michael grubb climate change

7/30/2019 Michael Grubb Climate Change

1/30

1

Climate change impacts, energy, and development

Professor Michael Grubb1

Paper to World Bank

AnnualBank Conference on Development Economics

Tokyo, 30 May 2006

ABSTRACT

Climate change both through its direct impacts, and the implications of measures to tacklethe problem through reducing greenhouse gas emissions is likely to be a major influenceupon global socio-economic development during the 21st Century. This paper addresses threedimensions of the challenge:

the risks associated with changing climatic patterns, particularly in relation to keyvulnerabilities and scope for adaptation, and economic approaches to evaluating thescale of those risks;

the relationship between emissions and development, including potentialopportunities between climate change policies and development at the project andsector levels

innovation and macroeconomic dimensions of emissions mitigation in the nationaland global context, including the role of economic instruments

The broad conclusion is that climate changes holds opportunities as well as threats todevelopment, and that the balance between them will to a large degree be a function of howpublic policy responds the most dangerous and damaging approach being to ignore theproblem and hope that it goes away.

1Chief Economist, The Carbon Trust , 3 Clem ent s Inn, London WC2A [email protected]; Senior Research Associate, Facult y of Economics at CambridgeUniversity; Visiting Professor, Centr e f or Environment al Pol icy at Imperia l Col lege, London.


2/30

2

Introduction

The general acceptance that climate is a real and pressing problem is beginning to move the

issue from one of scientific debate and observation towards questions about the impact ofclimate change on economic development, and the implications of measures to tackle it. Thispaper briefly summarises the scientific evidence and nature of the problem, and moves on todiscuss the implications and relationship to economic and development policy.

The paper comes at an interesting time in relation to international assessment processes. TheFourth Assessment report of the Intergovernmental Panel on Climate Change is in its finalanalytic stages, with drafts either already circulating or soon to be issued for globalgovernmental and expert review. In addition, the Stern review of the Economics of ClimateChange, commissioned by the UK Treasury as an assessment of the global economic issues,is due to report this autumn. Thus a much richer base of material will shortly become

publicly available. Obviously, this paper reflects my view of the debate.

The paper is divided into three main parts:

Part I summarises the scientific evidence, projections, and discusses key pointsaround evaluation of impacts particularly in relation to developing countries;

Part II discusses the relationship between emissions and economic development,presenting four facts and four opportunities around the CO2-developmentrelationship

Part III analyses the macroeconomics of mitigation policy, including the role ofinnovation and economic instruments

This paper as submitted for the ABCDE conference contains only Parts I and II. Part III willbe included for the final publication.


3/30

3

PART 1: SCIENCE AND THE NATURE OF THE

CHALLENGE2

Is Climate Change Real?

Emissions of various gases from industrial and other human activities are changing ouratmosphere. Climate change encapsulates the wide variety of accompanying impacts ontemperature, weather patterns and other natural systems. Despite decades of research,important things remain uncertain, but much is also now established beyond reasonabledoubt.

The fundamental science of climate change.

The fundamentals of climate change have long been well understood because they involvethe same basic physics that keeps the earth habitable. Heat-trapping greenhouse gases inthe atmosphere (of which the two most important are water vapour and carbon dioxide, CO2)let through short-wave radiation from the sun but absorb the long-wave heat radiation comingback from the earths surface and re-radiate it. These gases act like a blanket and keep thesurface and the lower atmosphere about 33 deg. C warmer than it would be without them.The Earths greenhouse blanket is a good balance between the extremes of our neighbours:Mars, exposed without any greenhouse gases, is a frozen wasteland; whilst Venus remainstrapped in a dense blanket of hot CO2.

Primarily through the burning of fossil fuels and deforestation, humans have been increasing

the concentration of CO2 and other greenhouse gases in the atmosphere since the industrialrevolution began, thickening the greenhouse blanket.

The world has been warming.Surface warming in recent decades is established beyond doubt. So too is cooling of thestratosphere (the layer above the main blanket), as would be expected from greenhousewarming that traps more heat near the surface. Direct temperature records back to the middleof the last century are considered to be reliable enough to establish that recent temperaturesare warmer than any since direct measurements began. Since the 1980s, due in part to theclean-up of other industrial pollutants (some of which had masked underlying warming),the underlying, long-term greenhouse warming has emerged more clearly - all of the 10

warmest years have occurred since 1990, including each year since 1995. Better accountingfor these and other factors can now generate a good fit between the observed temperaturetrend and the results of computer simulations that incorporate these multiple factors (Figure1).

2 The first half of this section draws heavily upon a report prepared by the author for the Carbon Trust,published as Grubb (2004). The source data draws heavily upon the Third Assessment Report of theIntergovernmental Panel on Climate Change (IPCC, 2001). The IPCC is currently engaged in its FourthAssessment, which will update such analyses.


4/30

4

Figure 1. Global average temperatures since 1860.

Source: IPCC, Third Assessment Report. The charts compare observed temperature trends

(red) with model predictions without (left hand side) and with (right hand side) greenhouse

gas emissions

Although debate continues about the exact temperatures during mediaeval times, a widevariety of proxy indicators (such as tree rings, coral layering, glacier records, etc) give a

high confidence that the warming observed is unprecedented; indeed it appears that globalaverage temperatures have varied by less than a degree C for thousands of years, andprobably during the entire post Ice-Age period during which human civilisation hasdeveloped, so that recent years are probably the warmest seen for more than 100,000 years.Scientists have been unable to identify natural factors that could explain either the degree orthe pattern of the surface warming and stratosphere cooling observed over recent decades.Understanding is still incomplete, but the fundamentals are clear and supported by a long listof other accumulating impacts.

