Economic Impacts of Climate Change Emily Massawa Tom Downing Paul Watkiss

Economics of Climate Change Objectives Assess potential impacts and economic costs of climate change: what is at-risk? Scope the cost and benefits of adapting to these effects over time For East Africa, look at the potential and benefits of low carbon growth This presentation is based on the Economics of Climate Change in East Africa study (funded by DFID / DANIDA) which is due for completion by the end of September, 2009, and the UNEP funded AdaptCost study. Both are led by the Stockholm Environment Institute in Oxford, with a wide range of partners and contributors, both international experts and African specialists.

Framing the costs of adaptation Evidence base is weak: climate change impacts are only beginning to be significant beyond current vulnerability and adaptation projects are still at a pilot stage. Several lines of evidence are required to build a robust picture. Case studies of existing projects provide an initial basis. Sectoral investment plans need incremental adjustment for climate resilience. Global assessment including integrated models can be interpreted for Africa and specific countries. However, a large range of estimates is plausible and there is low confidence in estimates at this stage. It is important to stress that there is no single answer--several lines of evidence are required and the lack of experience gives us low confidence. We tend to think in terms of ‘at least this much’ and a range of lower and upper benchmarks for planning rather than a ‘best guess’

Existing climate variability and economics Climate variability already has significant economic costs throughout Africa. In East Africa, periodic floods and droughts cause major macro- economic costs and reduce economic growth. In Kenya, periodic drought and flood years have economic costs equivalent to more than 5 % of GDP, and long-term impacts on growth (World Bank, 2006). Climate change will lead to future economic costs on top of these existing effects. Climate variability - and the periodic floods and droughts that affect the East African region lead to high economic costs. This can be seen in previous drought and flood years, when economic costs of these events have been added up. Several studies, including the World Bank, do this in selected countries (e.g., Kenya). Because these events happen every five years or so, they add up to major macro-economic costs, and they have a long term effect by reducing economic growth (without them, the economy would have been larger) For example, in Kenya, major periodic drought and flood years have been found to have economic costs equivalent to 10 % or more of GDP, and because of regular frequency, have long-term impacts on growth . Ongoing study work indicates similar flood damages occur in Rwanda and Burundi – we are finalising these numbers for the study.

The Economic Costs of Climate Change in Africa will be significant Coastlines and sea level rise. up to 20 million people / year in 2100 flooded Costs of several $billion/year by 2030 Up to $50 billion/year by 2100 (AdaptCost) Energy demand. Rising temperatures and demand for cooling rise of 30% by 2030. Heath burden Rising incidence of health burdens (malaria, other vector borne), heat extremes Increasing extremes Costs of flood and drought years already 5 – 8% of GDP. Extreme events could intensify Agriculture yield reductions up to 50% by 2020 and net crop revenues up to 90% by 2100 Examples of case studies. We are building a data base of such studies, for Africa and for selected countries as part of the weADAPT Adaptation Layer in cooperation with Google. Loss of ecosystem services Effects on forests, corals, wildlife parks, and on tourism and services Water resources People with high water stress, 75-250 million by the 2020s and 350-600 million by the 2050s Source: Watkiss et al SEI WeAdapt Google Earth Platform/ DFID Economics of Climate Change in East Africa / UNEP AdaptCost / EC ClimateCost

Source: AdaptCost / East Africa study based on FUND national model. Costs of impacts in Africa Assessments of economic costs of climate change highly uncertain Aggregated models give ‘indications’ of effects High potential costs for most of Africa, higher than for other world regions This figure shows the results from an integrated assessment model. These models are simplistic, but provide indications of headline economic costs for climate change. This graph shows the level of economic costs by country from climate change – note that it includes market (e.g. agriculture) and non-market (e.g. health) effects. The combined costs are expressed as a portion of GDP, however the non-market costs are not really part of GDP so this metric is not entirely satisfactory. The stronger the colour towards orange and red, the greater the economic costs. These model shows that estimated economic costs in 2030 are generally 1.5 – 3% in East African countries – and for Africa as a whole. Some care must be taken in directly comparing countries, e.g. between Kenya and Tanzania – the model is not really that accurate – though likely north africa will have higher economic costs because it is already hot and dry. The model does not include floods and droughts – and we don’t think it is very accurate for Rwanda – it is really just a way of providing some headline costs for Africa. Note that the costs for Africa are much higher than for other world regions such as Europe or America. Annual Impact from climate change as equivalent % of GDP in Africa in 2030 . Source: AdaptCost / East Africa study based on FUND national model.

