An Economic View of Global Warming

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An Economic View of Global Warming Bob
Doppelt, Director, Climate Leadership Initiative,
University of Oregon

bdoppelt_at_uoregon.edu 541-436-1609 Climate
Change Integration Group July 27, 2006
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• UO CLIMATE LEADERSHIP INITIATIVE
• The Climate Leadership Initiative (CLI) seeks to
  increase public understanding of the risks and
  opportunities posed by global climate change and
  to enhance climate policy and program
  development. Programs include
• Climate Literacy, Education and Communication
• Climate Economics
• Greenhouse Gas Quantification and Volunteer
• Regional GHG Index
• Low-Carbon Sustainable Economic Development
• Climate Governance, Policy and Program
  Development
• Website http//climlead.uoregon.edu

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A KEY HUMAN LEARNING DISABILITY
Im sure glad the hole is not on my end.
Our Inability to See Connections Across
Boundaries in Time
Space
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A SECOND KEY HUMAN LEARNING DISABILITY

Our Inability to See the Full Impacts of Our
Actions Due To Delays In the System
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• From An Economic Perspective Climate Change is a
  Unique Externality
• The emission of greenhouse gasses imposes costs
  on others that are not borne by the emitter.
• The costs will be felt over a long time period
  and over the entire world.
• But, the exact nature of costs is uncertain
  they will be shaped by policies, market
  mechanisms, other events.
• Those most affectedfuture generations cannot
  speak up for their interests

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• THE UNIQUE AND COMPLEX NATURE OF THIS EXTERNALITY
  SUGGESTS ECONOMICS MUST COVER A BROAD RANGE OF
  ISSUES
• Including The Economics Of
• Growth and development
• Innovation and technological change
• Institutions and governance
• National and international economies
• Demography and migration
• Public finance
• Information and uncertainty
• Environmental and public economics generally

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• Because Of The Complex Interaction Among These
  Issues, Climate Change Is Not Amenable To Simple
  Fixes
• Our response will depend on the choices we make
  about
• Growth
• Development
• The kind of society we want to live in
• Type of environment we want to live in
• Opportunities for future generations

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APPROACHES TO ECONOMIC ASSESSMENT Integrated
Assessment Models Tries to capture the links
between GHG emissions, climate change, and
impacts on the economy and society. Based on key
assumptions. Models have generated important
insights of year to year impacts of warming on
key sectors such as agriculture. However, due to
complex nature of issue, often has important
omissions, such as impacts outside the market
sectors of the economy and cumulative effects
expensive time consuming. Sectoral Analysis
Application of basic economic analysis to key
market sectors using temperature, water use
other scenarios. Can produce important insights
of 1-20--50 year impacts of warming on key
sectors (agriculture, electricity, snow sports)
rapid, less expensive. However, has similar
limitations to Integrated Assessment Models
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PATHWAYS DETERMINE OVERALL IMPACTS Slow Moderate
Warming Most economic models are based on
assumption of slow moderate warming and related
changes. We probably have time and resources to
adapt. Economic impacts can be assessed.
Significant business opportunities and capital to
invest. Flickering New data suggests that as
warming increases the climate may rapidly and
unpredictably move between various states as the
Earth seeks to settle into a new energy balance,
bring more extreme events (e.g. heat, drought,
rain). Unpredictability makes adaptation very
difficult. Large scale economic impacts can be
predicted, but not easy to model or quantify.
Major economic opportunities but likely scarce
capital. Abrupt Change Increasing concern that
tipping points may trigger abrupt changes Ocean
acidification, collapse of Greenland or WAIS,
shutdown of ocean circulation systems, methane
release from tundra. Impacts likely catastrophic,
with fewer resources available to mitigate
impacts. No models exist to estimate impacts.
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SCENARIOS AND 2 DEGREE THRESHOLD
James Hansen, Director of the NASA Goddard
Institute for Space Studies 1. Business as Usual
Annual emissions continue to increase at current
rates for next 50 years, as do other GHGs. The
business as-usual scenario yields an increase of
about 5 degree F of global warming this century.
The last time the Earth was five degrees warmer
was three million years ago when the sea level
was 80 ft higher. rising 20 ft or more per
century 2. Alternative Scenario CO2 emissions
level off this decade, slowly decline for a few
decades, and by mid-century decrease
rapidly. with global warming under two degrees
F, still produces significant rise in the sea
level, but its slower rate, probably less than a
few feet per century... The warmest
interglacial periods were about 2 degrees F
warmer than today and the sea level was as much
as 16 Ft. higher.
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SAMPLE IMPACTS ON HUMAN SYSTEMS
International Symposium on Stabilization of GHG
concentrations, Hadley Centre UK May 2005
Temp rise above pre-
industrial levels
Year when occurred
Impact on human systems
Region affected
Observed Impacts
Changes in streamflows, flood and draught (e.g.
earlier peak runoff Heatwave associated with
unusual 2004 summer caused 14,802 deaths in
France approx 25,000 in Europe Increased cloud
mount, annual precipitation and heavy
precipitation events Rainfall decline in W.
hemisphere, subtropics, E equatorial region,
consistent with more frequent El Nino like
conditions 1000 billion damage due to sea level
rise
2004 2004 2000-04
Europe, Russia, N. America,
Peru, Brazil, Columbia Europe Mid and high
latitudes N. Hemisphere S.
hemisphere, especially 5 Andean countries Globe
.06 .06 .06 .06 1.0
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SAMPLE IMPACTS ON HUMAN SYSTEMS
International Symposium on Stabilization of GHG
concentrations, Hadley Centre UK May 2005
www.stabilisation2005.com
Temp rise above pre-
industrial levels
Year when predicted
Impact on human systems
Region affected
Predicted Impacts
0.8 2.6 1.3
2010-2050 Any
Increased insurance prices Food prices
rise 5.3-5.4 billion losses in dryland
agriculture Threshold above which ag yields
fall 1620-1973 or 1092-2761 million additional
people suffer water stress 2000 billion
damage due to sea level rise Food production
threatened, fisheries impacted
Globe Globe USA EU, Canada, USA,
Australia Globe Globe Africa, Asia, parts of
Russia
2 2 1.9 2.0 2-2.5
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• SMALL CHANGES CAN LEAD TO
  BIG IMPACTS
• A 1 degree change in temperature can mean
  millions of dollars in damage if the variance is
  from 32 degrees F
• The impact of the 1 degree F variance from 32
  degrees F gets even larger if it is accompanied
  by precipitation
• When ocean waters rise above 82.4 degrees F,
  evaporation increased dramatically, providing
  huge reservoir of potential energy for storms
• Economic Impacts Therefore are Difficult to
  Determine

