[GreenYes] doing nothing to mitigate climate change will cost us at least five times as muc

[RicAnthony@no.address]

The Economics of Climate Change 
The Stern Report commissioned by the UK Chancellor of the Exchequer Gordon  
Brown shows that doing nothing to mitigate climate change will cost us at least 
 five times as much as if we start to act now, but will any government take 
heed?  _Prof. Peter Saunders_ (http://www.i-sis.org.uk/contact.php)   
A _fully  referenced version_ 
(http://www.i-sis.org.uk/full/The_Economics_of_Climate_ChangeFull.php)  of this article is posted on ISIS members' website. 
_Details here _ (http://www.i-sis.org.uk/membership.php)  
Almost everyone now accepts that climate change is already happening, that it 
 is going to get worse and that the main cause is the carbon dioxide and 
other  greenhouse gases we have been spewing into the atmosphere in increasing 
amounts  since the Industrial Revolution [1] ( _Global Warming Is Happening _ 
(http://www.i-sis.org.uk/GlobalWarming2.php) , SiS 31). More importantly, almost 
everyone agrees that we really  must start to reduce greenhouse gas emissions 
immediately [2] ( _Which Energy? _ (http://www.i-sis.org.uk/which_energy.php) 
).  
. There are many ways to cut emissions. Some are comparatively cheap and can  
be done quickly once we decide to go ahead, such as insulating our houses and 
 not cutting down the rain forests. Others are expensive, or will take a long 
 time to put in place, or will require changes in the way we do things.  
Governments will have to be convinced that these measures are necessary and  
cost-effective before they adopt them as policy. Furthermore, because climate  
change is by its very nature a global problem, there will have to be  
international agreement about what should be done and who should pay for it,  even though 
individual countries, or individual states in the USA, can make a  start on 
their own. So we need a clear idea of what the proposed measures will  cost and 
what they will accomplish.  
In July 2005, the UK Chancellor of the Exchequer, Gordon Brown, commissioned  
Sir Nicholas Stern, an economist who was Senior Vice-President of the World 
Bank  from 2000 to 2003, to undertake a review into the economics of climate 
change .  
Sir Nicholas and his panel have now produced a document several hundred pages 
 long that goes into all aspects of the problem: scientific, economic and  
political [3]. It is an invaluable resource for anyone interested in climate  
change. An immense amount of data has been assembled together. The analysis and  
predictions, and recommendations that follow, are the most authoritative we 
are  likely to have for some time.  
The Report contains far too much to summarise, and should be read in its  
entirety. Its main message, however, is stated clearly and succinctly in the  
five key questions the panel set themselves when they began (Box 1) and the  
conclusions they reached at the end of their work (Box 2). Climate change is  
real, and whatever we do now, it is going to get worse, as the effects of past  
emissions of greenhouse gases work through the system. But if we act decisively  
and start immediately, we can keep the consequences to well within what we 
can  live with, and at a price we can afford. If we do nothing, or if we delay 
too  long, then not only will the costs rise sharply, the change may be very 
large  and irreversible and the damage very great indeed.      
Box 1  
The five key questions addressed in the Stern Report 
 
    *   What is our understanding of the risks of the impacts of climate  
change, their costs, and on whom they fall?  
    *   What are the options for reducing greenhouse-gas emissions, and what  
do they cost? What does this mean for the economics of the choice of  paths 
to stabilisation for the world? What are the economic  opportunities generated 
by action on reducing emissions and adopting new  technologies?  
    *   For mitigation of climate change, what kind of incentive structures  
and policies will be most effective, efficient and equitable? What are  the 
implications for the public finances?  
    *   For adaptation, what approaches are appropriate and how should they  
be financed?  
    *   How can approaches to both mitigation and adaptation work at an  
international level? 