Other observed indicators and impacts of our changing climate

The list of observed changes other than temperature and sea-level is growing rapidly. These

include the thawing of permafrost, later freezing and earlier break-up of ice on rivers andlakes, lengthening of mid to high-latitude growing seasons, poleward and altitudinal shifts ofplant and animal ranges, declines of some plant and animal populations, and earlier floweringof trees, emergence of insects, and egg-laying in birds.3

Perhaps the most clear, prominent and consistent indicator of warming is the retreat ofmountain glaciers (e.g. Chart 2) which has been a worldwide phenomenon. Impacts on iceare also clear around the poles. The Arctic ice cap is shrinking and the Larsen Ice Shelf

3 Cited from IPCC Third Assessment, Climate Change 2001, Report on Impacts, Adaptation and Vulnerability(Policymakers Summary).


5/30

5

around the Antarctic peninsula has undergone unprecedented calving. Another widely-observed impact is the bleaching of coral reefs caused at least in part by rising sea-surfacetemperatures.

Changes in extreme weather events potentially have considerable impact on humans, butsince by definition they occur infrequently, trends are hard to prove. Warming increasesevaporation and precipitation, and both aggregate rainfall and occurrences of heavyprecipitation events in northern mid-latitudes (e.g. Europe and the US) the principal causeof flooding has increased in recent decades. In tropical regions, the potential for moreintense hurricanes and typhoons increases in a warmer world, but the data are sufficientlysparse and complex that the observational trend remains in dispute.

(a) c. 1900

(b) Recent

Figure 2. Alpine Glacier: comparison of present to 1900

Photo Source: Munich Society for Environmental Research

The impact on some other extremes is better established. Many areas have seen fewer longcold spells and more long hot spells, in ways that are consistent with the predictions ofclimate models. But unlike the general trends of temperature, ice and sea level, it mayalways be questionable to attribute any one particular weathereventto climate change,


6/30

6

because all weather events have multiple causes. So the question was X due to climatechange? cannot be answered simply whether X was record temperatures, exceptionalstorms, floods or droughts. Nevertheless science may increasingly be able to estimate how

much have past emissions increased the risk of such events? and the chances, at least ofextreme high temperatures, and in some areas droughts and flood events, are rising.

4

Insurance data (Figure 3) show a dramatic rise in the economic costs due to extreme weatherevents, though a major part of this is probably due to changes in demographics, propertyvaluation and insurance practices.

Figure 3. Global costs of extreme weather events (inflation-adjusted) since 1950.

Note.The economic losses from catastrophic weather events have risen globally 10-fold since the 1950s,after accounting for inflation. Part of the trend is linked to growing wealth and population, whichincreases economic vulnerability to extreme events, and part is linked to regional climatic factors (eg.changes in precipitation and flooding).

Source: IPCCThird Assessment, Climate Change 2001: Synthesis report (Figure 2-7)

The distinction between climate and weather is itself a bit like that between sea-level andwaves. Sea-level sets average conditions which vary locally according to tides and coastline,

but even understanding all these does not mean one can easily pick out trends from individualwaves, or predict them in detail. But the complexities and uncertainties around climatechange should not obscure the basic facts. The fundamental mechanics of climate change arewell understood; the world is warming; and much of the warming is due to human emissionsof greenhouse gases. The next section explains why climate changes seem set to accelerate inthe future, and the varied impacts this may bring.

4 The IPCC Third Assessment (IPCC, 2001) detailed observations, trends and projections, and in particular theWorking Group II assessed observed and projected impacts. The Fourth Assessment will present considerablyenhanced data on impacts and projections including at the regional level.


7/30

7

Projected impacts of climate change over the next few decades

Introduction and overview

Some of the big, persistent trends indicated for example in glaciers, which embody a lot ofinertia also due to past warming, can already be projected with confidence. The Snows ofKilimanjaro, for example, already much shrunk, are expected to disappear entirely within thenext few decades it is already too late to avert this(Alverson et al, 2001). Glaciers and seaice will continue to shrink, and there may be no Arctic sea ice in summer by the end of thiscentury. The Antarctic ice sheet, being in a much colder climate, is less likely to lose mass,notwithstanding some shrinking ice shelves around it.

Existing zones of preferred vegetation and associated crops will migrate towards the poles,

requiring farming practices and ecosystems to adapt. However, many species and ecosystemshave limited scope to move, because of a wide variety of barriers. The most comprehensivestudy to date estimates that about a quarter of the worlds known animals and plants morethan a million species will eventually die out because of the warming projected to takeplace in the next fifty years.(Thomas et al. 2004)

In addition to the broad physical and biological trends of warming and glacier retreat, sea-level rise, and the migration and loss of species and ecosystems, other predicted impacts ofclimate change are many and varied, and as research continues and experience begins toaccumulate the list grows longer.

Scientists rate the following other changes to be very likely (with more than 90%confidence):5

Higher maximum temperatures, with more hot days and heat waves over nearly all landareas. This would increase heat-related deaths, as well as heat related stresses on crops,livestock, etc;

Higher minimum temperatures, fewer cold days, frost days and cold waves over nearly allland areas. This would reduce cold-related deaths and crop and livestock-related stressesassociated with frost and other cold conditions. The balance between this and the first setof effects obviously depends on the starting conditions, but also on the rate and degree ofchange. Tentative estimates predict net agricultural gains for the US and Europe for

equilibrium global changes up to 2.5 deg.C (this does not include transitional effects), thebalance becomes negative for greater changes;

More intense precipitation events, resulting in increased floods, landslide, avalanche, andmudslide damage, with increased soil erosion and increased flood runoff.