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• The Economic Impacts of Climate Change in
  Oregon A Preliminary Assessment
  
  (UO Resource Innovations 2005)
• Oregon is particularly vulnerable to global
  warming because much the economy is dependent on
  freshwater and much of that freshwater comes from
  mountain snowpack.
• Water Supply Is (Initially) The Most Critical
  Issue
• Estimates suggest that as mountain snowpack
  disappears, by 2050 Oregon farmers could lose 2.9
  million acre feet of water for irrigation--
  roughly half of what they use today--valued at
  between 265 and 995 million.
• Obtained at http//climlead.uoregon.edu/publicati
  onspress/publicationspress.html

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Most Vulnerable Sectors (Initially)
Agriculture and ag dependent communities
Forestry and forest dependent communities
Municipal drinking water Power production
and costs Public health Winter
recreation and tourism Coastal
infrastructure, tourism and recreation Agricultur
e, Forestry, Tourism, and Hydropower Industries
Alone Represent 25 Of Oregons Economy. As
warming increases other sectors are likely to be
impacted.
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Municipal Drinking Water City of Portland Bull
Run assessment (Palmer and Hahn, 2002) found
warmer climate will reduce water availability by
1.5 billion gallons and increase demand by 2.8
billion gallons. Taking pop. growth into account
led to projected need for 9.6 billion gallons of
additional water storage. Global warming could
increase this need by 50. Forecasts for years
when average precipitation is lower led to
expected shortfall of 3 billion gallons. Planners
must develop water resources to meet dry year
demands. Agriculture Farmers likely to maintain
crop production and quality under modest warming,
particularly if water availability is not an
issue. But crops have temperature thresholds at
which yield and quality decline and little is
known about the effects of warming trend on
current crops grown in Oregon. Some
possibilities Water availability Water
availability may be stressed even with current
storage capacity. Study in Yakima basin projected
capital costs of 3.5 to 4 billion to build
sufficient extra storage capacity, which was
deemed not cost effective unless warming reached
4 degrees F. (Michael Scott, Battelle PNW Lab)
Wine industry The 2.7 degree F temperature
increase now projected by 2020s likely to
displace Brand Oregon Pinot Noir grapes from
Willamette Valley.
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• All told, major portions of Oregons 128.1
  billion economy may be at risk
• Goodstein and Matson estimate impacts of between
  .2 to 2.2 of Oregon GDP by 2050 just for
  irrigation and salmon alone.
• Significant economic impacts can be anticipated
  even at the lower end of warming regardless of
  whether Oregon becomes somewhat wetter or
  somewhat drier
• With few exceptions, long-term planning in
  Oregon does not yet take rising temperatures and
  sea levels, reduced snowpack, or increased human
  health risks into account.

