economics of climate change_intro(2)

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Economics of Climate Change

Costs of action and inaction

Surender Kumar TERI University



Nature of the problem

• GHG emissions – an externality and thus a market failure

• Distinctive features

– long-term

– global

– major uncertainties

– huge scale of possible damages

• Implications for economic analysis

– ethical treatment of values within and betweengenerations

– incentives for global cooperation

– treatment of risk

– non-marginal changes



The process of human-induced

climate change

• Five key links (Stern, 2008):

– from people to emissions

– from emissions to stocks

– from stocks to rising temperature

– from rising temperature to climate change

– from CC to the human impact



Drivers of emissions growth

• The Kaya identity (Kaya, 1990):

CO2 emissions from energy = Population X

(GDP per head) X (energy use/GDP) X

(CO2 emissions/energy use)

Country/Grouping

CO2 emissions

GDP per head

Carbonintensity

Energyintensity

Population

World 1.4 1.9 - 0.1 - 1.7 1.4

Annual growth rates in energy-related CO2 emissions and their

components, 1992-2002 (%)

Source: WRI, 2006



Country Annual growth

(%)USA 1.0

China 4.7

EU 15 -0.3

Indonesia 12.7Brazil 3.1

Russia -2.4

India 3.6

Japan 1.3Germany -1.3

Canada 1.9

Mexico 2.1

Annual growth rate of GHG

emissions (including deforestation)

for major emitters, 1990-2005

Source: WRI, 2009Source: Brohe et al, 2009



Concentration levels and probabilities

of temperature increases

The cost of inaction is the high probability of devastating impacts

resulting from dangerous increases in global temperature

Source: Stern 2008



Projected impacts of climate change

1°C 2°C 5°C4°C3°C

Sea level rise

threatens major cities

Falling crop yields in many areas, particularly developing regionsFoodFood

Water Water

EcosystemsEcosystems

Risk of Abrupt andRisk of Abrupt and

Major IrreversibleMajor Irreversible

ChangesChanges

Global temperature change (relative to pre-industrial)0°C

Falling yields in many

developed regions

Rising number of species face extinction

Increasing risk of dangerous feedbacks and

abrupt, large-scale shifts in the climate system

Significant decreases in water

availability in many areas, including

Mediterranean and Southern Africa

Small mountain glaciers

disappear – water

supplies threatened in

several areas

Extensive Damage

to Coral Reefs

ExtremeExtremeWeather Weather

EventsEvents

Rising intensity of storms, forest fires, droughts, flooding and heat waves

Possible rising yields in

some high latitude regions



The costs of inaction

Types of costs associated with climate change

Source: OECD (2008) Costs of Inaction on Key Environmental Challenges, OECD.



The Modelled Damages from Climate Change with

Increasing Global Temperatures

Source: Stern 2008



-5.3-7.3

-13.8

-4 0

-3 5

-3 0

-2 5

-2 0

-1 5

-1 0

-5

0

2000 2050 2100 2150 2200

%

l o s s i n G D P p e r c

High C l ima te, market im pacts + r isk of catastrophe +

non-marke t impac ts

Base l ine C l im ate, market impa cts + r isk of catastrophe

High C l ima te, market im pacts + r isk of catastrophe

• Essential to take account of risk and uncertainty

• Models do not provide precise forecasts

• Assumptions on discounting, equity, and risk aversion affect results

Mean losses in income per capita from scenarios

of climate change



The Stern Review, 2006

• “…. the costs of inaction could be from 5-

20 percent of GDP… The investment that

takes place in the next 10-20 years will

have a profound effect on the climate inthe second half of this century and the

next.”



BAU emissions and stabilisation trajectories for 450 - 550ppm CO2e

Source: Stern, N et al. (2006) The Stern Review: The Economics of Climate Change,Cambridge University Press, Cambridge. (Figure 8.3)



Source: Stern 2008



The costs of action

• Bottom up energy technology models

– e.g. McKinsey’s Global GHG abatement cost curve for

2030

• Top down economy wide models

– Stern’s estimates



Abatement Cost Curve shows that

• There are many available options; some involvenegative cost.

• Whole range of options and each should beexplored in detail.

• Emission savings from one option will depend onwhat it replaces

• Policy plays important role; bad policy will lead tothe uptake of more expansive options

• Technical progress is important and should bepromoted to widen the options and reduce costs.

• Timing is important; act now.



Cost of Action

• The costs of action to the global economy

would be roughly 1 percent of GDP to

achieve the target of stabilization at 550

ppm CO2e.



Cost of Electricity for Different Technologies



Public Energy R&D Investments as a Share of GDP

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