Transcript 20100527101511001

Costing the Earth: Uncertainty and
Climate Policy
Nafees Meah
Head of Science
May 2010
Climate Change As ‘Hard’ Problem
In Public Policy
 As a public policy issue, climate change is a classic
example of a ‘wicked’ problem
 Notwithstanding the compelling scientific evidence,
it is still contested
 It is the case that there is and will always be
irreducible scientific uncertainty – we cannot do a
controlled experiment on the planet
 Even if there is consensus on the science, that
does not tell us what we ought to do: what are the
trade-offs that the decision-makers need to
consider?
Outline
Summary of the science of climate change
The 2 degree target – AVOID Programme
Key questions in the economics of climate
change
Economic modelling and cost-benefit
analysis
Stern Review and its critics
Bottom up technical/economic models
The task facing the decision maker
Carbon Dioxide Concentrations In The
Atmosphere Since The Beginning Of The
Industrial Revolution
MacKay (2009)
Evidence that CO2 is Man Made
Last decade has been the warmest
since records began
Observed Global Temperature
Changes Not Explained by Natural
Factors Alone
Year to year range of modelled global temperatures
Excluding human influence
Climate models show the observed
warming is only explained by including
human effects through GHG emissions
By 2100 Global Temperature is
likely to be1.8 to 4oC Above 1990
Level
The scale of warming depends on emissions:
Low scenario 1.1 – 2.9oC
Best estimate 1.8 – 4.0oC
High scenario 2.4 – 6.4oC
IPCC (2007)
Projected temperatures – land and
polar regions warm more than
oceans
IPCC (2007)
IPCC Fourth Assessment
Report 2007
“Warming of the climate system is
unequivocal, as is now evident from
observations of increases in global average
air and ocean temperatures, widespread
melting of snow and ice and rising global
average sea level” – p2, IPCC Synthesis
Report
Temperature, Sea Level and Snow
Cover
•
The Earth’s surface
has warmed by
0.75C since 1900
•
Sea levels have
risen by 20cm since
1900
•
Now: glaciers,
snow cover and sea
ice are all declining
•
Now: more heatwaves, droughts,
extreme rain events
and more intense
cyclones
IPCC (2007)
Arctic Ocean September Ice Extent
Impacts of climate change
0°C
Food
Water
Global temperature change (relative to pre-industrial)
1°C
2°C
3°C
4°C
5°C
Falling crop yields in many areas, particularly
developing regions
Falling yields in many
Possible rising yields in
developed regions
some high latitude regions
Small mountain glaciers
disappear – water
supplies threatened in
several areas
Significant decreases in water
availability in many areas, including
Mediterranean and Southern Africa
Sea level rise
threatens major cities
Ecosystems
Extensive Damage
to Coral Reefs
Rising number of species face extinction
Extreme
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Weather
Events
Risk of Abrupt and
Increasing risk of dangerous feedbacks and
Major Irreversible
abrupt, large-scale shifts in the climate system
Changes
Cascade of uncertainty
Emission
scenario
Atmospheric
concentrations
Climate
sensitivity
Climate
change
Range of
Impacts
Impacts may not increase linearly with
warming
Lenton (2007)
Climate Sensitivity: Temperature
Response of doubling [CO2]
Q = F-λ∆T
Where Q = energy balance,
F = forcing and λ = feedback
parameter
At eqm Q=0
F = λ∆T
For the special case of
doubling CO2
F’ = λS
Where S = Climate
sensitivity
AR4 concluded that best estimate of climate sensitivity was 30C with range of 2-4.50C (ca. 2SD)
IPCC (2007)
Climate feedbacks include
Feedback
Water vapour
This is the most important.
Water vapour is a powerful
greenhouse gas.
Cloud radiation
Complex impact. Several
processes involved. Sensitive
to structure of clouds
Ocean-circulation
Plays large part in determining
earth’s climate. Large heat
capacity and moves heat
around.
Ice-albedo
Ice and snow are a powerful
reflector of solar radiation
Climate feedbacks affect the sensitivity of the climate.
Why a ‘fat’ tail?
AVOID Programme and the 2 degree
target
2 degree target agreed at Copenhagen Accord balances risks against
technical and social feasibility in an informal way
AVOID examined
variations in:
1. The year of peak
emissions (2014 to
2030)
2. The emission rates
leading up to the
peak (BAU)
3. The emissions
reduction rate
following peak
emissions (1 to 5%
per year)
4. The net long-term
level of emissions
(zero to high levels)
Business as usual
Policy scenario
AVOID Programme: 2 degree
trajectories
AVOID uses a ‘tuned’
climate model (MAGICC)
Global average temperature
determined by cumulative emissions
of GHGs (2.63TtCO2e 2000-2500)
Approximates to the area under the
curve
Take home message is that to
stabilise temperature at 2 degrees is
going to be a huge challenge - we
need to peak soon and STRONG
decline thereafter
GHG emission trajectories consistent with 2˚C increase in global
average temperature at 2100 at a 50% probability level
Action on Climate Change
Key questions
1. How much will it cost to ‘stabilise’ the climate
and avoid dangerous climate change?
