Economics of Global Warming

 

The economics of global warming refers to the projected size and distribution of the economic costs and benefits of global warming, and to the economic impacts of actions aimed at the mitigation of global warming. Estimates come from a variety of sources, including integrated assessment models, which seek to combine socio-economic and biophysical assessments of climate change.

At an Intergovernmental Panel on Climate Change (IPCC) conference in April 2007, delegates from 120 nations discussed the specific economic and societal costs of mitigating global warming, and eventually approved the IPCC Fourth Assessment Report, which indicates general consensus that benefits of mitigation are worth the mitigation costs.

Economic impacts of global warming

Main article: Effects of global warming

Many estimates of aggregate net economic costs of projected damages from climate change across the globe are now available. These are often expressed in terms of the social cost of carbon (SCC), the aggregate of future net benefits and costs, due to global warming from carbon dioxide emissions, that are discounted to the present. Peer-reviewed estimates of the SCC for 2005 have an average value of US$43 per tonne of carbon (tC) (i.e., US$12 per tonne of carbon dioxide, tCO2) but the range around this mean is large. For example, in a survey of 100 estimates, the values ran from US$-10 per tonne of carbon (US$-3 per tonne of carbon dioxide) up to US$350/tC (US$95 per tonne of carbon dioxide.)

In a 2004 comment on the economic effect of global warming in Copenhagen Consensus, Professor Robert O. Mendelsohn of Yale School of Forestry and Environmental Studies, stated that

"A series of studies on the impacts of climate change have systematically shown that the older literature overestimated climate damages by failing to allow for adaptation and for climate benefits (see Fankhauser et al 1997; Mendelsohn and Newmann 1999; Tol 1999; Mendelsohn et al 2000; Mendelsohn 2001;Maddison 2001; Tol 2002; Sohngen et al 2002; Pearce 2003; Mendelsohn and Williams 2004). These new studies imply that impacts depend heavily upon initial temperatures (latitude). Countries in the polar region are likely to receive large benefits from warming, countries in the mid-latitudes will at first benefit and only begin to be harmed if temperatures rise above 2.5C (Mendelsohn et al 2000). Only countries in the tropical and subtropical regions are likely to be harmed immediately by warming and be subject to the magnitudes of impacts first thought likely (Mendelsohn et al 2000). Summing these regional impacts across the globe implies that warming benefits and damages will likely offset each other until warming passes 2.5C and even then it will be far smaller on net than originally thought (Mendelsohn and Williams 2004)."

McKibbin and Wilcoxen (2002) cite the United Nations IPCC as concluding with 33 to 67 percent confidence that the aggregate market sector effect of a small increase in global temperatures could be "plus or minus a few percent of world GDP". Developed countries are more likely to experience positive effects and developing countries are more likely to experience negative effects. Larger temperature rises would be more adverse across the board. McKibbin and Wilcoxen do not endorse GDP as a welfare measure.

The Stern Review, a 2006 report  by the former Chief Economist and Senior Vice-President of the World Bank Nicholas Stern, predicts that climate change will have a serious impact on economic growth without mitigation.  The report suggests that an investment of one percent of global GDP is required to mitigate the effects of climate change, with failure to do so risking a recession worth up to twenty percent of global GDP. The Stern Review has been criticized by some economists, saying that Stern did not consider costs past 2200, that he used an incorrect discount rate in his calculations, and that stopping or significantly slowing climate change will require deep emission cuts everywhere. Other economists have supported Stern's approach  or argued that Stern's estimates are reasonable, even if the method by which he reached them is open to criticism.

Effects on agriculture

Main article: Global warming and agriculture

For some time it was hoped that a positive effect of global warming would be increased agricultural yields, because of the role of carbon dioxide in photosynthesis, especially in preventing photorespiration, which is responsible for significant destruction of several crops. In Iceland, rising temperatures have made possible the widespread sowing of barley, which was untenable twenty years ago. Some of the warming is due to a local (possibly temporary) effect via ocean currents from the Caribbean, which has also affected fish stocks .

While local benefits may be felt in some regions (such as Siberia), recent evidence is that global yields will be negatively affected. "Rising atmospheric temperatures, longer droughts and side-effects of both, such as higher levels of ground-level ozone gas, are likely to bring about a substantial reduction in crop yields in the coming decades, large-scale experiments have shown" (The Independent, April 27, 2005, "Climate change poses threat to food supply, scientists say" - report on this event).

