1. Economic Aspects of Climate Change and Climate Policy: Some Controversial Issues
13 June 2007
Rolf Kappel
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2. Structure of the Presentation
(I) Statements from the Executive Summary of the Stern Review
(II) Attribution and Projections of Climate Change
(III) Welfare and Intergenerational and Intragenerational Equity
(IV) Estimated Welfare Losses and Mitigation Costs
(V) An Alternative Approach to Welfare Loss Estimates
(VI) Mitigation Costs and Technological Change
(VII) Changes of the Global Energy System
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3. (I) Statements from the Executive Summary of the Stern Review Costs of BAU
The benefits of strong, early action on climate change outweigh the costs.
In summary, analyses that take into account the full ranges of both impacts and possible outcomes - that is, that 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, of aversion to the 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.
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4. Costs of stabilising GHG-emissions
Stabilising at or below 550ppm CO2e would require global emissions to peak in the next years, and then fall at a rate of at least 1 - 3% per year. By 2050, global emissions would need to be around 25% below current levels. These cuts will have to be made in the context of a world economy in 2050 that may be times larger than today - so emissions per unit of GDP would need to be just one quarter of current levels by 2050.
To stabilise at 450ppm CO2e, without overshooting, global emissions would need to peak in the next 10 years and then fall at more than 5% per year, reaching 70% below current levels by 2050.
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5. Costs and policies of GHG-emission reduction
Achieving these deep cuts in emissions will have a cost. The Review estimates the annual costs of stabilisation at ppm CO2e to be around 1% of GDP by a level that is significant but manageable.
Reducing the expected adverse impacts of climate change is therefore both highly desirable and feasible.
Policy to reduce emissions should be based on three essential elements: carbon pricing, technology policy, and removal of barriers to behavioural change.
Adaptation policy is crucial for dealing with the unavoidable impacts of climate change, but it has been under-emphasised in many countries.
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6. nadel ETH Zürich

7. (II) Attribution and Projections of Climate Change
Asks whether observed
changes are:
consistent with expected responses to forcings
inconsistent with alternative explanations
Temperature changes are “very likely” due to GHG-emissions: p = 90%
evaluated whether observed changes are quantitatively consistent with the expected response to external forcings and inconsistent with alternative physically plausible explanations.
Could also make the point about needing to know the response to RF here.
Figure TS-23
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8. (III) Welfare and Intergenerational and Intragenerational Equity
Rationale of Cost Benefit
Analysis
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9. Fundamental questions of “climate economics”
How much and how fast should the world reduce greenhouse-gas emissions?
How should the world balance the costs of emission reductions against the damages and dangers of climate change?
How should the world decide between mitigation of and adaptation to climate change?
Which instruments should be used to achieve emission reduction goals as efficient as possible?
How should the costs be distributed?
How can an international / global climate policy be implemented against the partial interests of powerful actors on the national and international level?
How can compliance with an international agreement be enforced?
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10. Costs and benefits of climate change and climate policy
The Stern Review has not identified the equilibrium point (or several equilibrium points) between marginal damages of climate change and marginal abatement costs of GHG-emissions.
The Review concludes that total benefits from preventing damages of climate change are substantially higher than total costs of mitigation. Costs of damages that would occur despite mitigation are unknown.
Although the report mentions frequently the importance of adaptation policies and its costs the cost-benefit calculations do not identify optimal combinations of mitigation and adaptation measures.
Delayed mitigation of GHG-emissions would require very high reduction rates later on.
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11. Stern‘s Welfare Function
= Consumption
= Intragenerational Equity
= Pure Rate of Time Preference
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12. Discounting the future: PV = M / (1 + ) t Intergenerational equity
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13. Choice of CRRA-parameter: Implications for intragenerational equity
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14. Comment: Ethical Duality
Both parameters determine the overall investment rate i in a simple Ramsey model:
= Labour Productivity
= Capital Income Share
= Population Growth
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15. Inequality between Rich and Poor
Investment Rate and Ethical Duality: Stern’s Parameter Choice is “Inconsistent”
Intergenerational Inequality
0.1 %
1 %
5 % 2
18 %
16 %
12 % 1
36 %
30 %
0.5
70 %
51 %
24 %
Inequality between Rich and Poor
a = 5 %, n = 1 %
= 30 %
Equality
Inequality
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16. Missing Sensitivity Analyses
Stern’s results, above all estimated damages of climate changed effects and benefits from preventing them early on, are strongly influenced by the choice of the two ethical parameters.
