1. 0 Marzio Galeotti (Università di Milano, FEEM, CMCC) Fourth Annual Forum on Business Ethics and Corporate Social Responsibility “Restoring Responsibility: The Accountable Corporation” Milan September 13-14, 2007 The Cost of Climate Change: Sharing the Burden

2. 1 Outline  Keywords of this presentation  CC undisputed: it is under way  CC: the chain of effects  CC: causes, consequences, remedies  CC: the impacts  CC: crucial features – global externality, differentiated origins and consequences in time and space, uncertainty  Mitigation  Sharing the Burden  The problem of participation: actors and role  Focus on Business

3. 2 Keywords  Keywords of this presentation  The keyword is *Differences* and variants (Differentiation, Differential,…)  Differences in CC as to: –The causes –The consequences –The policies –The actors  Hence: Sharing the Burden

4. 3 Climate Impacts/1 CC undisputed: it is under way A selection of probable impacts:  Temperature increase of the planet (since 1860: global- average surface temperature has increased by 0.6°C)  Increase in precipitation events  Increase in frequency and intensity of extreme climate events  Increase in risk of desertification  Shrinkage of glaciers  Sea-level rise (last 100 years: increase by ca. 10-25 cm)

5. 4 The process is speeding up The concern is growing Global Warming: Climate Impacts/2

6. 5 Climate Cycle: The Chain of Effects GHGs Concentr ations Thermo- dynamic Response GHGs Emission s Climate Change Impacts Production Processes LULUCF Mitigation Adaptation Life style/Culture/Quality of Life/ Risk Management

7. 6 Carbon Dioxide (CO 2 ) Carbon Dioxide (CO 2 ) – Most prevalent GHG Methane (CH 4 ) Methane (CH 4 ) – Second most common, 21x the potency of CO 2 Nitrous Oxide (N 2 O) Nitrous Oxide (N 2 O) – 310x the potency of CO 2 Other Gases Other Gases – HFCs, PFCs, and SF 6 = range 600 – 23900x potency of CO 2 Transportation Energy Generation Industrial Processes Land Use: Agriculture & Forestry Transport The Causes: Emissions/1

8. 7 The Causes: Emissions/2 CFC HFC Fluorinati CO2 Global Emissions by sector

9. 8 CO2 Global Emissions by Fossil Fuel Fonte: OECD/IEA World Energy Outlook 2006 The Causes: Emissions/3 Fonte: IEA World Energy Outlook 2006

10. 9 Energy-related CO2 Global Emissions by Region The Causes: Emissions/4 Fonte: IEA World Energy Outlook 2006

11. 10 Changes in temperature, weather patterns and sea level rise Agriculture: Changes in crop yields Irrigation demands, Productivity Forests: Change in Ecologies, Geographic range of species, and Health and productivity Coastal Areas: Erosion and flooding Inundation Change in wetlands Human Health: Weather related mortality Infectious disease Air quality - respiratory illness Industry and Energy: Changes in Energy demand Product demand & Supply The Impacts/1 Water Resources: Changes in water supply and water quality Competition/Trans-border Issues

12. 11 Key Sectoral Impacts ( as a function of increasingglobal average temperature change) IPCC 4AR 2007 WG2 (Impacts will vary by extent of adaptation, rate of temperature change, and socio-economic pathway)

13. 12 Key Regional Impacts (as a function of increasing global average temperature change) Fonte: IPCC 4AR 2007 WG2

14. 13 Impact Assessment Damages in physical units: 2.5° C temperature increase scenario Source: adapted from IPCC, 1996 SAR

15. 14 Global Warming: Key Features/1 UNCERTAINTY: the knowledge of environmental and socio-economic dynamics, and of the feedback between the two is still affected by a large amount of uncertainty. GEOGRAPHICAL SCALE: climate change is a global phenomenon affecting the whole world, at the same time environmental and socio-economic impulses and responses are highly differentiated across regions. TIME SCALE: climate change is a long-term phenomenon. Assessing impacts on environmental and socio-economic systems requires a long-run perspective.

16. 15 Global Warming: Key Features/2 EFFECTS INVOLVING INTERACTING SYSTEMS characterized by: Non linearity (in environmental and economic systems) Discontinuity (“Jumps”, abrupt changes of state e.g. extreme events, catastrophes, new technologies), Irreversibility (non-return point e.g. species extinction, irreversible investments high sunk costs) WELFARE MEASUREMENT (ethical judgements): Interpersonal utility comparison (is it possible to compare and aggregate utility?) Inter-temporal utility comparison (is it legitimate to discount and what discount rate has to be used?) Choice of a metric (money, loss of human life, multi-criteria approach?)