Box 2  
The conclusions of the Stern Report 
 
    *   There is still time to avoid the worst impacts of climate change, if  
we take strong action now.  
    *   Climate change could have very serious impacts on growth and  
development.  
    *   The costs of stabilizing the climate are significant but manageable;  
delay would be dangerous and much more costly.  
    *   Action on climate change is required across all countries, and it  
need not cap the aspirations for growth of rich or poor countries.  
    *   A range of options exists to cut emissions; strong deliberate policy  
action is required to motivate their take-up.  
    *   Climate change demands an international response, based on a shared  
understanding of long-term goals and agreement on frameworks for action.  


We need to set the target and work towards it now 
The key  recommendation of the Report is that we should aim to stabilise the  
concentration of greenhouse gases (see Box 3) in the atmosphere in the range  
450-550ppm. This is higher than the present level of 430ppm, which is in turn 
 higher than the level of only 228ppm before the Industrial Revolution. For 
that  to happen, emissions must peak within the next 10 to 20 years and then 
fall at a  rate of 2 percent a year. By 2050, they must be about a quarter less 
than they  are now. What is more, because the world economy is expected to 
expand, the rate  per unit of GDP will have to be much lower, perhaps only a 
quarter of the  current level.      
Box 3  
The Greenhouse Effect and CO2e 

