Stern Review on the Economics of Climate Change

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Content lifted from Presentation for the CDM DNA
ForumAddis Ababa, 6th October 2007, Hannah
Muthoni Ryder, and Nicholas Stern, Richard Sabot
Lecture Centre for Global Development, Washington
DC June 2008, and the Stern report, exec summary
and chapter 6
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What is the economics of climate change and how
does it depend on the science?

• Analytical foundations
• Climate change is an externality with a
  difference

• Global
• Long-term
• Uncertain
• Potentially large and irreversible

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Projected impacts of climate change
Global temperature change (relative to
pre-industrial)
1C
2C
5C
4C
3C
0C
Food
Falling crop yields in many areas, particularly
developing regions
Falling yields in many developed regions
Possible rising yields in some high latitude
regions
Water
Significant decreases in water availability in
many areas, including Mediterranean and Southern
Africa
Small mountain glaciers disappear water
supplies threatened in several areas
Sea level rise threatens major cities
Ecosystems
Extensive Damage to Coral Reefs
Rising number of species face extinction
Extreme Weather Events
Rising intensity of storms, forest fires,
droughts, flooding and heat waves
Risk of Abrupt and Major Irreversible Changes
Increasing risk of dangerous feedbacks and
abrupt, large-scale shifts in the climate system
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Stabilisation and Commitment to Warming
400 ppm CO2e
5
95
450 ppm CO2e
550 ppm CO2e
650ppm CO2e
750ppm CO2e
Eventual temperature change (relative to
pre-industrial)
1C
2C
5C
4C
3C
0C
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Caveats to Cost of climate change estimates

• Few or no estimates for high temperature changes
  and/or developing regions
• Areas of greatest risk and greatest uncertainty
  coincide
• Requires non-market values--problematic, as we
  already know
• Formal models can provide useful information in
  spite of limitations

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Integrated Assessment Models

• IAMS model one-way linkages
• Their focus on differences between socioeconomic
  conditions with and without climate change
• Initial focus on market sectors

Figure 6 Hope (2005)
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Other IAM model projections

• IPCC 1996 Based on fixed 2.5 c warming and did
  not consider risk
• Mendelsohn model Five market sectors (ag,
  forestry, enerty, water, coastal zones)
• Tol model Also includes ecosystems, diseases,
  heat and cold stress. Weights costs
  output/equity.
• Nordhaus model includes market and non-market
  section, incorporates risk

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Figure 6.2
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Take-home points

• Disagreement about effects up to 2-3 c temp
  change
• Consensus that higher changes will reduce
  consumption, but from almost nothing to 10.
• Note 10 reduction in output counts more for a
  rich country than a poor one (thus equity
  weights)
• Each treats adaptation differently--Mendelsohn is
  most optimistic. Assumes that economic
  activity/output migrates with temperature change.
  Does not account for transition costs.
• Models based on 1990 science

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Figure 6.3
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Figure 6.3 cont.
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How do these models fall short?

• Missing scientific knowledge for high temperature
  effects--likely leads to underestimates
• Do not fully account for risk and system
  surprises
• Do not fully incorporate non-market effects
• Do not account for social conitengencies
  (conflict, migration, adaptation, cultural and
  political change
• Do not account for climate-change feedbacks on
  the climate/carbon sequestration side
• Sectoral interactions (for example, water and
  agriculture) not accounted for

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What should a monetary cost model provide?

• Cost simulations across a broad range of impacts
• Within a theoretical framework suited for
  analyzing changes over broad spatial, temporal,
  and social scales

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PAGE2002 IAM

• Strengths
• Uses monte carlo simulation to generate
  probability distribution of results under
  different assumptions
• Projects income under different scenarios
• Uses parameters from other peer-reviewed studies
• Can include market and non-market impacts and
  sectors
• Non-linear losses at high temperature levels
• Weaknesses
• Data
• Non-market values
• Social contingencies
• Remains a black box to me

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Box 6.1 Climate scenarios
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Temp distributions
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Categories of economic impact (figure 6.4)
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Preliminary estimates

• Estimates relative to projections with no climate
  change
• Lots of variation in projected impacts, very high
  risks of high damage
• Inclusion of non-market impacts increases damages
• Estimates still limited
• Only some costs can be avoided due to climate
  inertia
• Costs increase non-linearly with warming

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Mean losses in income per capita from scenarios
of climate change

• Essential to take account of risk and uncertainty
• Models do not provide precise forecasts
• Assumptions on discounting, equity, and risk
  aversion affect results

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Translating income losses into welfare/cost
estmiates

• Their model acccounts for inter-temporal, but not
  intra-temporal distribution (ie, discounting but
  no equity weights0
• Assumption is that GDP will be higher in 2050
  than now
• Approach is standard look at discounted sum of
  per-capita utility from consumption over time

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Welfare model assumtions

• Fixed savings/investment rate (20)
• No feedbacks (??)
• Diminishing marginal utility from consumption.
  Places more weight on near-term vs. longer-term
  consumption (due to increased wealth). Places
  more weight on severe impacts (ie, any low
  consumption paradigm has a high marginal
  contribution to utility)
• Use low rate-of-time-preference discount rate
• Each of the 1000 runs calculates a cost estimate
  -gt average as expected utility

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How to evaluate welfare impacts?

• Want a metric that is easily understood
• Use a balanced growth equivalent BGE the
  consumption path that if it grew constantly
  forever, would generate the same utility
• Difference between the two measures the permanent
  loss of consumption due to climate change--like a
  tax on consumption
• Question how does this differ from the other
  perspectives?
• Break to review math.

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Welfare cost estimates

• Three BGE
• Mean total utility
• 5th percentile
• 95th percentile
• With and without climate change
• Wide range, all project significant costs.

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How to assess range of estimates?

• Where to place estimates between 5 and 20?
• Should include
• Non-market effects
• Distribution within a generation
• catastrophic effects
• Not sure which of the 2 probability distributions
  to use. Could take a weighted average of best
  and worst.
• These steps move to somewhere between 13 and 20

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Taking urgent action makes good economics -
delaying is dangerous and costly
The cost of cutting emissions consistent with a
550ppm CO2e stabilisation trajectory averages 1
of GDP per year in 2050 this can be achieved by
deployment of available technologies and those
expected to be commercialised in coming
decades Delaying emissions reductions
significantly constrains the opportunities to
achieve lower stabilisation - strong mitigation
is fully consistent with aspirations for growth
and development in poor and rich countries
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Adaptation priorities

• Adaptation unavoidable will put strong pressure
  on developing country budgets and ODA
• Adaptive measures in the energy sector have a
  role to play
• International action has a key role in supporting
  global public goods for adaptation
• Disaster response
• Crop varieties and technology
• Forecasting climate and weather

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