The following changes are rated as likely (with confidence greater than two-thirds):

5 This list is drawn from the IPCC 3rd Assessment, Report on Impacts, Adaptation, and Vulnerability, TableSPM-1.


8/30

8

Summer drying over most mid-latitude continental interiors and associated risk ofdrought;

More intense tropical cyclones (in terms of both wind and rainfall);

Intensified droughts and floods associated with the PacificEl Nio events, in manydifferent regions; and

More variable Asian summer monsoon, obviously of particular relevance to the half ofthe worlds population that live in China, India and surrounding countries.

Human impacts: an overview of the debate

There are several broad approaches to thinking about the potential implications of suchimpacts for human economies and societies. Research during the 1990s tended to dividebetween scientific emphases on physical impacts, and economic studies some of which werefar more optimistic. The economic debate was largely stimulated by Nordhaus (1991), whoargued that quantifiable impacts of a warmer climate would be modest and justified only verymodest action to mitigate emissions, with a contrary view by Cline (1992) who adoptedbroadly comparable methods but found quite different results depending upon parametisation.Mendelsohn and others (1994) developed more detailed analyses of US agricultural impacts,which based on comparative static analysis concluded that moderate levels of climate changecould boost US agricultural output. Over the 1990s he and colleagues extended the work toother sectors and other countries. These studies are considered further below, but one featureto which they draw attention is a prediction that impacts will be highly diverse, with the bruntof damages falling upon low latitude developing countries, whilst high latitude countries maygain and, according to his studies, mid-latitude countries may be little affected in aggregateover the Century.

These optimistic analyses were based primarily on projections of aggregate, averagewarming patterns, and effective adaptation to these, and have come under extensive criticismfor these reasons. Certainly, any evaluation of human implications needs to start from a morecomprehensive understanding of the likely nature of impacts than displayed in these earlyeconomic evaluations. Moreover, human impacts depend on specific changes in regions andlocalities.

Localised changes are likely to be both more varied, and harder to predict, than the globalaverages. All projections are thus still quite speculative. Nevertheless, two regional exampleshelp to illustrate possible consequences. Summer drying and heatwaves in and around theMediterranean could further stress water supplies in some regions that are already politicallysensitive and heavily dependent upon irrigation for agriculture. The suffering could also driveexpanded migration into northern Europe that which might itself come under growingpressure from increased floods and heatwaves.

On the Indian subcontinent, Bangladesh and north-east India could face a number of diversepressures: rising seas and storms inundating the Ganges delta region; a more variablemonsoon undermining the agricultural foundations that feed a quarter of a billion people; andchanging patterns of river flow as climate change impacts the Himalayan glaciers that feedthe rivers, with corresponding international tensions across already volatile borders.


9/30

9

These are just tentative examples; the possible human consequences of climate change areonly just beginning to be seriously considered. A particularly complex consideration is thatwhilst most scientific studies have focused upon the possible impacts of a warmerworld,

most human impacts may flow from the nature of a warming world, in which change oftenhard to predict at the local level may be the most difficult characteristic for societies tohandle. Farming practices, water industries, and innumerable other social and infrastructuralsystems designed for the last Centurys climate will not necessarily adapt easily to theaccelerating change now in prospect, particularly as some of the underlying natural systemsare also pressured by global economic and population growth.

Such considerations inform the risk assessment-led approach to considering impacts. Oneform of this is illustrated in Figure 4, in which the impacts of projected climate changes havebeen summarised in terms of five risk categories. This suggests that even at the mostoptimistic end of projections, some unique and threatened ecosystems will disappear and

some regions will be exposed to adverse impacts. In the mid range, many unique systemsmay be at risk and the impact of extreme events would rise, with the developing countrieshurt the most although impact on the aggregate global economy could still be modest.Change towards the upper end pose significant risks to all and the risk of planetary-scaleabrupt disruptions becomes significant.

To date, this debate on impacts between economists quantifying specific, potentiallymeasurable and monetiseable impacts, and scientists focused on risk indices and scenarios,has been largely a dialogue of the deaf. The next section sets out more formally a structurefor thinking about these different dimensions.

Figure 4Five risk indicators associated with projected global temperatures changes


10/30

10

The chart shows how the projected range of temperature changes for this century (left hand panel) wouldaffect the risks posed in terms of five generic reasons for concerns (right hand panel). In the columns,

white indicates neutral or small impacts, yellow indicates negative impacts for some systems or low risk,and red means negative impacts or risks that are more widespread and/or greater. The five columnsconcern (i) risks to unique and threatened ecosystems, (ii) the risks from extreme climate events; (iii) therisks posed to specific regions, with only the most vulnerable being affected in the white/yellow zone butmost in the red zone; (iv) the aggregated impact on the global economy, and (v) the risk from large-scaleclimatic discontinuities (such as collapse of ocean circulation patterns). The assessment took account onlyof the magnitude, not the rate, of change.

Source: IPCC, IPCC Third Assessment, Report on Impacts, Adaptation, and Vulnerability,

Figure SPM-2.

Economic evaluation of climate change impacts

How costly may climate change really be? This is a natural question for economists inparticular to ask, but an extraordinarily difficult one to answer. Continuing scientificuncertainties about the detailed nature, timing and severity of natural impacts are multipliedby many layers of uncertainty about how society will cope with growing impacts and how toquantify these. The impacts literature is dominated by natural scientists. But it is natural foreconomists to ask, for any given emissions pathway, how costly may climate impacts betaking account of human capacity to adapt and hence how much might the reduced impactsin lower emission pathways compare against the presumed costs of lowering emissions?Rather than answering this question quantitatively, this section attempts to introduce acomprehensive structure into the debate on impacts quantification, and to draw some basicconclusions.

Attempts by economists to quantify impacts in monetary terms have tended to concentrate ona few measurable dimensions, using one of two approaches: either model simulations, orcomparative-static (cross-sectional) studies that attempt to compare indices such as landvalue and other indicators as a function of temperature. Some of the most widely-citedstudies have been those of Mendelsohn (1994), who referred to the latter as the Ricardianmethod. These methods are applied to specific sectors such as timber, energy, water supplyetc. Mendelsohn and Williams (2004) present a recent collection of such studies.