A greenhouse or a conservatory is generally considerably  warmer than its 
surroundings, even if it is not heated. This is because  the glass allows the 
radiation from the sun to pass through with very  little loss of energy, but at 
the same time it prevents most of the heat  from escaping  
The Earth's atmosphere acts in a similar way, allowing more  energy to enter 
in the form of solar radiation than can escape as heat. It  also turns out 
that if we increase the concentration of certain gases in  the atmosphere, then 
the Earth retains more heat, just as a greenhouse  does if you install 
double-glazing. The most important of these gases are  carbon dioxide, methane, 
nitrous oxide, sulphur hexafluoride and  hydrofluorocarbons.  
The concentration of the greenhouse gases is usually  expressed in parts per 
million of carbon dioxide equivalent 
(ppm  CO2e), which means the concentration of CO2 that  would produce the 
same greenhouse effect as the actual mixture that is  observed. For example, as 
methane has a global warming potential 23 times  that of CO 2 , 1 ppm methane 
counts as 23 ppm CO2e.  Even though methane is a more powerful greenhouse gas, 
carbon dioxide is  used as the reference because there is so much more of it 
in the  atmosphere. In 2005 about 77 percent of the CO 2e emissions was  CO2 
and about 14 percent methane.  
For the same reason, annual emissions are generally measured  in gigatonnes 
(billions of tonnes) of carbon dioxide equivalent per  year(GtCO2e/y). The 
global greenhouse gas emissions in 2000  were 42 GtCO 2e.  
The panel concluded that to allow the level to rise above 550ppm  CO2e would 
substantially increase the risk of very severe impacts  without much reduction 
in the cost of mitigation. To aim for a lower target  would be very 
expensive, and besides it may already be too late.  
Furthermore, unless we are prepared to see the concentration of greenhouse  
gases rise indefinitely, with all the consequences both known and unknown that  
would entail, we must sooner or later reduce our emissions to below the 
Earth's  capacity to remove greenhouse gases from the atmosphere. This is only 5 
GtCO  2e/y, about an eighth of the present rate. The longer we delay, the  
higher the level at which the concentration will stabilise and the more the  
climate will change; and the measures we take will have to be much more  drastic 
than if we start right now.  
Net benefit of $2.5 trillion 
The panel estimate that by 2050 the annual cost of stabilisation at 550pm  
CO2e is likely to be no more than 1 percent of global GDP, i.e.  roughly US$1 
trillion. They expect it should remain much the same after that,  though that 
will naturally depend on what sorts of new technologies are  developed. Over the 
period 1965-99 the annual growth rate in global GDP was over  3 per cent, so 
they expect that diverting 1 per cent into mitigating the effects  of climate 
change should only slow the growth of the world economy, not reverse  it.  
In contrast, on the "Business as Usual" (BAU) path, a conservative estimate  
of the loss to global world output by the end of the century would be 5 
percent  of global GDP. The panel conclude that the net benefit of action, i.e. the  
excess of benefits over costs, would be of the order of $2.5 trillion 
(present  value) and that figure will increase in time. This shows what a good 
investment  we will be making.  
There is, of course, more to life than economics and GDP , and there is  
always a danger in this sort of modelling that we will ignore many of the things  
that matter the most. One practice is to assign monetary values to some of 
these  things, but this is problematic at best and raises all sorts of moral 
issues. As  the Report states, "A toll in terms of lives lost gains little in 
eloquence when  it is converted into dollars; but it loses something, from an 
ethical  perspective, by distancing us from the human cost of climate change."  
The panel did investigate the cost of including other effects on the quality  
of life by making conservative estimates of the " non-market impact s" , 
i.e.,  direct impacts on the environment and human health, and found it raised the 
ir  estimate from 5 percent of global GDP to 11 percent . Even allowing for 
all the  uncertainty ? one should rather say especially allowing for all the  
uncertainty ? that makes the 1 percent cost of mitigation a real bargain.  
The social cost of carbon 
You might think that if the cost of reducing greenhouse gas emissions is so  
much less than the cost of doing nothing, the operation of the market should  
solve the problem for us more or less automatically.  
It's not that simple . Markets not very good at looking several years ahead,  
and carbon emissions, like other kinds of pollution, are what economists call 
an  'externality', a cost not borne by the people who benefit from the 
activity that  causes it.  
When we use fossil fuels, we pay for the cost of getting the fuel out of the  
ground and bringing it to where we want it and in a form we can use it. We do 
 not, however, pay for our contribution to global warming. We leave that to  
everyone else, including the vast majority of the world's population who use 
far  less fossil fuel than we do. That amounts to a substantial subsidy for 
fossil  fuel. In considering the economics of climate change we need to know how 
big  that subsidy is, and the measure commonly used is the 'social cost' of 
carbon,  the amount of future damage that will be caused by the emission of a 
tonne of  carbon dioxide equivalent today.  
The social cost of a tonne of emissions depends on our estimate of damage  
that will occur many years from now. Over and above the usual problems of making 
 predictions about the distant future, this depends on the level at which the 
 greenhouse gases are stabilised, because the higher the level, the more 
damage  an additional tonne will cause. And that in turn depends on what measures, 
if  any, we have put in place to mitigate climate change.  
The result is that estimates of the social cost of carbon can vary  
considerably. The Report does not arrive at a firm figure, but on the basis of  what 
the panel describes as preliminary work, they estimate that if we aim for  the 
recommended target of no more than 550 ppm CO 2e, the social cost  of carbon 
would start in the region of $25-30 per tonne, increasing in time as  the 
concentration of greenhouse gases increases and, with it, the effect of  adding one 
more tonne. The figure of about $25 per tonne is already higher than  some 
other estimates, as the latest scientific evidence warns us that global  warming 
will be greater than was previously thought.  
In contrast, if the world were to stay on the BAU path, the Report estimates  
that the social cost would be about three times as much.  
The social cost of carbon is not the same as the price at which carbon  
emissions are likely to be traded, although over time the two are likely to  
converge. It is an important figure to know when we are discussing policy, but  we 
cannot solve the problem simply by taxing every activity by the social cost  of 
the emissions it produces.  
For example, using the figures given in the Report, the social cost of a  
gallon of petrol works out to be 31 cents. Yet we know from experience that a  
rise as small as that would have very little effect on the consumption of  
petrol. Road transport is a prime example of how we can be so locked into a  
technology that market forces cannot bring about the necessary changes. Stern  
suggests that petrol and diesel should be included in emissions trading schemes.  
This would go some way towards limiting the total fuel consumption because the  
more petrol was used the more the cost would rise, but it is highly unlikely 
to  be enough to deter people from using fossil fuels.  
Curbing emissions 
An obvious first step in reducing our greenhouse gas emissions is to know  
where they come from. In 2000 the total global emissions amounted to 42  GtCO2e 
and the proportions arising out of different human activities  are shown in 
Figure 1, taken from the Stern Report.  

