1. The Economics of Climate Change
Daniel De La Torre Ugarte
Professor, University of Tennessee
Trade, Environment, Climate Change and Sustainable Development Branch, UNCTAD

2. Environemental Problems According to Area of Influence
Domestic: Local/Regional
Bi-national / Multinational
Global

4. Sources of emissions

5. Externalities
Left on its own, the market will not solve the problem in a social optimal way
Climate change is an externality: the emitter does not bear the direct costs of their action.
As with any externality without policy interventions, the emitter has little motivation to consider the costs in their decision-making.

6. Climate Change is a Unique Externality”
The emission of greenhouse gasses imposes costs on others that are not borne by the emitter.
The costs will be felt over a long time period and over the entire world.
But, the exact nature of costs is uncertain: they will be shaped by policies, market mechanisms, & other events.
Those most affected—future generations– cannot speak up for their interests

7. Basic Policy Approaches For Reducing GHGs
Tax the emitter equivalent to the marginal external social costs
Ultimately borne by households, raises revenues that can be used to achieve other goals, provides incentives to economize on the damaging activity
The allocation of property rights linked with emissions trading
Provides large emitters the flexibility to trade emission rights across sectors.
Direct regulation
Tends to place burden on industry (which generally passes on the costs to consumers—if they can/will pay)
Provide financial incentives
Usually popular, sends clear signals, but often suffers from free rider problem.

10. Stern Review on the Economics of Climate Change
Author: Economist Sir Nicholas Stern
Purpose: Created for the British government to address climate change using economic analysis
Length: 700 pages!
Published: October, 2006

11. The Science
Doubling of pre-industrial greenhouse gases (~ 1900) = 2°-5° C change in mean global temperatures
This doubling will most likely occur between 2030 and 2060, at today’s rate of carbon emissions
Feedback effects could bring temperatures even higher (permafrost thaw)
3 ½ to 9 degrees F

12. Risk If carbon emissions stabilize at today’s rates:
0-2% chance of less than 1° C increase in temps.
2-20% chance of greater than 5° C increase in temps.
Risk on high side > risk on low side

13. Projected impacts of climate change
Global temperature change (relative to pre-industrial)
0°C
1°C
2°C
3°C
4°C
5°C
Food
Falling crop yields in many areas, particularly developing regions
Possible rising yields in some high latitude regions
Falling yields in many developed regions
Water
Significant decreases in water availability in many areas, including Mediterranean and Southern Africa
Small mountain glaciers disappear – water supplies threatened in several areas
Sea level rise threatens major cities
Ecosystems
Extensive Damage to Coral Reefs
Rising number of species face extinction
So, how did the Review demonstrate that climate change is so important? It did so in two ways. First, it looked at the potential impacts and effects of climate change at different increases in temperature, then related those temperature rises to projections of greenhouse gas emissions. Many of you will know that this is the task of the Intergovernmental Panel on Climate Change’s WG2 on impacts, adaptation and vulnerability, and it supports the findings of the Review.
If the world continues to emit greenhouse gases in the quantities we are doing right now, we run very high risks – it implies a rise in temperature of around 4-5 degrees C above pre-industrial levels, which we’ve not really considered or seen before. A change of 5 degC could change the worlds physical geography, and therefore human geography, how we live our lives. And these effects are, in the main, negative effects and inequitable – they hit poor countries earliest and hardest.
Let me give just one example briefly: at a temperature increase of 1 deg C, we expect severe impacts in the marginal Sahel, at an increase of 2-3deg C we may see a 25-60% increase in the people at risk of hunger with half of that increase in Africa and West Asia, while at 4-5degC scientists expect crop yields to decline by up to a third in Africa. Many other effects of climate change are mediated through water, risks of more extreme events such as both drought and flooding - leading to major water shortages. There are risks to ecosystems, of extinction of major species, of abrupt and major irreversible changes.
Extreme Weather Events
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Risk of Abrupt and Major Irreversible Changes
Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system

14. Anticipated Regional Impacts
Climate change impacts will vary upon regions. This table provides a sample of some predictions for regions of the world.

15. Examples of Impacts of Climate Change: Africa
(The information provided with this map is self explanatory)

16. Examples of Impacts of Climate Change: Asia
(The information provided in this table is self explanatory)

17. Stabilization and Commitment to Warming5%
400 ppm CO2e
95%
450 ppm CO2e
550 ppm CO2e
650ppm CO2e
There are some very serious threats we face, and by considering those risks, the Review finds that we should try to do something to stabilise greenhouse gas emissions, in order to avoid these dangerous temperature increases. Our emissions are a flow each year that accumulates in the atmosphere, building up stocks over time – concentrations – and it is that stock that leads to climate change. At the moment, we are at around 430ppm concentrations, and rising by around 2ppm per year. Therefore, stabilising at around 450ppm, where the risk of a temperature rise of around 2deg C will be about 50:50, will be very difficult – we will get to 450 within the next 10 years on current projections. But even something more “realistic” of stabilising at around 550ppm would be very risky – that gives a 50:50 chance of a 3 deg C rise, but it is far less risky than staying on a BAU path, which gets us to 5 deg rises. This underlines the problem, that the actions we – the world - takes now make a very large difference.
750ppm CO2e
Eventual temperature change (relative to pre-industrial)
0°C
1°C
2°C
3°C
4°C
5°C 17