Economic Costs for Africa Findings are Climate change will lead to potentially large economic costs in Africa Models indicate could be equivalent to annual loss in GDP of 1.5 - 3% by 2030 These costs are much higher in Africa than other world regions, because of vulnerability and low adaptive capacity Annual economic cost in Africa likely to rise in future years Economic impacts will be unevenly distributed across countries, between sectors and between individuals, communities and regions Summary for the previous slide

Adaptation Adaptation can reduce the economic costs of climate change, but cannot not remove them completely. Number of studies have estimated the costs of adaptation and investment needed for Africa. African Development Bank (2006) estimated $2 to 7 billion / year needed in the short-term in Africa More recent studies indicate higher estimates. There is very little evidence on adaptation and the costs. That hasn’t prevented several groups estimating ‘top down’ (that is, based on little grounded evidence) numbers for Africa. We have used these to intepret costs for Africa and individual countries. Note the point about residual damages – even with adaptation, economic costs of climate change will not be zero – there will still be economic impacts. How to handle the residual impacts is a good question! African negotiators could argue for the costs needed for adaptation funding as well as finance to alleviate the residual impacts of climate change that will occur even if adaptation is funded. At one extreme this might be considered ‘compensation’ while there are mechanisms related to disaster responses, insurance and risk management that could be effective.

Adaptation to do what? Current climate impacts Additional climate change impacts Immediate priorities, institutional capacity Climate resilience in sectoral investment Additional investment to accelerate development to ensure adequate climate resilience Natural resource management, poverty alleviation, disaster risk reduction, major infrastructure Three categories are part of the adaptation cost exercise. The immediate, current climate impacts, pilot projects such as NAPAs, building national and sectoral units, what used to be called enabling conditions--all already agreed in principle and in process but actual delivery of funding has been slow. The additional climate change impacts are the main target for UNFCCC funding, some is the incremental cost of a ‘climate proofing’ a project, more difficult but also essential are information systems, institutional capacity, research and development, and the soft approaches to resilience. There is a clear need as well to accelerate a climate-friendly development path. However, it is difficult to apportion these needs to climate change vs poverty reduction vs disaster risk reduction vs environmental management. Some refer to this as an adaptation deficit, which conveys the sense of a gap in capacity to deliver future adaptation. However, it is impossible to apportion these costs between different funding regimes. 9

Adaptation financing needs for Africa $ Billion per year (2012-2030) This graph is a preliminary estimate of the adaptation investment needed for Africa. This note interprets those results for East Africa. It shows the range of estimates from different sources. Immediate priorities of vulnerability, building capacity (orange box 2) is at least $1 billion per year now. Adding in piloting adaptation, and operational adaptation the needs by 2012 are at least $15 billion for Africa and rising to perhaps $20 billion per year for Africa by 2030 (green box 3). For EAC the costs are $50 – 105 million a year in 2012, rising to $100 – 250 million a year for EAC in 2030. On top of this, there will be a need to climate proof future investment in the region, i.e. to make sure that new investment can cope with future climate change. This increases the costs of this investment, and these additional costs are in the orange box- these numbers are much larger, at least $10 billion per year and possibly twice that. Corresponding costs for EAC are $240 – 830 million a year for the region. Added together, this makes 0.25 – 1 billion / year for EAC. Note some estimates are higher than this – e.g. the 7 billion for Africa is considered conservative by some. If there is a higher Africa number, this will increase the numbers for the EAC respectively, Draft estimates from the AdaptCost project