Figure 1. Global carbon emissions by source in 2000  
Note that the proportions for Industry and for Buildings represent only  
direct emissions, e.g., from industrial processes or fossil fuels used for  
heating; they do not include those activities' shares of the emissions from  
generating the power that they use. Aviation accounts for about 1.6 percent of  
emissions but has a greater impact on global warming because the gases are  emitted 
at high altitude. It is estimated that if we follow the BAU path, by  2050 
aviation will account for only 2.5 percent of global emissions but 5  percent of 
the total warming effect.  
A striking feature of the pie chart is that a fifth of all greenhouse gas  
emissions come from changes in land use. Almost all of that is associated with  
deforestation. The report points out that putting a stop to deforestation 
could  reduce emissions by about 8 GtCO 2 e/y at a cost of less than  $5/tCO2e, 
possibly as little as $1/tCO2e. Large scale  planting of new forests could save 
an additional 1 GtCO2e/y for  between $5/tCO2e and $15/tCO 2e. Both are well 
below the  social cost of carbon.  
Further savings could be made at relatively low cost by changing tilling  
practices, by producing biogas from animal and other organic wastes and by  
reducing the wastage in the production of fossil fuels and other industrial  
processes.  
The total savings could be of the order of 5 GtCO2e/y.  
Saving energy 
On the energy side, the first step is to improve energy efficiency. Stern  
estimates this could reduce carbon emissions by up to 16 GtCO2e/y by  2050. He 
also considers that fossil fuels will remain a major source of energy  and that 
carbon capture and storage (CCS) may have a key role to play. If all  projec
ted fossil fuel plants used CCS, it could save 17 GtCO 2e/year  at a cost of 
between $19/tCO2e and $49/tCO2e. He  acknowledges, however, that there remain 
many uncertainties about cost,  practicability and the effect on the 
environment.  
Stern discusses in some detail the many other sources of energy that are  
being developed: on - and offshore wind, wave and tidal, solar (both thermal and  
photovoltaic)Stern discusses in some detail the many other sources of energy 
that are  being developed: on - and offshore wind, wave and tidal, solar (both 
thermal and  photovoltaic)<WBR>, the use of hydrogen for heat and transport, 
nuclear (if the  waste disposal and proliferation issues are dealt with), 
hydroelectric, and fuel  from energy crops (though not if these compete with food 
crops or forests for  land and water). He points out that some of these, while 
 