The region likely to be worst affected is Africa, both because its geography makes it particularly vulnerable, and because seventy per cent of the population rely on rain-fed agriculture for their livelihoods. Tanzania's official report on climate change suggests that the areas that usually get two rainfalls in the year will probably get more, and those that get only one rainy season will get far less. The net result is expected to be that 33% less maize—the country's staple crop—will be grown .

Insurance

An industry very directly affected by the risks is the insurance industry; the number of major natural disasters has trebled since the 1960s, and insured losses increased fifteen fold in real terms (adjusted for inflation).[17] According to one study, 35–40% of the worst catastrophes have been climate change related (ERM, 2002). Over the past three decades, the proportion of the global population affected by weather-related disasters has doubled in linear trend, rising from roughly 2% in 1975 to 4% in 2001 (ERM, 2002).

According to a 2005 report from the Association of British Insurers, limiting carbon emissions could avoid 80% of the projected additional annual cost of tropical cyclones by the 2080s. A June 2004 report by the Association of British Insurers declared "Climate change is not a remote issue for future generations to deal with. It is, in various forms, here already, impacting on insurers' businesses now." It noted that weather risks for households and property were already increasing by 2-4 % per year due to changing weather, and that claims for storm and flood damages in the UK had doubled to over £6 billion over the period 1998–2003, compared to the previous five years. The results are rising insurance premiums, and the risk that in some areas flood insurance will become unaffordable for some.

Financial institutions, including the world's two largest insurance companies, Munich Re and Swiss Re, warned in a 2002 study that "the increasing frequency of severe climatic events, coupled with social trends" could cost almost US$150 billion each year in the next decade. These costs would, through increased costs related to insurance and disaster relief, burden customers, taxpayers, and industry alike.

In the United States, insurance losses have also greatly increased. According to Choi and Fisher (2003) each 1% increase in annual precipitation could enlarge catastrophe loss by as much as 2.8%. Gross increases are mostly attributed to increased population and property values in vulnerable coastal areas, though there was also an increase in frequency of weather-related events like heavy rainfalls since the 1950s.

Infrastructure

Roads, airport runways, railway lines and pipelines, (including oil pipelines, sewers, water mains etc) may require increased maintenance and renewal as they become subject to greater temperature variation. Regions already adversely affected include areas of permafrost, which are subject to high levels of subsidence, resulting in buckling roads, sunken foundations, and severely cracked runways.

Investment

Venture capitalists and other investors have noted potential opportunities arising from global warming, as massive sums of money are needed for enhanced infrastructure as well as clean technologies that could help reduce emissions of global warming gases. AsJoel Makower, a noted expert on business and the environment, has pointed out, "For all the handwringing over the negative bottom-line impacts of climate change for most companies, a handful of large corporate interests may come out winners, creating potentially profitable opportunities for forward-thinking investors." These include companies investing in clean energy technologies such as solar energy and wind power, but also companies in other sectors: agriculture (to produce biofuels as well as biobased plastics that supplant petroleum-based ones), information technology companies (producing switches, routers, and software intended to create a more efficient, "smart grid", chemical companies (producing "green chemistry" alternatives to petrochemicals), and producers of more efficient motors for aircraft, automobiles, and industrial use.

Migration

Some Pacific Ocean island nations, such as Tuvalu, are concerned about the possibility of an eventual evacuation, as flood defense may become economically inviable for them. Tuvalu already has an ad hoc agreement with New Zealand to allow phased relocation.

In the 1990s a variety of estimates placed the number of environmental refugees at around 25 million. (Environmental refugees are not included in the official definition of refugees, which only includes migrants fleeing persecution.) The Intergovernmental Panel on Climate Change (IPCC), which advises the world’s governments under the auspices of the UN, estimated that 150 million environmental refugees will exist in the year 2050, due mainly to the effects of coastal flooding, shoreline erosion and agricultural disruption (150 million means 1.5% of 2050’s predicted 10 billion world population).

Northwest Passage

Ice thicknesses changes from 1950s to 2050s simulated in one of GFDL's R30 atmosphere-ocean general circulation model experiments

Ice thicknesses changes from 1950s to 2050s simulated in one of GFDL's R30 atmosphere-ocean general circulation model experiments

Melting Arctic ice may open the Northwest Passage in summer, which would cut 5,000 nautical miles (9,000 km) from shipping routes between Europe and Asia. This would be of particular relevance for supertankers which are too big to fit through the Panama Canal and currently have to go around the tip of South America. According to the Canadian Ice Service, the amount of ice in Canada's eastern Arctic Archipelago decreased by 15% between 1969 and 2004.[

While the reduction of summer ice in the Arctic may be a boon to shipping, this same phenomenon threatens the Arctic ecosystem, most notably polar bears which depend on ice floes. Subsistence hunters such as the Inuit peoples will find their livelihoods and cultures increasingly threatened as the ecosystem changes due to global warming.