17. 16 Uncertainties related to carbon cycle & climate system The relation between stabilisation targets and resulting temperature increases for different climate sensitivities (Source: Azar & Rhode 1997)  uncertainty in climate sensitivity has a drastic impact on the expected temperature increase

18. 17 The importance of timing The time scales involved to stabilise CO2 concentrations at any level between 450 and 1000 ppmv (Source: IPCC)  CO2 concentrations, temperature and sea level continue to increase long after emissions are reduced

19. 18 Stern Review: Damages

20. 19 Summarizing: a cascade of uncertainty Uncertainty on climate change Uncertainty on its “physical” impacts Uncertainty on social- economic evaluation

21. 20 Global Warming: Key Features/3 GHGs emissions: externality + “public bad” No super-national enforcing authority exists Countries are different Environmental effectiveness => “large” participation Free-riding incentive Agreement based on “voluntary” participation => Benefits > Costs to participants Uneven distribution of costs and gains among would-be participants

22. 21 Putting the Policy in Context: ”IPCC AR4 WGIII” SHORT TERM ACTION In 2030 macro-economic costs for multi-gas mitigation, consistent with emissions trajectories towards stabilization between 445 and 710 ppm CO2-eq, estimated at between a 3% decrease of global GDP and a small increase, compared to the baseline. However, regional costs may differ significantly from global averages LONG TERM ACTION In order to stabilize GHGs concentrations, emissions would need to peak and decline thereafter. The lower the stabilization level, the more quickly this peak and decline would need to occur. Mitigation efforts over the next two to three decades will have a large impact on opportunities to achieve lower stabilization levels

23. 22 Putting the Policy in Context: ”IPCC AR4 WGIII” Costs in 2030 for Different Stabilization Trajectories Estimated Costs and Potential for Mitigation

24. 23 What should we do: 2) According to the IPCC WG 3 With current climate change mitigation policies and related sustainable development practices, global GHG emissions will continue to grow over the next few decades Both bottom-up and top-down studies indicate that there is substantial economic potential for the mitigation of global GHG emissions over the coming decades, that could offset the projected growth of global emissions or reduce emissions below current levels

25. 24 Summarising:  Scientific research emphasises need for action  Support from the Precautionary Principle  Complex issue and economic characteristics highlight difficulty to cope with climate change  International cooperation: International environmental agreements  Need for voluntary initiatives - the role of the actors involved: consumers, business, governments

26. 25 Sharing the Burden Effectiveness Environment should be better off with than without the policy Efficiency The policy should achieve its targets at the minimum cost possible Equity Costs should be shared “evenly” Supposing we know the true value of the environment...

27. 26 Sharing the Burden: the Kyoto Answer/1 Binding Emission Reduction Targets for industrialised (Annex I) countries: 5.2% overall reduction of greenhouse gas emissions compared to their 1990 levels between 2008-2012. Effectiveness Flexibility/Cost Efficiency Equity/Responsibility 55% Clause At least 55 Parties to the Convention, representing at least 55% of 1990 carbon dioxide emissions of AnnexI Parties, must have ratified. No emission reduction requirements for developing countries Where: ET, JI, CDMWhen: 2008-2012

28. 27 Sharing the Burden: the Kyoto Answer/2 2001 USA + Australia withdrawal Notwithstanding flexibility the agreement is perceived as excessively costly = non profitable. Requiring “meaningful participation” of LDCs = requiring a transfer from LDCs. Non acceptable by LDCs 2004 Russia ratification. KP into force 16 Feb. 2005 Required reduction low and possibility to sell hot-air => agreement very profitable + no incentive to free ride 2002 EU, Japan, Canada ratification Possibility to buy hot air lowers costs. Strong use of flex. mech.s Developing Countries still to accept binding targets Effectiveness seriously threatened

29. 28 EU and Kyoto … emissions must go to level 80 for Kyoto….  EU emissions: historical trend (source: EEA)

30. 29 Kyoto Gap Kyoto Gap (source: Point Carbon, 19 June 2006)

31. 30 Sharing the Burden: the European Recipe/1  The main recipe of the European C-E policy: “20-20-20” by 2020 (magic numbers)  As for CO2 emissions: −20% unilateral reduction for the whole of EU27 by 2020 relative to 1990 levels –30% reduction for the whole of EU27 by 2020 relative to 1990 levels provided that the other DCs do the same and fast growing LDCs participate according to their capacity −60% to 80% reduction for the whole of DCs by 2050 relative to 1990 levels  As for the rest: −20% minimum share of renewable energy by 2020 (of which: 10% biofuels) −20% increase in energy efficiency by 2020