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CLI Washington Economic Impact Assessment For
Department of Community, Trade and Economic
Development and Department of Ecology Assessing
Water resources
Agriculture and ag dependent communities
Forestry and forest dependent
communities Municipal drinking
water Industrial water supplies
Power production and costs
Public health
Impacts of sea level rise in Puget Sound
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Ski Industry Ski areas in Washington are likely
to be negatively affected by double whammy of
less snow and more precipitation. A 1 degree F
temp increase yields a 23 decline in skiable
days and a 2 degree F temp increase yields an
average of 46 decline. Water Availability Using
Yakima basin as case study, found a 14
probability of water rationing of at least 50
with a 1 degree F increase and up to 54
probability of rationing of at least 50 when
temperatures approach 2 degree F increase.
Forestry Over 50 of Washington is forest land.
Pests and fire are the biggest threat. The
average fire year is expected to see a tripling
of acres burned with 2 degree F increase. On DNR
lands this would increase burned acreage from
12,000 to 36,000. In 2003 UW Rural Technology
Initiative calculated all forest and indirect
costs of forest fires and estimated they cost
1,300 to 2,100 per acre. Current estimates of
12,000 acres burned per year produces 16-25
million costs. Tripling of acres burned would
yield costs of 48-75 million annually.
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• WEATHER AND INSURANCE STUDIES
• Tyndall Center in UK If climate warms
  gradually, the chances of catastrophic
  weather-related losses rise from about 1 in 100
  to 9 in 100 over next 50 years, which is
  manageable impact for the insurance industry.
• Abrupt climate change brings the odds to 9
  chances in 100 as early as 2010, which would
  raise insurance costs as high as 12 of value.
  Most businesses start to self-insure when
  premiums reach 3 of value
• John Dutton, dean emeritus Penn State College
  of Earth and Mineral sciences estimates 2.7
  trillion of the 10 trillion U.S. economy is
  susceptible to weather-related loss of revenue.

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• Bottom Line Global Warming May Fundamentally
  Change the Way the Economy Operates
  (Stern Review, What is the Economics of
  Climate Change, UK)
• 1. Direct Effects on Outputfor example, reduce
  water availability higher water, energy,
  materials and transportation costs restrictions
  on GHG generation in processes and products
  increased insurance costs, or none.
• 2. Increased Depreciation of Capitalfor
  example, equipment and technologies will need to
  be replaced at accelerated rates (faster than
  normal depreciation) to suite a changing climate.
  
• 3. Adverse Effects on Human Skills and
  Healthfor example, increased heat, psychological
  stress, and pathogens will increase employee
  illness absenteeism reduce productivity.

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• 4. Cumulative Effects Impacting Economy-wide
  Productivity
• Decreased output in a few sectors reduces
  incomes which reduce purchasing power and
  effects other sectors.
• Corporations may face more environmentally
  related litigation and insurance related payouts,
  both as emitters of GHG and from non-compliance
  with new regulations if political climate changes
  due to public alarm
• Insurance costs may rise substantiallyor not be
  available at all--constraining business activity.
• Restrictions on trade, transportation and travel
  and market instability may grow.
• (Sources What is the Economics of Climate
  Change, Stern Review, UK
  Climate Change Futures, Harvard
  Medical School, Swiss Re, UNDP 2005)

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• IN SHORT, WE ARE IN A WHOLE NEW ERA--
  A CARBON
  CONSTRAINED ECONOMY
• Many scientists are discussing that stabilizing
  the climate will require 60-80 reductions in GHG
  emissions based on 1990 levels.
• This requires transition to low-carbon
  economy
• Goal must be to decouple economic and population
  growth from energy use emissions
• Must do so in context of likely rapid and
  unpredictable variation. Traditional planning
  methods may not work.

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• LEFT ON ITS OWN, THE MARKET WILL NOT SOLVE
  WARMING PROBLEMS
• Climate change is an externality
  the emitter does not
  bear the direct costs of their action.
• As with any externality
  without policy
  interventions, the emitter has little motivation
  to consider the costs in their
  decision-making.

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• MITIGATION ADAPTATION POLICIES ARE NOT
  ALTERNATIVES
• Both will have costs but both can produce
  economic benefits
• Possible Criteria for Evaluating Climate Policy
• Environmentally Effective
• Economically Effective
• Administratively Effective
• Equitable
• Politically Feasible

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• Theory Of Externalities Suggests Some
  Basic Policy Approaches For Reducing GHG
  
• Tax the emitter equivalent to the marginal
  external social costs Ultimately borne by
  households, raises revenues that can be used to
  achieve other goals, provides incentives to
  economize on the damaging activity
• The allocation of property rights linked with
  emissions trading Provides large emitters the
  flexibility to trade emission rights across
  sectors.
• Direct regulation
  Tends
  to place burden on industry (which generally
  passes on the costs to consumersif they can/will
  pay)
• Provide financial incentives
  
  Usually popular, sends clear signals, but often
  suffers from free rider problem.
• Each option has different distributional public
  finance implications.