The essential foundation of such studies is that the explicitly climate-vulnerable sectors ofthe economy account for a relatively limited share of GDP, and in particular Ricardianapproaches suggest that there are optimum temperatures for most of the sectors, which liesomewhat above the average temperatures typical in mid-latitude regions. This drives theprincipal findings that climate damages are found to be modest in mid-latitude regions, aversein low latitude regions, but with net gains in high latitude regions. Since mid-latitudecountries which dominate world GDP, the net impact of climate change is modest across theCentury. The Mendelsohn and Williams (2004) results suggest that globally aggregateddamages and benefits are comparable for the next several decades; damages start to dominate


11/30

11

after about 2050 and get worse thereafter, but in an aggregated present value analysis thesehave little impact due to discounting.

Table 1, drawn from a major review study on the "social cost of carbon" (Downing et al.,2005) helps to set such studies in perspective in terms of a 3x3 risk matrix covering thedimensions of uncertainty in both climate change impacts (rows) and the scope of evaluation(columns). As the authors note, over 95% of the studies that seek to put a monetized value onclimate impacts have focused mostly on only two out of the nine elements of the matrix,namely the market and non-market costs associated with smooth projected change. This istrue for example of most of the studies cited above, whilst Nordhaus estimates try toquantify the most measurable impacts, and then assumes by extrapolation that other impactsare correspondingly small. Even more limited are the comparative static (Ricardian) analyseswhich compare the costs of two assumed climates, since these neglect transitional costs ofshifting systems from one climate to another (which is itself changing).

However since the bulk of existing work lies in this domain, I start by discussing the metricsof evaluation within the boundaries of existing comparative-static and projection-basedquantification studies. I then try to lay out considerations around the missing elements,respectively:

the dynamic and socially contingent issues, focused upon the actual capacity of societiesto prepare for, and to tackle, climate-related changes; and how as a result societalconstraints might affect the welfare consequences of impacts (or limit adaptation) in waysbeyond the evaluation of direct market and non-market measures currently employed;

the risks that may arise from regionally variable (non-trend) changes within the broad

envelope of projected climate variation including extreme events (bounded risks), andlarger scale system surprises

The essential conclusion of these sections is that there is no a priori ground for believingthese elements to be insignificant compared to those that economists have sought to quantify.

Uncertainty in valuation

A. Market B. Non-marketC. Socially

contingent

1. ProjectionOver 95% of the studies are in this category; with abias toward market costs.

2. Bounded risksSome models have explicit scenarios but most are tiedto benchmark 2xCO2 scenarios and do not cover localchanges in weather.

Plausible effects havebeen posed but not

adequately valued norincluded in themarginal SCC

Uncertainty

in

ClimateChange

3. System change and

surprise

A few exploratory studies, but not sufficient toprovide robust estimates of the marginal SCC

No credible studies

Table 1. Locating the 'social cost of carbon' literature in a risk assessment frameworkSource: Downing et al. (2005).


12/30

12

a) Issues in aggregating quantified impacts: discounting and contingent methodologies.

Because of the long timescales of climate change, discounting over time is a critical

determinant of the present cost from impact assessments. The discounting literature isenormous, and has yielded consensus that market-based discount rates are not appropriate forevaluation of very long-term issues like climate change. Indeed it is now general practice touse discount rates for public policy evaluation that are well below market interest rates,particularly for longer-term endeavours; uncertainty around future economic growth rateslowers applicable rates further (eg. Weitzman 1998). Indeed, the literature increasinglyquestions the form as well as the number used for discounting: whilst the argument of Heal(1998) for a logarithmic form has not been generally accepted, Groom et al (2003) doconclude that the classical single exponential form is not tenable, and the UK governmentitself has adopted a rate that declines over time (UK Treasury Green Book (2004)). Allthese revisions tend to amplify the present value of climate change impacts, whichpredominate in the longer term.

This in itself has important implications, as sketched in the Downing et al report, establishingthat the long-term cumulative impacts of climate change cannot be wholly "discounted away"in evaluation of climate damages. I return to some implications at the end of this section.

In the pursuit of treatments that are ethically consistent across space as well as time, similarscrutiny needs to be applied to the evaluation of transboundary impacts. Contingent valuationmethodologies based upon 'willingness to pay' lead for example to valuation of mortalitybased upon national Value Of Statistical Life (VOSL), which is heavily constrained bynational income and can differ by a factor of well over ten between countries (IPCC, 1996) a fact which has already led to political dispute due to the apparent unequal valuation of lifecontingent upon the wealth of the country impacted. In aggregate there is a huge 'North-South' asymmetry between the principal emitters and biggest potential victims: it is the richcountries whose mitigation expenditures would be most influenced according to the estimatedglobal damages, not the poor.

Hence the case for using national VOSL (and other willingness-to-pay based measures) isunclear. A logical link can only be maintained by appeal to the argument that abatementexpenditure in rich countries would displace foreign assistance for adaptation or other aid (anindirect opportunity cost argument). But there is no evidence that mitigation expendituredoes or would displace foreign aid. Moreover foreign adaptation assistance (partly due toinstitutional constraints and the dynamic uncertainties documented below) is likely to be an

imperfect substitute for reduced climate variability.

Equity weightings introduce a multiplier for VOSL or other willingness-to-pay based impactmeasures in poorer countries to increase their weighting in global economic aggregationindices (Groom et al, 2003), and thus attempt to correct for the apparent inequities arisingfrom such approaches. However the basis and derivation for such weights is unclear. In myview this reveals some genuinely complex ethical issues underpinning global aggregation ofdamages that have yet to be resolved. Simply taking a purely egalitarian approach (forexample, assuming a constant VOSL across humanity at the level of rich countries) does


13/30

13

vastly amplify quantified estimates of climate change impacts, but is similarly riddled withinconsistencies.