The Stern Review does not include sensitivity analyses with respect to these two parameters. (Richard Tol mentions in a paper that some additional calculations have been added after the Review had been published.)
Sensitivity analyses have been provided (using other models than Stern) by other authors, e.g. Partha Dasgupta, William Nordhaus, Richard Tol.
These sensitivity analyses clarify that Stern’s results are part of a larger set of equally defensible simulation results.
The valuation of damages as well as the suggested timing and the amount of mitigation measures vary substantially.
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17. (IV) Estimated Welfare Losses and Mitigation and Adaptation Costs (Quotations from the Stern Review)
The welfare costs of BAU climate change are very high. Climate change is projected to reduce average global welfare by an amount equivalent to a permanent cut in per-capita consumption of a minimum of 5%.
Table 6.1 presents results in terms of Balanced Growth Equivalents (BGEs), based on defensible values for the utility discount rate (0.1% per annum) and for the elasticity of the marginal utility of consumption (1.0) (see Chapter 2 and its appendix for an explanation and justification).
Climate change will reduce welfare even more if non-market impacts are included, if the climatic response to rising GHG emissions takes account of feedbacks, and if regional costs are weighted using value judgements consistent with those for risk and time. Putting these three factors together would probably increase the cost of climate change to the equivalent of a 20% cut in per-capita consumption, now and forever.
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18. Stern’s most quoted and emphasised cost estimates of
climate change are on the high side.
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19. Impact of Climate Change on Developing Countries
The negative impact of climate change is probably most severe in low income developing countries.
Temperature rise leads to:
decline of agricultural productivity
decline of water availability
decline of the health of people
increase of extreme weather events
increase of sea water level
decline of biodiversity
...
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20. Impact of Climate Change on Developing Countries and Adaptation Measures
The impact of climate change includes a broad range of effects.
The impact exacerbates several existing development constraints, many of them reflecting the (sometimes growing) scarcity of natural resources.
In some scenarios and cases of resource scarcity it is difficult to assess the importance of climate change effect compared to other causes of growing resource scarcity.
In some scenarios the presumed effects are so severe that it seems not very plausible to maintain the assumption that developing countries grow by 4% p.a. over several decades.
Many, but not all, of the adaptation policies consist of policies and measures which are suggested since decades.
Not much is known about the political economy of adaptation policies and the distribution of costs.
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21. at the beginning, which somehow contradicts other estimates.
According to Stern, specific mitigation costs ($ per t CO2) are highest
at the beginning, which somehow contradicts other estimates.
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22. (V) An Alternative Approach to Welfare Loss Estimates
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23. The Alternative Criterion: Preventing very large and possibly irreversible risks
This approach has the advantage that it does not require estimates of monetary costs of damages due to climate change.
Nonetheless, such an approach must deal with other unavoidable uncertainties and value judgements :
Which risks are not acceptable and must be avoided?
What are the monetary costs of mitigation and adaptation, which somehow must be balanced against the risks not taken?
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24. (VI) Mitigation Costs and Technological Change
Emission
Reduction
The Mitigation
Gap
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25. This diagram indicates that negative and low cost
mitigation measures exist that could be implemented early on
(although some of the measures are very time-consuming).
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26. Mitigation Costs and Induced Technological Change How can innovation be promoted and how can the uncertainties of technical and institutional progress be dealt with?

27. (VII) Changing the Global Energy System:
Substantial Reduction of Primary Energy Demand
and Change of Energy Mix Is Required
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28. DOE-
Projection
of Energy
Consumption
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29. Projected
Fuel Mix,
DOE
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