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CLIMATE POLICY EVALUATION CHART
Economic Efficiency
Environmental Effectiveness
Administrative Feasibility
Political Feasibility
Equity
Voluntary and Information Prescriptive
Regulation Financial
Disincentives Financial Incentives Emission Cap
and Trade Permits Niche Market Regulation
Medium to Poor Good to
Poor Good Poor Good Medium
Poor Good Medium Medium Good Good
Good Good Good Medium Medium Medium
Good Medium to Poor Poor Good Medium Good
Good Good Poor Poor Good Good
(Adapted from What is the Economics of Climate
Change?, Stern Review, London, 2006
Sustainable Fossil Fuels, M. Jaccard, 2005, and
U.S. Technologies and Innovation Policies, Pew
Center, 2003)
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• ADAPTATION MUST FOCUS ON
• Built SystemsGreater exposure to extreme
  events resulting in increased demands on
  maintenance and upgrades damage to energy,
  water, sewage, communication, transport systems.
• Human Systems--Increased stress shocks
  effecting skills and productivity, social
  welfare, public health, emergency response,
  natural hazard management, insurance,
  organizations, systems of governance
• Natural Systems--Increased temperatures
  effecting ecosystems and species increased
  pests, diseases, forest fires more heat waves
  diminished air quality.

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TYPES OF ADAPTATION MEASURES
CATEGORY Status Quo Prevent the Loss Spread or
Share the Loss Change the Activity Change the
Location Enhance Adaptive Capacity
MEANING Do nothing to reduce vulnerability
absorb losses Adopt measures to reduce
vulnerability Spread the burden of losses across
different sectors Stop activities that are not
sustainable under new climate regime and
substitute others Displace the infrastructure or
system Enhance the resiliency of the system to
improve its ability to deal with stress
EXAMPLE Rebuild, or abandon affected
structures Engineer structures for big winds,
floods, drought Purchase flood insurance Prevent
development in low lying coastal areas, rebuild
wetlands Relocate infrastructure out of risk
zones Preserve or rehabilitate natural systems,
increase emergency response capacity
From Adapting to Climate Change, Canadian Climate
Impacts and Adaptation Research Network
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• MITIGATION ADAPTATION MEASURES HAVE COSTS AND
  BENEFITS
• All economic wealth results from increased
  productivity.
• Increased productivity results from continual
  innovation.
• Policy Goal Should Be
• Make short term economic impacts negligible while
  stimulating innovation, breaking path dependency,
  and producing net future economic benefits
• Is this possible?

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• EXAMPLE
• Economic Assessment of Some California
  Greenhouse Gas Control Policies
  
  (California Climate Change Center, UC
  Berkeley, 2006)
• Assessed 9 climate policy scenarios Baseline,
  vehicle emission, building efficiency, HFC
  reduction, manure management, semiconductors,
  landfill management, afforestation, cement
  management.
• Conclusion
  CA can
  save money and increase overall employment by
  implementing a suite of climate change policies
  due to the direct effects cumulative effects of
  indirect effects

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• IF WE CHANGE OUR THINKING AND PRACTICES, WE MAY
  END UP BETTER OFF
• Global warming requires a change in energy
  regimes. Despite the pain,
  each previous major change in energy produced
  increased prosperity and well being.
• The first major energy shift came about 230,000
  years ago when humans discovered how to control
  fire. The ability to use fire to kill germs by
  cooking food and to provide warmth in cold and
  damp weather dramatically reduced illness and
  death.
• The change from wood and organic material, for
  most of human history the dominant source of
  energy, to coal over 200 years ago launched the
  industrial revolution.
• The transition from coal to oil and from the
  direct use of fuels to electricity in the early
  part of the twentieth century triggered wealth
  creation over the past one hundred years or so on
  a scale never before seen in human history (at
  least in the West).

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Likely Big Impacts Possible Irreversibility's
Suggest An Insurance Approach
Basic Economic
Principle When the risk of economic harm is not
zero, it is prudent to take steps to project
yourself against those potential risks. For
example, although the chances of our house
burning down are low, it's not zero. Therefore,
we buy homeowners insurance that we may never
use, but which we nevertheless view as a good
investment because it will pay off big time if
ever needed. Climate Insurance Policy Framework
Act

Prepare

Invest
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• SUMMARY
• Current trends show the economic impacts of
  climate change will be significant increase the
  warmer it gets.
• Warming poses risks and opportunities. If done
  right, solutions are likely to increase
  efficiency and productivity of U.S. and world
  economy
• Doing so will require broad mix of policies
  tailored to specific sectors and regions aimed at
  stimulating innovation throughout the economy.
• Innovation must also focus on the institutional
  structures and systems that support the policies
• Must avoid ideology and think in new ways.