Economics is thus struggling to provide an objective approach to quantifying global impacts,let alone one that is accepted as such across the most relevant parties. In the absence of this,the only ethically defensible approach to developing responses has to include negotiationsbased upon fair representation of both victims and emitters.

b) Dynamic and socially contingent impacts6

Unlike issues of discounting and even international comparison, the literature exploring thesocially continent aspect of impacts is extremely limited. Concerning this, three particulardimensions need consideration:

(i) Transitional impacts. Spatial and time aggregation over the long run may mask the bulk ofsocial costs, which are far more likely to be those associated with transitions and extremes:adaptation to a changed climate, predicted ex-ante, may be very different from adaptation to achanging climate, with attendant changes in the distribution and scale of extremes. Boththeory and recent experiences (such as Asia and New Orleans) suggest that what matters isthe joint effect of climate impacts and constraints upon preparation, reconstruction andadaptation capabilities.

Consequently the scale of losses may be sensitive to the pre-existing conditions of theeconomy on which climate change impacts may fall. Hourcade (2005) argues that impactsmay be aggravated by constraints on: (i) reconstruction capabilities; (ii) failure of cost-sharing mechanisms including insurance and international assistance; (iii) local obstacles

including rigid agricultural practices; (iv) knock-on economic impacts arising fromdepreciation of this share of capital stocks (through real estate and property ownership); and(v) ecological constraints. Drawing in part on wider development literature on the economicsof natural disasters (Benson and Clay, 2004), Hallegate and Hourcade (2005) present a modelin which poor societies are unable to recover from one extreme climate event before the nextdisaster strikes, leaving such countries trapped a cycle of under-development.

Finally, mechanisms for adaptation, compensation and cost-sharing are inevitablyweaker at international levels. This may increase the probability of adverse effectspropagating across regions (including through migration), blurring any distinction betweenwinners and losers.

(ii) Uncertainty. The most obvious conclusion is that adaptive capacity needs greatly to bestrengthened. This is unquestionably true but incomplete, not least because of the uncertainnature of impacts (particularly extremes) combined with the demonstrated incapacity ofsocieties to prepare adequately on the basis of risk warnings (such as with the Asian Tsunami,and Hurricane Katrina). The main impact of climate change may arise from the interplaybetween climate uncertainty and the constraints and sources of inertia in social and economicsystems. The dilemma is neatly illustrated by the juxtaposition of two papers in ClimatePolicy (Olsen (2006) and Butt et al. (2006)): one an agricultural modelling study of the

6 This section draws heavily on a Powerpoint presentation by Dr Jean-Charles Hourcade, posted on the WorldBank website.


14/30

14

capacity of optimal adaptation to yield net benefits in Mali, the other a political economystudy of the fact that a decade of international assistance efforts have made little headway ininfluencing practical policy in Uganda.

Three big factors constrain the capacity for preparatory adaptation: (i) uncertainty inregional climate predictions, probably an order of magnitude greater than that in globalaverage predictions; (ii) the masking effect of natural climate variability, which means thatclimate change signals may be undetected, ignored or misinterpreted; and (iii) the capital-intensive nature and inertia of adaptation strategies (eg. dams, building norms, etc). Incombination these factors combined create a significant risk of maladaptation. The firstlesson from comparing optimal control models is that costs and responses can be verydifferent between perfect foresight and decision-making under high uncertainty.

(iii) Aggregation and the value of climate stability. Estimates of GDP losses associated withclimate change in existing literature are thus questionable to the extent that they neglect

issues of transition, uncertainty, and human capacity. When extrapolated to global estimatesthey also face questions about the ethical basis of aggregation indicated above, and moreoverimplicitly assume perfect compensation between winners and losers, which humaninstitutions are unlikely to deliver.

c) Beyond smooth change: risks, surprises and the very long term

Particularly in the longer term, these difficulties are amplified by the remaining elements inthe risk matrix, namely larger-scale risks and surprises in the climatic system, particularlywhen combined with inertia. The 'Burning Embers' diagram of the IPCC WGII ThirdAssessment report (reproduced in Figure 4 above), attempted to depict how different levels of

atmospheric change may affect risk levels across five impact metrics (ecosystem impacts,risks from extreme events, impacts focused upon vulnerable regions, globally significantimpacts, and risks of surprises).


15/30

15

Figure 5: Potentially sensitive switch point areas in which local effects might trigger larger-scalechanges

The chart shows regions in which specific local phenomena may result in points of sensitivity for larger-scale

and possibly rapid changes in regional or global climatic conditions.Source: J. Schellnhuber and H. Held, adapted from How Fragile is the Earth System?, in J.Briden, andT.Downing, T.(Eds.), Managing the Earth: the Eleventh Linacre Lectures, Univ. Press., Oxford (2002).

Scientists studying the interaction between different components of the climatesystem, and related natural systems, express concern about various possible instabilities. The

north Atlantic ocean circulation is the best known, but is by no means the only example.Some studies question the stability of monsoon patterns particularly on the Indiansubcontinent. The UK Hadley Centre projects that climate changes over Amazonia will leadto loss of the rainforest during this century. Other very long term possibilities include themelting or collapse of the Greenland and West Antarctic Ice sheets. Figure 5 illustrates someof these potential points of instability. The scale of threats posed by structural disruption; forexample, to Indian monsoon or African rainfall patterns are extremely hard to evaluate, butclearly should not be ignored in any quantification that claims to be reasonablycomprehensive.