Development

The combined effects of global warming may impact particularly harshly on people and countries without the resources to mitigate those effects. This may slow economic development and poverty reduction, and make it harder to achieve the Millennium Development Goals.

In October 2004 the Working Group on Climate Change and Development, a coalition of development and environment NGOs, issued a report Up in Smoke on the effects of climate change on development. This report, and the July 2005 report Africa - Up in Smoke? predicted increased hunger and disease due to decreased rainfall and severe weather events, particularly in Africa. These are likely to have severe impacts on development for those affected.

At the same time, in developing countries, the poorest often live on flood plains, because it is the only available space, or fertile agricultural land. These settlements often lack infrastructure such as dykes and early warning systems. Poorer communities also tend to lack the insurance, savings or access to credit needed to recover from disasters.

Environmental

Secondary evidence of global warming — reduced snow cover, rising sea levels, weather changes — provides examples of consequences of global warming that may influence not only human activities but also ecosystems. Increasing global temperature means that ecosystems may change; some species may be forced out of their habitats (possibly to extinction) because of changing conditions, while others may flourish. Few of the terrestrial ecoregions on Earth could expect to be unaffected.

Increasing carbon dioxide may increase ecosystems' productivity to a point. Ecosystems' unpredictable interactions with other aspects of climate change makes the possible environmental impact of this unclear, though. An increase in the total amount of biomass produced may not be necessarily positive: biodiversity can still decrease even though a relatively small number of species are flourishing.

Water scarcity

Positive eustasy (sea-level rise) may contaminate groundwater, affecting drinking water and agriculture in coastal zones. Increased evaporation will reduce the effectiveness of reservoirs. Increased extreme weather means more water falls on hardened ground unable to absorb it, leading to flash floods instead of a replenishment of soil moisture or groundwater levels. In some areas, shrinking glaciers threaten the water supply. The availability of freshwater runoff from mountains for natural systems and human uses may also be impacted.

Higher temperatures will also increase the demand for water for the purposes of cooling and hydration.

In the Sahel, there has been on average a 25% decrease in annual rainfall over the past 30 years.

Health

Direct effects of temperature rise

Rising temperatures have two opposing direct effects on mortality: higher temperatures in winter reduce deaths from cold; higher temperatures in summer increase heat-related deaths.

The distribution of these changes obviously differs. Palutikof et al. calculate that in England and Wales for a 1 °C temperature rise the reduced deaths from cold outweigh the increased deaths from heat, resulting in a reduction in annual average mortality of 7000. However, in the United States, only 1000 people die from the cold each year, while twice that number die from the heat.The 2006 United States heat wave has killed 139 people in California as of 29 July 2006. [Deaths of livestock have not been well-documented.] Fresno, in the central California valley, had six consecutive days of 110 degree-plus Fahrenheit temperatures.

The European heat wave of 2003 killed 22,000–35,000 people, based on normal mortality rates (Schär and Jendritzky, 2004). It can be said with 90% confidence that past human influence on climate was responsible for at least half the risk of the 2003 European summer heat-wave (Stott et al 2004).

Spread of disease

Global warming is expected to extend the favourable zones for vectors conveying infectious disease such as malaria. In poorer countries, this may simply lead to higher incidence of such diseases. In richer countries, where such diseases have been eliminated or kept in check by vaccination, draining swamps and using pesticides, the consequences may be felt more in economic than health terms, if greater spending on preventative measures is required.

Contamination by sector and cost of reducing fossil fuel use

Reducing greenhouse gas emissions depends on lowering consumption of fossil fuels. The key challenge is that nearly all forms of economic activity rely on fossil fuel energy sources, from transportation fuel, electricity from coal-fired plants, industrial furnaces to home and office heating. Reducing emissions can be achieved through gains in efficiency - producing the same benefits with smaller amounts of fossil energy, or by displacing fossil sources with non- or low-emitting sources. Low emission renewable energy sources such as wind, solar and biomass still represent only a small fraction of total energy consumption . The scale of current fossil energy dependence poses a substantial challenge. Gaining energy efficiency typically requires up-front investment, such as adding insulation, replacing energy-inefficient devices and processes, or buying hybrid vehicles. Some such investments can pay for themselves in the savings on energy bills, and the economic case for choosing them depends on the payback period. If an upgrade's payback is better than the risk-free interest rate, economic theory predicts individuals will choose the higher return of making the efficiency investment. If current pricing is not leading to this outcome, the cost of fossil energy is not yet high enough to drive adoption of available efficiency gains.