Stern also reminds us that many of the measures necessary for mitigating  
climate change have other benefits as well. Energy efficiency, for example,  
reduces costs and contributes to energy security. In Europe, the measures  
required to limit climate change to 2°C would lead to savings of ?10 billion per  
year on existing air pollution control and ?16-46 billion on avoided health  
costs. Moreover, if we are concerned about the loss to the economy if high  
emissions activities are curtailed, we must not ignore the gains from the new  
industries that will be developing. Even in the USA, where the greatest fears  have 
been expressed about the economic consequences of action against climate  
change, clean technology had already become the third largest category of  
venture capital investment by the second quarter of 2006.  
Policies 
If we could agree about the measures we should take , t hat still wouldn't  
tell us how we can make them happen. Governments have direct control over only 
a  comparatively small fraction of what goes on in a country. What they can do 
is  to set targets, pass laws, impose regulations, raise or lower taxes and 
give or  withdraw subsidies, and it is not easy to devise measure s t hat will 
bring  about significant reductions in emissions without doing too much 
collateral  damage.  
This is made even harder by the global nature of climate change. Any single  
government is naturally reluctant to take unpopular measures that the other  
governments are not taking, and especially to put its own industrialists and  
farmers at a serious competitive disadvantage. Stern points out, however, that  
the effect is less than is often supposed. For many industries, the extra 
costs  would not be large enough to warrant a move, especially if they can reduce 
their  emissions by using new technology, which often has other advantages as 
well. And  on the whole, the industries that produce very large emissions are 
not easily  transferable from country to country.  
Stern considers that carbon pricing and emissions trading will be very  
important in reducing emissions, but points to a number of difficulties that  have 
to be overcome. For example, if the initial allocations are not free, or if  
the total to be allocated is significantly less than the current level, the  
transition may be very difficult as firms will be faced with a sudden large cost 
 that they have no time to mitigate. On the other hand, if the initial  
allocations are free and do correspond to the current level, as has been the  case 
in the EU, there is very little incentive for anyone to cut back. What is  
more, new firms, who will have to purchase allocations for their emissions, will  
be at a competitive disadvantage, yet it is precisely these that we want to  
encourage because they are more likely to be using new, low emissions  
technology. If we try to help them by adopting a "use it or lose it" policy to  stop 
older firms hoarding allocations, the result may simply be that old,  
inefficient plant is kept in operation at the expense of better technology.  
New technology is seldom as cost efficient when new as it will become after a 
 few years. Think of how much more you get for your money when you buy a PC 
now  compared with twenty years ago. Unfortunately, as Stern points out, while  
computers were able to establish a market and then develop, the nature of 
many  important sectors such as power generation makes this unlikely to happen 
without  assistance. The old technology also has the advantage of an existing  
infrastructure that has been designed to suit it. For example, large 
investments  have gone into systems for moving electricity, gas and goods (including 
food)  over considerable distances. This can make it harder for local production 
to  grow to the point where economies of scale make it cheaper as well as more 
 carbon efficient.  
Stern recommends that "deployment incentives" for low emission technologies  
should be increased two to five times globally from their present levels of  
around $34 billion. He also recommends that global public energy research and  
development funding should be doubled to about $20 billion.  
Adaptation 
It is already too late to stop climate change completely, and Stern  
recommends that we should aim to stabilise the greenhouse gas concentration at  550ppm 
CO2 e. Even if we achieve that, however, it is expected that  the mean 
temperature on the Earth will rise by at least 2°C. That will have  serious enough 
effects. For example, the sea level will rise, many areas will  have a greatly 
reduced supply of water, and there will be many more extreme  weather events 
such as hurricanes.  
No matter what we do to mitigate climate change, we will also have to devote  
resources to adapting to the change that does occur. We must also expect a 
loss  in agricultural productivity that will get worse as the temperature 
increases.  What is more, because most of the areas that will suffer the greatest 
are in the  developing world, there will have to be international cooperation, 
with the rich  countries making substantial contributions.  
Conclusion 
The main message of the Stern Report is that we can do quite a lot about  
climate change. It's too late to stop it altogether but we can limit global  
warming to no more than about 2°C and we can cope with the damage that will  
cause. What is more, we can do both at a price we can afford, say 1 percent of  the 
world's current total consumption.  
But we have no time to lose. The longer we put it off, the harder it will be, 
 the more it will cost, the less it will achieve, and the higher the risk 
that  that the effect will be both irreversible and so great that we will not be 
able  to deal with the consequences in any reasonable way.  
Keeping climate change within bounds is going to require governments to act  
quickly and decisively. It will also require international cooperation on an  
unprecedented scale. Countries are going to have to sign up to and abide by  
agreements that will imply considerable changes in the way they do things. The  
rich countries are going to have to pay a bigger share of the costs, 
including a  major contribution to helping the developing countries to adapt to those 
changes  that do take place, but not to the extent that it will have a 
significant effect  on their own economies.  
As for the individual citizen in the developed world, the good news is that  
our own quality of life need not suffer. The estimated 1 percent of GDP will  
mean not that our standard of living will fall but only that it will rise more 
 slowly than if we were ignoring the problem. We'll find ourselves doing less 
of  some things, like flying to faraway countries for the weekend. We'll do 
other  things in different ways: we'll heat water using solar energy and we'll 
probably  go to work on efficient public transport instead of driving alone in 
an SUV on a  crowded road. But on the whole we'll live just as well as if we 
weren't doing  anything about climate change. The difference is that we won't 
be doing it at  the expense of our grandchildren.  
For more options on what we can do, read ISIS' _Which Energy? _ 
(http://www.i-sis.org.uk/which_energy.php) [2] .  
_Ricanthony@no.address (mailto:Ricanthony@no.address) 
RichardAnthonyAssociates.com
San  Diego, California


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