18. Mean losses in income per capita from scenarios of climate change
I mentioned earlier that the Stern Review demonstrated that climate change is urgent and serious in two ways, and this is the second. As you will know, economists like to turn concepts, actions, events into numbers – and that is exactly what we did here. We considered just how much these sorts of impacts might cost the world, and comparing those to what the costs of doing something about emissions now – trying to stabilise at those levels I’ve already mentioned of ppm – might be. To do this, we averaged over three things – time, risk and countries. Depending on how you average these things, on whether, for example, you take an ethical view about how we should value future generations, about how we should value those who are poorer than us, we found that these costs equated to something between 5 and 20% of GDP every year if we continue as we are. 5 and 20% of GDP – those are big numbers, and a wide range. But even that valuation is limited – there were many things, many impacts on human life, that as economists, we still can’t value. And modelling is a simplification exercise. But at least it gives a broad range of the kinds of costs we might expect.
Essential to take account of risk and uncertainty
Models do not provide precise forecasts
Assumptions on discounting, equity, and risk aversion affect results

19. Taking urgent action makes good economics - delaying is dangerous and costly
The cost of cutting emissions consistent with a 550ppm CO2e stabilisation trajectory averages 1% of GDP per year in 2050 – this can be achieved by deployment of available technologies and those expected to be commercialised in coming decades
Delaying emissions reductions significantly constrains the opportunities to achieve lower stabilisation - strong mitigation is fully consistent with aspirations for growth and development in poor and rich countries
And compared to the costs of reducing emissions? Well, that depends on when we start to cut emissions, how we do so, and how much technology costs fall over time. This graph illustrates the scale of action required. Doing more, costs more. But, for example, we found that a very wide range of models – both top down and bottom up - suggest that trying to stabilise at 550ppm will cost 1% of GDP per year. Again, that finding was corroborated by the IPCC report on mitigation released earlier this month. It is manageable, and it means we can grow and be green. In fact, comparing this to the potential costs of doing nothing, it is the other way round – if we don’t tackle climate change we will reduce growth and development.
And that’s a strong message. A strong message delivered by Sir Nick that was embraced by African Heads of State at the African Union summit here in Addis Ababa earlier this year – so much so that they adopted a declaration on climate change and development. 19

20. Costs of climate change
A loss of 5% average per capita GDP ‘now and forever’
Costs are not evenly distributed
Developing nations will pay higher price
Sub-Sahara Africa (high non-market costs)
India & Southeast Asia (9-13% loss in GDP)
Developed nations will vary depending upon geography
US (1-1.2% loss in GDP)

21. What kinds of costs? Agriculture Water Temperature Mortality
Increased flooding / droughts
Extreme weather events
Mortality
Heat
Malnutrition
Disease
Infrastructure
Storm damage
Coastal Protection
Species Loss

22. Other potential cost factors
Non-market impacts
Environment & human health
Amplified feedback effects
Methane release & loss of carbon sinks
Correct weighting of poor regions
If these factors are taken into account, total costs are potentially as high as 20% of world GDP

23. Economics of Stabilization
Today’s Carbon level: 430 ppm
Pre-industrial level: 280 ppm
‘Business as usual’: 550 ppm by 2035 and 700 ppm by 2100 creating temperature changes unseen in human experience
Last ice age to pre-industrial = 5 degree C temp difference

24. Sources: National differences
Direct relationship between per capita income and carbon emissions.
U.S. emits five time the world average for per person carbon emissions
As populations increase, carbon emissions will increase
As the large populations in Asia (India & China) continue to develop economically, carbon emissions will continue to increase.

25. Stabilization Goal
Stabilization defined: A balance whereby emissions are equal to the Earth’s natural capacity to remove the gases.
Carbon Goal to obtain stabilization: ppm
Cut of 25% of current emissions levels by 2050
Cost of abatement: Approximately 1% of world GDP
Consistent with continued growth & development

26. Emergency Pathways Global emissions peak in 2015
Emergency Pathways Global emissions peak in Drop by % by 2050
Risk of exceeding 2ºC
These three pathways define a band of emergency reduction trajectories
The least stringent of these emergency pathways – by which we mean 50% emissions reduction by 2050 – is being supported by the most courageous politicians.
This is progress. But the fact remains that this is a rather risky trajectory.
So, taking seriously that the climate crisis warrants an emergency response, we take the most stringent of these pathways, the blue line, the one that has global emissions dropping by 80% by 2050, as our reference, and reckon our calculations with respect to it.
Delaying the peak, or slowing the subsequent rate of reductions, increases the risk of exceeding 2ºC