Advocates of mitigating climate change hold that greenhouse gas emissions must carry a price, so the market can price in the impact of their emission. This could take the form of a carbon tax or of emission caps, with a market created for trading emission permits, much as was done for sulfate emissions blamed for acid rain. Thus the economic impact of avoiding greenhouse gas emissions depends on how much consumption will have to be avoided, and how quickly the economy can incorporate efficiency gains.

Some pundits have criticized such attempts at calculating the costs of mitigating climate change by avoiding fossil fuel consumption, pointing out that the opportunity costs of avoiding consumption are not (and cannot) be calculated and are likely to be more important than the expected benefits.

Many estimates of aggregate net economic costs of damages from climate change across the globe (i.e., the social cost of carbon (SCC), expressed in terms of future net benefits and costs that are discounted to the present) are now available. Peer-reviewed estimates of the SCC for 2005 have an average value of US$43 per tonne of carbon (tC) (i.e., US$12 per tonne of carbon dioxide) but the range around this mean is large, primarily due to the variation in discount rates used. For example, in a survey of 100 estimates, the values ran from US$-10 per tonne of carbon (US$-3 per tonne of carbon dioxide) up to US$350/tC (US$95 per tonne of carbon dioxide.)

 Mitigation and adaptation

Main article: Mitigation of global warming

See also: Adaptation to global warming

The costs of mitigating (reducing) global warming depend on a number of factors. One fundamental factor is the target level of atmospheric carbon dioxide: the lower the level, the sooner action must be taken if increases beyond the target level are to be avoided. The sooner action must be taken, the shorter the period over which costs must be spread, and the higher the absolute costs, as cheaper technologies which might emerge later are not yet available. A common target level (assumed by the United Kingdom) is 550ppm (current levels are around 380ppm, and rising at 2-3ppm per year). Signatories of the Kyoto Protocol committed themselves to targets that require lowering their national greenhouse gas emissions to a specified level relative to their actual 1990 emissions. Many nations set targets to reach a small percentage below 1990 levels, during the target period for Kyoto of 2008-2012.

Another crucial factor in estimating the costs of climate change is the discount rate to apply. Normally a relatively high rate (e.g. 5%-10%) is applied, reflecting the cost of capital. However, where intergenerational issues involve potential irreversibilities such as climate change, a low discount rate (e.g. 1%-4%) may be applied. The difference is dramatic: at 4% (a typical rate for social issues), avoiding $1m worth of climate change damage in 100 years' time is valued at nearly $20,000 today (net present value), whereas at 8% it is valued at less than $500.

Another area for debate is the relationship between technological development and regulatory incentives: if regulation can induce substantial technological change, the costs of mitigation may be much lower.

 Cost estimates

IPCC TAR (Synthesis Report) suggested values of $78bn to $1141bn annual mitigation costs, amounting to 0.2% to 3.5% of current world GDP (which is around $35 trillion), or 0.3% to 4.5% of GDP if borne by the richest nations alone. As economic growth is expected to continue, the percentage would fall. In terms of cost per tonne of carbon emission avoided, the range (for a target of 550ppm) is $18 to $80.

These cost estimates refer to reductions achieved through tradable emissions permits when those permits are given away to polluters. If the reductions are achieved through emission taxes or auctioned permits, and the revenue is used to reduce distortionary taxes, the TAR III synthesis report concludes that "[depending] on the existing tax structure, type of tax cuts, labour market conditions and method of recycling... it is possible that the economic benefits may exceed the costs of mitigation." This is in contrast to McKibbin and Wilcoxen's (2002) report that Nordhaus and Boyer calculated that the present value cost of the Kyoto Protocol would be $800 billion to $1,500 billion if implemented as efficiently as possible. They also cite a study by Tol that estimated the net present value cost to be more than $2.5 trillion.

