aversion and the precautionary principle, provide rationales for greenhouse gas mitigation actions beyond no regrets. The literature indicates that significant no regrets opportunities for greenhouse gas mitigation are available in most countries
• No regrets measures are those for which benefits, such as reduced energy costs and reduced emissions of local/regional pollutants equal or exceed their cost to society, excluding the benefits of climate change mitigation. They are sometimes known as measures worth doing anyway

  Note: This definition of no regrets has two aspects. There is a component of no regrets which benefits the company or individual undertaking the measure, with reduced fuel costs offsetting initial investment. The IPCC definition also includes a second component - non-climate benefits to society or the country as a whole. These arise in part because of environmental and health benefits from reducing local and regional air pollution through reduction in use of fossil fuels.

How much to limit emissions is a policy judgement

• Energy efficiency gains of perhaps 10% to 30% below baseline trends over the next two to three decades can be realized with net economic benefits to zero net cost. (an example of no regrets measures).
• Estimates of (aggregate annual) damages from a 2-3º C global warming tend to be a few percent of world GDP, with, in general, considerably higher estimates of damage to developing countries as a share of their GDP. Small islands and low lying coastal areas are particularly vulnerable to projected sea level rise accompanying global warming, and damages may be as high as 9% of GDP.
• Attitude towards risk aversion will influence the extent of mitigation measures. The IPCC 1995 Assessment of the Science states, "Future climate changes may also involve "surprises". In particular, these arise from the non-linear nature of the climate system. When rapidly forced, non-linear systems are especially subject to unexpected behaviour".

The costs of action depends in significant measure on the policies adopted

• Two main types of models have been used to analyze costs of greenhouse gas mitigation. These are referred to as top-down models of the large scale economy, and bottom-up models which incorporate more detailed studies of engineering costs.
• In the specific case of stabilizing emissions at 1990 levels, most top-down studies estimate annual costs in the range of -0.5 % of GDP (equivalent to a gain of about $60 billion in total for OECD countries at today's GDP levels) to 2 % of GDP (equivalent to a loss of about $240 billion) could be reached over the next several decades.
• Although it is difficult to generalize, top-down analyses also suggest that the costs of substantial reductions below 1990 levels in OECD countries could be as high as several percent of GDP. However, studies also show that appropriate timing of abatement measures and the availability of low-cost alternatives may substantially reduce the size of the overall bill. Realization of economic double dividends (below), and secondary environmental benefits through reduction of local and regional air pollution, can also significantly offset costs of mitigation.
• Bottom-up studies are more optimistic about the potential for low or negative cost emission reductions, and the capacity to implement that potential. Such studies show that the costs of reducing emissions by 20 percent in developed countries within two to three decades are negligible to negative (i.e. economically beneficial). Other such studies suggest that there exists a potential for absolute reductions in excess of 50 percent in the longer term, without increasing and perhaps even reducing total energy system costs.
• A number of studies indicate that global emissions reductions of 4 to 18 percent, together with increases in real incomes are possible from phasing out fuel subsidies world-wide.
• Economic instruments, such as emissions trading and carbon taxes can reduce significantly the costs of achieving a given target. If a carbon or carbon-energy tax or sale of permits is used as a policy instrument for reducing emissions, this could raise substantial revenues, and how the revenues are distributed could dramatically affect the cost of mitigation. If the revenues are distributed by reducing distortionary taxes in the existing system, they can potentially yield an additional economic benefit (economic double dividend).
• Appropriate long run signals are required to allow producers and consumers to adapt cost-effectively to constraints on greenhouse gas emissions and to encourage research and development. Failure to adopt policies as early as possible to encourage efficient replacement investments at the end of the economic life of plant and equipment (i.e. at the point of capital stock turnover) impose an economic cost to society. Implementing emissions reductions at rates that can be absorbed in the course of normal turnover are likely to be cheaper than enforcing premature retirement now.
• Studies suggest that as much as 15-30% of 1990 global energy-related emissions could be offset by additional carbon sequestration in forests for a period of 50-100 years. Costs of carbon sequestration, which are competitive with source control options, differ among regions of the world, particularly in relation to land costs.

A prudent strategy

A prudent way to deal with climate change is through a portfolio of actions aimed at mitigation, adaptation and improving our knowledge. The appropriate portfolio will differ for each country. The challenge is not to find the best policy for the next 100 years, but to select a prudent strategy and to adjust it over time in the light of new information.

Mitigation measures (in addition to adaptation) can be grouped in three broad categories:

1) Reduction of anthropogenic emissions. This reduction of GHG's can typically be achieved by improving energy efficiency; by changing consumption and production patterns; and by fuel substitution (from carbon rich fuel such as coal or petroleum to low carbon or carbon-free fuel).

2) Sequestration and removal. In this case the GHGs are captured where they occur (using scubbers for example) or removed from the atmosphere by increasing the intake from biomass (reforestation, changes in agriculture practices, etc.). The possibility of increasing the carbon uptake of ocean by fertilizing them with iron has also been discussed. However the large environmental uncertainties associated with this measure raises serious doubts concerning its possible use.

3) Compensation. These measures have been suggested as a way to compensate the enhanced greenhouse effect by reducing, for example, the solar radiation reaching the earth. They involve various geo-engineering measures such as the use of orbiting mirrors to reflect incoming solar radiation. The technical complexity and high costs associated with these measures have prevented them from being considered in the current discussions over mitigation measures.

Individual countries that seek to implement mitigation policies can choose from among a large set of potential policies and instruments, including carbon taxes, tradable permits, deposit refund systems as well as technology standards, performance standards, product bans, direct government investment, and voluntary agreements. Public education on the sustainable use of resources could plan an important part in modifying consumption patterns and other human behaviour. The IPCC report analyzes available information on the applicability of each of these instruments in various situations and regions.

The (economic) value of better information and predictions of climate change and its impacts are likely to be great. Research and development on energy efficiency technologies and non-fossil energy options also offer high potential value.

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