32. 31 Sharing the Burden: An Assessment Burden Sharing: while the discussion goes on…one preliminary study

33. 32 Summarising:  Scientific research emphasises need for action  Support from the Precautionary Principle  Complex issue and economic characteristics highlight difficulty to cope with climate change  International cooperation: International environmental agreements  Need for voluntary initiatives - the role of the actors involved: consumers, business, governments

34. 33 The Role of Actors  The Role of Individuals  Energy Saving  Production of Waste  Wise Shopping  Sensible Investors – Shareholders impose an environmental discipline on corporations

35. 34 Summarising:  Dasgupta, Laplante, Wang, and Wheeler (2002) argue that higher income and education empower local communities to enforce higher environmental standards. It should also be noted that in developed countries pressure for environmental protection created by market agents is likely to be stronger. Thus, for instance, banks may refuse credit if worried about environmental liability; consumers may avoid products of firms known to be heavy polluters.  Evidence is building up showing, for instance, that multinationals are sensitive and positively react to the close scrutiny from consumers and environmental organizations (Dowell, Hart, and Yeung, 2000).  Finally, investors appear to play an important role in encouraging especially quoted companies to adopt clean production processes (Konar and Cohen, 1997; Lanoie, Laplante, and Roy, 1998). Similar effects of environmental news on stock prices have been identified in developing countries such as Argentina, Chile, Mexico, and the Philippines (Dasgupta, Laplante, and Mamigi, 2001).  By the same token, it is observed that low income communities frequently penalize dangeorus pollutants even when formal regulation is weak or absent. Evidence from Asia and Latin America documents that neighboring communities can strongly influence factories’ environmental performance (Pargal and Wheeler, 1996; Hettige, Huq, Pargal, and Wheeler, 1996). Thus, the role of regulation is important in low income countries, not only in rich ones.

36. 35 The Role of Actors  The Role of Governments  Pledge to reduce emissions – Demand for federal regulations  The Case of U.S. States: RGGI, WEI (California, Arizona, New Mexico, Oregon, Washington, Utah, Manotiba, British Columbia)  The Case of EU Member States (“20-20-20”)

37. 36 The Role of Actors  The Role of Business  Scientific Studies  Environmental Dumping/Pollution Haven/Race to the Bottom  Porter Hypothesis (implications for EU ETS)  Regulation and Competitiveness  Current initiatives  UN Global Compact  WBCSD World Business Council for Sustainable Development  Greening of business (The Economist May 31st, June 8th, 2007)

38. 37 The Role of Actors  The Role of Business  Demand for Government Regulation  Inevitability of CC  Need for certainty framework for planning capital investment and R&D efforts  Need to keep fossil fuels prices “high” to go green  Counting on fiscal incentives  Profit opportunities: financial markets, energy markets (spillovers on society from employment creation and inventive activity)

39. 38 The Role of Actors  The Role of Business  However: not all initiatives, while certainly profit-driven, are genuinely environment- friendly.  The case of biofuels  Governments, NGOs, Consumer associations, public opinion has to watch

40. 39 References  Dasgupta, S., B. Laplante, H. Wang, and D. Wheeler (2002), “Confronting the Environmental Kuznets Curve”, Journal of Economic Perspectives, 16, 147-168.  Dowell, G., S. Hart, and B. Yeung (2000), “Do Corporate Global Environmental Standards Create Dasgupta, S., B. Laplante, N. Mamigi (2001), “Pollution and Capital Markets in Developing Countries”, Journal of Environmental Economics and Management, 42, 310-335.  or Destroy Market Value?”, Management Science, 46,1059-1074.  Hettige, H., M. Huq, S. Pargal, and D. Wheeler (1996), “Determinants of Pollution Abatement in Developing Countries: Evidence from South and Southeast Asia”, World Development, 24, 1891- 1904.  Konar, S. and M. Cohen (1997), “Information as Regulation: The Effect of Community Right to Know Laws on Toxic Emissions”, Journal of Environmental Economics and Management, 32, 109-124.  Lanoie, P., B. Laplante, and M. Roy (1998), “Can Capital Markets Create Incentive for Pollution Control?”, Ecological Economics, 26, 31-41.  Pargal, S. and D. Wheeler (1996), “Informal Regulation of Industrial Pollution in Developing Countries: Evidence from Indonesia”, Journal of Political Economy, 104, 1314-1327.