There are also feedbacks which concern scientists. Drying of the Amazonianrainforest system would feed more carbon back into the atmosphere. Thawing permafrost in

the far north is likely to release pent-up methane (another and potent greenhouse gas). Farlarger amounts of methane are currently locked on the sea bed and could ultimately bereleased, though only over very much longer time periods (Centuries or Millennia, if and aswarming penetrates to ocean floors).

There are inherent uncertainties about such systems; the dynamics that keep themstable, and their limits, are not well understood. When it comes to such big questions aboutcomplex systems, uncertainty is endemic. But especially given the inertia in all these systems including the inertia in economic systems discussed further in Part II - by the time limits arefully understood they may already be unavoidable. Several of the examples noted above -systemic changes in monsoon patterns; desertification of the Amazon; and perhaps collapseof salinity shifts in the Thermohaline, may only be clearly identifiable through observational


16/30

16

data (on rainfall change, soil moisture / forest cover, and saline water movement); but by thetime changes can be observed in the data with sufficient statistical certainty to understand andproject much further, the inertia in all the systems concerns may well mean that the transition

involved can no longer be avoided - potentially with dramatic consequences.

Long term trends and risks

This is because one fundamental characteristic of the climate problem is the inertia involved.Atmospheric greenhouse gas concentrations will not stabilise until global greenhouse gasemissions are reduced to a small fraction of todays levels, which few expect before the endof the century. Even after the atmosphere stabilises, other effects will continue to accumulate.Global temperatures will continue to rise for decades as the oceans slowly adjust to the higherheat input. Sea levels will rise due to both thermal expansion and ice melt effects whichwill cumulate over hundreds to thousands of years respectively (see Figure 6): overcenturies, sea levels would rise many metres if and as the Greenland and/or west Antarctic icesheets disintegrate. Although these seem far away, there are economic reasons discussedfurther in Part II why choices over the next few decades will affect emissions andconcentrations for decades beyond that, and thus do much to determine the degree ofcommitment to a range of temperature, sea-level and other kinds of risks and instabilitiesnoted below.

Figure 6Accumulating impacts of climate change over the long term

The chart shows how key aspects of climate change will continue to accumulate long after globalemissions are reduced even to low levels. Temperatures would continue to rise slowly for a few centuriesas the oceans continued to warm; but sea level rise would continue for hundreds to thousands of years, dueto the continuing impact on ice sheets in addition to thermal expansion of the oceans. The impact onspecies might also continue for centuries as the effects on ecosystem viability play out (not shown).

Source: IPCC Third Assessment Synthesis Report, SPM-5.


17/30

17

Conclusions

Against this background, it is not hard to understand the conclusion of Downing et al. (2005)

that the social cost of carbon the present value of damages associated with a tonne ofcarbon emissions - is characterised by huge uncertainties. They suggest that values couldspan a range potentially from 1 to 1000/tC, though also argue that the very low values in thisrange are unlikely.

Hourcade (2005) offers a complementary perspective that would have similarpractical implications. He argues that considerations such as those set out above could beused to argue that from an economic standpoint, climate stability is a component in utilityfunctions that should be explicitly represented; and that given loss aversion (one of the moststable findings in behavioural economics) there is an intrinsic value to avoiding an unstableclimate. Moreover, although it is poorer societies that may suffer most from an unstableclimate, the decreasing marginal utility of income means that high-income populations /

generations should be more willing to spend resources on protecting the climate (in additionto the fact that they have been and remain the major emitters of greenhouse gases). Climatestability is thus a superior good and this may influence some of the policy insights,including those relating to the cost-effective distribution of mitigation investments.

To conclude, these various factors suggest a strong evidence base that:1. Climate change will result in significant social costs, adaptation is very important but cannot be

expected to negate such costs. All the discussion above underlines why trying to cost theimpacts of climate change is a daunting task. Early efforts to do so were criticised on thegrounds that they assumed little or no adaptation a dumb farmer. Since a substantialdegree of climate change is already unavoidable, there is no question that far greater

efforts are needed to help societies adapt to its likely impacts, and that this has thepotential to lower the cost of such impacts. But assuming that adaptation can radicallyreduce the costs of impacts is itself questionable, not least because of the fundamentalnature of the uncertainties at the micro-level, where adaptation is actually relevant butwhere the uncertainties are greatest: in economic terms, it is not certain that replacingassumptions of dumb farmers (no adaptation) by assumptions about clairvoyantfarmers (perfect adaptation) is necessarily more realistic.

2. Adaptation is only likely to contain adverse impacts if combined with serious moves

towards slowing atmospheric change and ultimately stabilising concentrations. The risksassociated with uncertainties and irreversibilities are considerable and also constrain the ability ofadaptive measure to avoid adverse impacts: a stable climate has characteristics of an intrinsic

good. Moreover the whole issue is set in the context that climate change is not a discretephenomenon with an identifiable end-point to which we need to adapt; to the contrary, theprojected growth of global emissions means simply that it will be an ongoing andaccelerating process of continual climatic change, without any identifiable prospect ofstability, and growing risk of planetary-scale disruption.

Very few studies have looked explicitly at the relationship between emissionpathways and impacts, 7but the two facts above make it plain that reducing global emissions ultimately to low levels - has to

7ONeill and Oppenheimer (2004) offer one of the few studies of this nature. They examine the implications ofthree types of pathways: rapid change that follows reference until at least 2030 before departing and


18/30

18

be part of a balanced response. Hence with this background, I turn to consider emission prospects andthe scope for emissions mitigation.

stabilising in 2100; slow change pathways that depart from 2005 and remain on a lower trajectory that finallyreaches and stabilises at the target level in 2200; and overshoot pathways that exceed the target level by100ppm in 2100 and then decline to the target in 2100. For a range of different ultimate outcomes (targetconcentrations 500, 600 and 700ppm) they find that the range of temperature outcomes in 2100 across the threetypes [of pathway] is about 0.5-1.2 deg.C, as large as or larger than the difference in long-term outcomes fordifferent stabilisation levels. Moreover, the slow change pathways lead to median rates of temperature changethat decline over time from an initial rate of 0.16deg.C/decade (for their central climate sensitivity), contrastingwith peak rates of around 0.2deg.C/decade for the rapid change 500ppm case, and approaching0.3deg.C/decade for the rapid change (and overshoot) scenarios with higher stabilisation levels. The authorsconclude that the faster rates of change would both be harder to adapt to, and also would increase the risk ofabrupt climate changes such as impacts on the Thermohaline circulation and polar ice melting.