Estimates of adaptation in Africa Directly related to additional climate change: Immediate (current) adaptation needs are several billion/year. Costs rise for adaptation to future climate change including additional protection of sectoral investment to $10 to $30 billion by 2030. Additional investment is related to development: Current capacity for adaptation, especially in disaster risk reduction, poverty alleviation and natural resource management Social protection and compensation for residual impacts These additional investments to enhance future resilience are difficult to cost but could be a further $10 to 30 billion (possibly more) per year by 2030 AdaptCost range of estimates is therefore Lower benchmark of $25 billion per year for immediate needs (by 2012) Upper benchmark of $60 billion per year by 2030 including accelerated development finance Notes for the previous slide, A final tally would be a minimum of $25 billion per year by 2030. But this could easily be $50 billion per year depending on scenarios of future investment flows, types of adaptation projects that are required and emerging climate impacts. The very high numbers proposed are based on the assumption that accelerated development is required in order to have the capacity to successfully adapt to climate change. These costs are very difficult to estimate, but could be in the range of $10 to 30 billion per year by 2030. Thus, an upper limit for climate adaptation in Africa might be $60 billion per year. A more conservative ‘upper benchmark’ would be $$35 billion per year.

Low Carbon Growth There are existing international financing mechanisms for low carbon projects, but CDM has been difficult to access for Africa Discussion about reforming mechanisms in negotiations New mechanisms likely to emerge include programmatic CDM, and possibly National Appropriate Mitigation Actions (NAMAs) Potential for forestry and REDD Need to ensure they will benefit Africa Link low carbon growth and development This is about mitigation – but wider than that. it has been difficult for Africa to access CDM funds to date: the current project-based approaches place high transaction costs on small countries. There are new mechanisms emerging – programmatic CDM, NAMA, REDD. These need to be targeted to try and enhance benefits to Africa – in terms of ease of access, but also to ensure that they don’t penalise low levels of emissions in Africa, or particular conditions.

Low Carbon Growth Economic and rapid population growth will lead to large increase in energy, transportation and food requirements and GHGs. In Rwanda and Kenya electricity is not the major source of future national emissions – transport & agriculture are most important. Low carbon development pathway could provide significant economic opportunities, strongly in Africa’s self-interest. Failure to do so will ‘lock-in’ future economic growth to high emissions. Reduce opportunities for future low carbon finance. Low carbon growth has co-benefits reducing energy imports, enhancing energy security, improving air quality and health, reducing pressure on natural resources. Also important to highlight that there is a need to look across the economy. Emissions studies to 2030 for Kenya and Rwanda show that electricity generation is a small part of total emissions, and that transport and agricultural emissions are predicted to rise quickly. If this happens, it reduces the potential for national emission reduction credits, and reduce economic benefits to countries. There is a need to target these sectors. There is also lots of self-interest reasons for doing this, in terms of reduced costs, lower fuel imports, lower air pollution, etc.

East Africa Examples These are examples of low carbon projects that are funded or in the process of being funded and implemented across East Africa. One or two are CDM, one or two are voluntary carbon projects.

Concluding issues Economic costs of climate change likely to be high in Africa. Large need for adaptation finance. Entitlement to substantial funds must be assured but effective mechanisms and institutions must be developed. Variety of low carbon funding mechanisms under discussion, but need to enhance benefits and application for Africa. Common negotiations positions are important – for low carbon and adaptation. Need to agree on early next steps, including effort over next 3 - 5 years. An important point here is that there is an entitlement to funds – both for adaptation and residual damages even with adaptation. However, to access funds, there will be a need to build up good and competent capacity – especially for the potentially large funds that might flow. Failure to do this could reduce potential. Also there is a need to try and make sure any new mechanisms will benefit Africa as much as other developing regions – or even more so than other regions – and a common voice is essential. Nairobi declaration is key point. It is useful to start preparing, first mover advantage. However, until the exact mechanisms are known, some caution and flexibility is needed!

Thank you