27. What does the Emergency Pathway mean for Southern development?
80% global reductions by 2050
What’s left
for the South?
The blue line is our global emergency pathway – the most most stringent of the three from the previous slide
The green line is 90% (below 1990) by 2050, Gore’s trajectory, but across all of the A1 countries rather than just the US
The purple line is the problem. This is where the tension between climate protection and development comes in. This is where the global climate policy impasse resides.
NOTE: Relaxing the blue pathway doesn’t really change our results – unless you really relax it to blow off stringency
Quick CYA: This slide approximates the North with A1 and the South with NA1
90% by 2050
in the North
Greenhouse Development Right Framework

28. Income and Capacity National income distributions showing capacity (in green) as fraction of income above the development threshold
India
China US
The curves here represent reasonable approximations of the income distributions within these three countries. Each chart arrays people from poorest to the richest member of these three countries. (We’ve constructed such curves for all countries, using the World Bank and World Income Inequality Databases of per-capita incomes and GINI coefficients, respectively.) The first thing to notice is the horizontal line at $9,000 that represents the development threshold
You can see that a very small portion of India’s population, about 4% earns more than the $9,000 development threshold. (And the income above the threshold is about 4% of the aggregate national income.)
A much larger portion, nearly 95%, of the US population earns more than the development threshold. (And the income above the threshold is about 80% of the aggregate national income.)
China falls of course between these two. It’s total consuming class is almost the size of the US consuming class, but has a much smaller aggregate capacity. (About China’s 22% of population, 24% of aggregate national income.)
It’s these green areas – income above the threshold – that represent our definition of national capacity. If we think of the burden sharing system as a global income tax, the development threshold can be thought of as marking a “0% tax bracket”, so as to shield the resources of those who’ve not yet reached the development threshold.
On thing that is plainly obvious is that the US, despite its much smaller population, has the lion’s share of the capacity – and (you’ll see in a moment) a similarly disproportionate national obligation. The obligation falling on those members of the global consuming class residing in India and China is small enough that it might be reasonable to excuse them altogether.
However, as a political matter, it is probably not possible to do so. It unlikely that the working consensus to pay a large proportion of the total mitigation and adaption bill could ever emerge in the US if the “wealthy” people in the Indian and Chinese nations were not also paying their “fair shares.”
Ultimately, this “Greenhouse Development Rights” approach seeks to define, in quantifiable terms, such national fair shares – fair in the sense of safeguarding the right to development, by – again – shielding those below the line from the costs of action.
The precisely analogous calculation can be done for responsibility….
$9,000/capita (PPP)
“development threshold”

29. Cost of delay Mitigating carbon emissions is a slow process
Once abatement proceeds, peak emissions will still not occur for ten or more years
The longer the wait, the greater the risk factors associated with drastic climate change
The longer the wait, the greater the costs associated with abatement

30. Abatement Opportunities I
Reduce non-fossil fuel emissions
Land use (deforestation)
Halt deforestation especially in tropics
Plant new forests
Require enforcement & regulatory costs
Require aid from developed world
Agriculture
Change tilling practices
Produce bioenergy crops

31. Abatement Opportunities II
Reduce Demand for Emission-intensive goods
Primarily energy use in heating, transport, & electricity
Pricing signals via taxes. Costs to atmosphere should be included in purchase of offending products
Change preferences via information

32. Abatement Opportunities III
Improve energy efficiency
Power generation
Energy use
Efficient appliances & vehicles
Greatest abatement potential may lie here.

33. Abatement Opportunities IV
Switch to lower carbon emitting energy production
Wind
Wave & tidal
Solar
Carbon capture
Hydrogen
Nuclear
Hydroelectric
Bioenergy

34. Policy requirements Successful policy requires three elements:
1. Carbon pricing
2. Technology policy
3. Remove barriers to change

35. Carbon Pricing
The cost of carbon emissions must be included in the pricing of carbon emitting goods
This will result in:
Less of the offending activity
Incentives to find non-emitting alternatives
Types of pricing
Taxes
Pros: creates revenues
Cons: unpopular, does not directly control amount of emissions
Carbon trading (cap & trade)
Pros: efficient, directly controls amount of emissions
Cons: does not create revenue

36. Technology Policy Public investment in R&D
R&D subsidies encourage private firms to invest in risky technology
Creation of new technologies become public goods which can be dispersed globally

37. Remove barriers to change
Standards
Where carbon pricing proves ineffective, regulatory standards may be useful
Education
Understanding of climate change and its consequences can shape future policy

38. Adaptation Strategies
High-quality climate information
Rainfall & storm patterns critical
Land-use standards
Infrastructure should account for climate change
Climate sensitive public goods
Natural resource & coastal protection
Emergency readiness
Social safety nets
Those who are most vulnerable and cannot afford protection (insurance)

39. Collective Action
Climate change is a global problem which will require:
Building of effective institutions
Shared understanding of long-term goals
Leadership and trust

40. Thanks ! daniel.de.la.torre.ugarte@unctad.org danieltu@utk.edu
Stern Review on the Economics of Climate Change