2. Will the cost of avoiding dangerous climate
change compete with other priorities such as
development?
What action do we take in the light of
the scientific evidence for climate
change?
 So if we applied the appropriate discount rate ,
then we might say that action would be justified on
cost-benefit grounds if:
NPV = Present Value (benefits) – Present Value (costs) > 0
 Or for a range of alternative policy actions, choose
the one with highest NPV
Uncertainties in economic modelling
of climate change
 This is a formidable challenge because:
 We do not and cannot know the precise benefits of policy
action given the underlying uncertainty in the science
 We do not and cannot know what the future cost of the policy
will be given the long time horizons
 Costs and benefits functions are likely to be highly non-linear
- and we don’t know what they are
 If standard economic models are based on marginal changes,
how do we account for irreversibilities?
 Given the very long time horizons, what is the appropriate
discount rate to use?
Economic models for climate policy
Number of different kinds of economic
models
 Much of the debate is about Integrated
Assessment Models (IAMS) which seek to
integrate science and the economic theory
to optimise climate policy
These are utility maximising models which
seek to maximize, W, the social welfare,
where
W = ∫ exp(-ρt)U[c(t)]dt
Where ρ is the rate of pure time preference,
c(t) is the consumption at time t, and
U is the utility function specifying how much
utility is derived from a particular level of
consumption
Outputs from Integrated Assessment
Models
Reference case without
impacts
Global
economic
activity
Reference case with
impacts
Benefits of policy
Cost of policy
Time
Stern Review
 Uses PAGE 2002 Integrated Assessment Model
 Takes account of risk and uncertainty through Monte Carlo
simulations on the climate sensitivity parameter, assumptions on
risk aversion and equity
 Key finding
 Cost of trajectory consistent with 550ppm CO2e
stabilisation averages 1% of global GDP per year (range
-1% to 3.5%)
 Avoided damages would be 11% of GDP (range 2-27%)
for Baseline climate and 14% (range 3-32%) for High
climate
 This contrasts with other IAMs which suggest a higher level of
cost and lower level of damage – DICE, MERGE, FUND
 Other models propose ‘policy ramp’ and modest rates of GHG
reduction
The critics
 Main criticism in the literature has been over the choice discount rate used by
the Stern Review – should instead have used a market rate (i.e. 3 – 7%)
 In the Ramsay formula, the social discount rate is given by:
Social discount rate =  + ( x consumption/cap growth rate)
Reflects pure rate
of time preference
(which Stern
suggest should be
0) and risk of
human extinction
(which Stern select
as 0.1).
Elasticity of marginal
utility of consumption
(Stern suggest this is
1, which assumes
society is moderately
adverse to income
inequality).
Growth in per capita
consumption varies over
time and according to
extent of climate change
damages. For baseline
climate scenario with
market impacts only, the
5-95% range of timeaveraged growth is 1.08%
- 1.14%.
Therefore in Stern, discount rate = 0.1 + (1*(1.08 to 1.14%)) = 1.18 to 1.24%
Discount rate have an important effect
on the present value of climate
change impacts
Value of £100 over time using different discount rates
£
90.479
60.577
0.1%
1.0%
5.0%
81.865
0.5%
2.0%
10.0%
36.603
36.696
13.262
13.533
1.759
0.0000001
0.004
0.623
0.003
0
10
20
30
40
50
60
70
80
90
10
0
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0
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0
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0
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20
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100
90
80
70
60
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40
30
20
10
0
Years
On Extreme Uncertainty of Extreme
Climate Change – Martin Weitzman
 Implication of the fat tail of climate sensitivity
 Translating the pdf of climate sensitivity into confidence levels for
temperature change as a function of GHG concentrations gives:
 So at 550 ppm there is a 10% of T >4.8 ˚C. This is disturbing and can’t
be ignored in formal economic modelling.
Damage function
 Thought experiment on the damage function, which often takes the
quadratic form in IAMs of:
C*(T) = 1/ 1+aT2
 Where C*(T) is defined as the ‘welfare equivalent’ consumption as a
fraction of what the consumption would be at T=0, and a=0.003
 However, it is impossible to know a priori what the functional form
should be for high temperatures
 What if we used quartic or exponential form then the estimated damages
would be very different
 For a quartic exponential function, C*(T) = exp(-bT4), then at 10˚C C*(T)
is 0.08% i.e. a catastrophic loss of ‘welfare equivalent’ consumption
Technical feasibility models McKinsey Marginal Abatement Cost
Curve – Bottom up estimates
Generally optimistic – it can be done and at comparatively small cost!
Choices facing the decision makers
 Is formalised cost-benefit analysis appropriate for climate
change policy?
 If the answer is ‘no’ what other approach should we adopt?
 Given that a 2 ˚C has been adopted, should economic
analysis focus on seeking the cost effective pathway
 Is a risk based approach formalising the ‘precautionary
principle’ the appropriate way forward?
 Do we need more scientific knowledge on threshold
temperatures for major discontinuities or catastrophe’s?
 What else is there any other approach that we should
consider?
Thank you for your attention
Finally....