19/30

19

PART II. CLIMATE, EMISSIONS AND DEVELOPMENT

Despite the emerging efforts to tackle the problem, global CO2 emissions are widelyprojected to grow. If industrialised countries fail to limit their emissions and energy-intensive, fossil fuel-driven energy systems remain a foundation of economic growth, it ishard to see rapid emissions growth in the rest of world being much curtailed as othercountries aspire to the same levels of economic development. Yet, the link between wealthand emissions is far less strong than generally supposed. In this section I first present andprobe four facts around the relationship between global economic and emissions growth, andthen outline four opportunities that arise in the context of considering lower emittingdevelopment paths.

A. Four Facts

1. Large disparities in present emissions combined with population and economicgrowth create huge potential for global emissions growth if countries pursue

existing models of development.

Figure 7 plots per-capita emissions against population in different countries and regions (sothat annual emissions in each are represented by the area of the blocks). Per capita emissionsin the industrialised countries are typically as much as ten times the average in the morepopulous developing countries, particularly Africa and the Indian subcontinent. The potentialfor global emissions growth is thus huge, even if and as leading countries start to embark

upon more serious action:


20/30

20

Figure 7. CO2 emissions per capita and population by region in 2000

Note. The chart shows the global distribution of CO2 emissions in terms of three major indices: emissions per

capita (height of each block); population (width of each block); and total emissions (product of population andemissions per capita = area of block). Per capita emissions in the Industrialised countries are currently as muchas ten times the average in developing countries, particularly Africa and the Indian subcontinent.

Source: Grubb (2004)

Population. Recent debates have tended to lower populations projections for this Century,due to sharply declining birth rates, but most still involve projections that globalpopulation (the horizontal axis in Figure 7) will expand by around 50%.8

Economic growth and per-capita emissions. Recent debates about CO2-GDPrelationships and projections focused on metrics of measurement,9 and about expectationsof economic convergence vs a continued bimodal distribution of world per-capita incomelevels (eg. Jones 1997; Quah 1993, 1996; Barro and Sal-i-Martin, 1997; Riahi 2005), do

not change the big picture. Almost all scenarios involve considerable economic growthin developing countries that, in the absence of counteracting policies, would tend to taketheir per-capita emission levels closer to those of the present industrialized world.

Mainly as a result of these two forces, the vast majority of non-intervention scenarios in thepeer-reviewed literature (as reviewed for the IPCC Fourth Assessment) result in global CO2emissions typically close to doubling around mid-Century, and reaching between two andfour times current levels by 2100 taking the world far beyond the doubled CO2concentrations scenarios that were the traditional focus of climate change modeling.

8 Out of 115 population scenarios collated recently by IIASA for the IPCC (Lutz et al, 2001; UN 2005; WorldBank 2005; US Census Bureau 2005), the majority project population in the second half of the Century to bemoderately stable at around 9-10 billion people, and only one scenario involves global population decliningbelow 5 billion by the end of the Century.9 An extensive debate has focused upon use of Purchasing Power Parity (PPP) vs Market Exchange Rates(MER)) and assumptions about economic convergence. Whilst the choice of GDP denominator would not beexpected to have afirst orderimpact on projections of a physical quantity such as emissions (Holtsmark andAlfsen, 2004a and b), it may have second-order impacts due to structural effects. Nordhaus (2005) concludesthat the jury is still out and recommends a hybrid treatment using PPP base-year calibration with MER growthrates; Dixon (2005) presents evidence that PPP treatments could lower emission projections due to differentialstructural effects and associated sectoral emission intensities and elasticities.


21/30

21

0

1

2

3

4

5

6

7

8

9

0 10000 20000 30000 40000 50000 60000

Income Per Capita (1995 US$)

EmissionsPerCapita(MetricTonnes

)

EIT

OECD

OPEC

NICs

Other

Figure 8. CO2 emissions per capita for different economic categories as a function of income

Source: Grubb, Butler and Feldman (2006)

2. Beyond the stage of basic industrialization, there are large differences in per-capitaemissions and huge variability in the CO2-GDP relationship.

Figure 8 plots per-capita emissions against per capita GDP. At present no country withincome beyond c.US$10,000 per capita emits less than about 1.5tC/cap. This reflects theemissions inherent in building basic industrial and urban infrastructures a fact which ifextrapolated forward, and comparing against Figure 7, implies considerable growth indeveloping country emissions on almost any scenario for the world economy.

Nevertheless there are big variations across the richer countries. Per-capita CO2emissions in the new world developed economies, of 5-6tC/cap, tend to be around twice thelevels typical in old world economies (Figure 7). Looked at more closely (Figure 8), thedifferences are even more extensive. This diversity is a modest source of hope, even based oncurrent patterns; that itself implies a large degree of freedom over long run emissions even inthe absence of radical technological breakthroughs or major lifestyle changes.10 A world in

which most countries by the end of the Century emit 1.5-2.5 tC/cap clearly has far lowerclimate risks than one in which they emit at up to 3 times those levels.