Azar and Schneider (2002) observe that global output in 1990 was around $20 trillion. If it grew steadily at 2.1 percent per annum it would be just short of $200 trillion by 2100. They thereby make the point that the calculated present value costs of mitigation would look smaller if scaled against 2100 output than if scaled against 1990 output. However, neither comparator is relevant to the question of whether the likely benefits from mitigation exceed the costs.

Lord Peter Levene , chairman of Lloyd's of London, demanded, on 12 April 2007, that the threat of climate change must be an integral part of every company’s risk analysis.

Benefits

McKibbin and Wilcoxen also report that Nordhaus and Boyer calculated that the present value of benefits from mitigation under the Kyoto Protocol would be $120 billion, far below the likely costs. McKibbin and Wilcoxen report that "[o]ther studies reach similar conclusions". They cite Tol as concluding that "the emissions targets agreed in the Kyoto Protocol are irreconcilable with economic rationality."

However, the Stern Review produced much larger benefit estimates, of between 5 per cent and 20 per cent of GDP. The difference reflected a number of factors, the most important of which were the choice of discount rate, the use of welfare weighting for effects on people in poor countries, a greater weight on damage to the natural environment and the use of more up-to-date scientific estimates of likely damage.

In addition to avoiding the costs of the business-as-usual scenario, mitigation actions can bring other benefits, depending on factors such as the technology used. These include, for example, the reduced economic impact from oil supply disruptions and/or price rises, if mitigation reduces oil dependence. This may be of particular benefit to non-oil-exporting developing countries, which suffer greater economic impact from oil price rises.  Co-benefits from ending deforestation include protection of biodiversity, benefits for indigenous people, research and development possibilities, tourism, and some protection from extreme weather events. (Stern Review, page 280)

 Optimal strategies for mitigation

Financial and technological strategies can have a major impact on reaching a particular target atmospheric greenhouse gas concentration.

Carbon tax

Carbon emissions trading

Hybrid systems of permits and user fees (e.g. the Brookings McKibbin-Wilcoxen Blueprint)

Regulation

Reducing the carbon intensity of energy via Nuclear power or Renewable Energy

Energy efficiency

"No regrets" policies - notably reducing fossil fuel subsidies, which is predicted to increase growth whilst reducing CO2 emissions. Article 2 of the Kyoto Protocol specifies a progressive removal of subsidies and reform of taxes as a means of achieving reduction commitments.

McKibbin and Wilcoxen (2002) argue that a combination of long term carbon price signals and short terms caps on economic cost is needed to address both economic efficiency, equity sharing and political feasibility.

The Stern Review recommends adopting a quantative global stabilisation target range for the stock of greenhouse gases as a foundation for policy. It suggests that this target range would be likely to be somewhere between 450-550 ppm CO2-e. It also recommends a carbon price signal through the use of a carbon tax or emissions trading scheme.

Brink et al (2005) showed that the costs of mitigation can be reduced by considering the inter-relationships of different greenhouse gas, and the differential impact that different technological decisions may have on their emissions.

Cost distribution

The costs and benefits of global warming are distributed quite unequally.

low-lying countries' risk of floods

many countries subject to increased drought are poor African countries

ability of poor countries to mitigate / adapt (margin)

GW increases variability of weather, which implies greater capital requirements for water storage systems, flood defenses, etc as well as individual requirements to cope with wider variation in weather patterns

The costs of mitigation may also be distributed unequally, both within and between countries. Wier et al (2005) showed that carbon taxes, particularly direct taxes on households, are regressive (more so than VAT), suggesting that in order to maintain social acceptance the regressive effect needs to be compensated for either within the environmental tax structure, or in other parts of the tax system. Indirect taxes (on business) are less regressive, and petrol taxes are found to be progressive.

Inter-relationships

Between countries

Bastianoni et al (2004) note the differences between methodologies for assigning responsibility for greenhouse gas emissions, which include the geographical approach, based on the IPCC guidelines for GHG inventory; the consumer responsibility approach, based on the Ecological Footprint methodology; and the Carbon Emission Added (CEA) approach, which resembles the accounting of a Value Added Tax. Different methodologies can produce quite different results in terms of responsibility for emissions, with consequent impact on policy.

Gradual change vs climate surprises

Baranzini et al (2003) conclude that "(i) gradual, continuous uncertainty in the global warming process is likely to delay the adoption of abatement policies as found in previous studies, with respect to the standard CBA; however (ii) the possibility of climate catastrophes accelerates the implementation of these policies as their net discounted benefits increase significantly."

 

 

   








 
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