Yet Fig.8 illustrates that the difference between these is not primarily to do withwealth. It is to do largely with technology and infrastructure choices around the development,

10 Eg. The econometric evidence is mixed. If cross-country data show the predicted relationship (aleit withcontroversities, country-level analysis show relatively weak relationship between levels of GDP and emissionsn.. econometric anlayiss does not support an optimistic interpretation of the hypothesis that the problem willtake care of itself with economic growth, bt the pessimistif interpretation, that gorwht and CO2 emissionswould be irrevocably related, is not supported by the data either. Case studies confirm that there are majordegrees of flexibility. (F. Lecocq, RFF/DEFRA workshop on the Economics of Climate Change:Understanding Transatlantic Differences, Washington, March 2-3 2006).


22/30

22

scale and efficiency of buildings, industrial and transport systems, and the supply systems(particularly electricity) with these are supplied. To these we now turn.

3. Emissions arise from a wide diversity of activities that embody huge inertia butmany of which offer a correspondingly wide array of higher or lower emitting

technology options

It is widely recognized that the climate problem overall requires us to tackle a number ofdifferent gases and sources in addition to fossil fuels; in addition to the energy sector,greenhouse gases also emanate from agriculture, land use and direct industrial processemissions. For some developing countries, non-energy sources (particularly deforestation andother land use activities) dominate, and the desirability of addressing these for a multitude ofreasons is widely recognized. But the relative role of energy-related emissions tends to growwith development.

Yet even fossil-fuel related emissions result from several different systems each of

which involve fundamentally different processes. Specifically, they are driven by energydemand in three main components (buildings, industry, and transport), supplied increasinglythrough three main systems (electricity, refined fuels, plus direct fuel delivery (

Figure 9)).

Figure 9 Main com ponent s of glob al ener gy syst em and CO2 emi ssions

Transport(29%)

Buildings,

Appliances& other(36%)

Industry(Manufacturing

andConstruction)

(35%)

End Users Supply Systems Resources

Coal (37%)

Gas (21%)BiomassSolar & geothermal

Petroleum (42%)Biofuels

NuclearHydro

Wind, wave & tidal

Solar PV

Direct Fuels & Heat(24%)

Refined Fuels System(40%)

Electricity System(36%)

Transport(29%)

Buildings,

Appliances& other(36%)

Industry(Manufacturing

andConstruction)

(35%)

End Users Supply Systems Resources

Coal (37%)

Gas (21%)BiomassSolar & geothermal

Petroleum (42%)Biofuels

NuclearHydro

Wind, wave & tidal

Solar PV

Direct Fuels & Heat(24%)

Refined Fuels System(40%)

Electricity System(36%)

Flow of economic value

Notes: The data show the % of global energy-related CO2 emissions associated with thedifferent parts of the energy system (including emissions embodied in fuels and electricity). Somesmall flows that comprise under 1% of global energy flows (eg. electricity and natural gascontributions to transport) are not shown. Note that patterns vary between regions (eg. industry islower and transport higher in developed economies), and the sectors are growing at differentrates (over past 30 years, energy demand for buildings : industry : transport has grown at


23/30

23

2.6%:1.7%:2.5% annual average. Non-electric energy industries (emissions from refineries, gasetc) cited as 7% of total, are allocated here in ratio 4:1:2 to transport : industry : buildings & other.Refined fuels taken as petroleum less input to elec; direct fuels and heat is the residual.

Source data: Resources CO2 from EIA (2002); supply systems and end-use data from IEA (2002

The options for different technologies and systems are in most cases extensive. Buildingsdiffer radically in the efficiency with which they consume energy. Urban planners areregularly faced with choices between road and rail investments. Electrical power is generatedfrom a wide array of technologies, from the highest to the lower carbon emitters. A recentcontribution (Pacala and Socolow, 2004) sought to frame the debate in terms of technologywedges that could each deliver savings of 1GtC/yr by mid century, and listed fifteen possiblesuch wedges.

Even in terms of energy resources, most options are not seriously limited in total; norare low-carbon options including renewable energy sources. Although constraints limit what

is feasible, the estimated global potential for tidal, wave and hydro are comparable to thescale of global electricity consumption, whilst most estimates of practicable wind and solarresources are substantially greater still (Figure 10 summarises various estimates). As withnatural gas, key issues for delivery include the systems, and the fact that (with the minorexceptions of direct solar heating and lighting, and geothermal heating) all but one biomass- produce primary electricity. Rather, the constraints concern the economics of matchingsources and systems to demands. It is often said that countries will not leave their domesticenergy resources (such as coal) in the ground have coal, so will use it. There is nofundamental reason why the same logic should not apply to the renewable energy resourceswhich sweep most countries: the reality is that the options developed are a matter of cost,technological capacity, and political choices.

Figure 10 Global renewable energy potential estimated by various studies compared to currentglobal energy and electricity demand.


24/30

24

Source: Neuhoff (2005). See source for references and explanation

-50000

-25000

0

25000

50000

75000

100000

125000

Wind Tidal Wave Hydro Geothermal Solar Biomass Fuel and

ElectricityUse

ElectricityGeneration(TWh/yr)

-180

-90

0

90

180

270

360

450

ThermalEquivalent(EJ/yr)

Bonn TBP (2004) WEA (2000) RIGES (1993) Shell (1996)

Greenpeace (1993) Grubb & Meyer (1993) WBGU (2004) Fischer & Schrattenholzer (2001)

IEA (2002) WEC (1994) IPCC (1996) Hall & Rosillo-Calle (1998)

x y

Electricity Only Renewable SourcesElectricity and

Thermal RenewableSources

FuelRenewable

Sources

Global EnergyConsumption

Fuel Use(Other)

Fuel Use(Transport)

Fuel Use(Buildings)

Fuel Use(Industrial)

CurrentElectricity

Output

Losses inElectricity

Generation

4. The biggest determinants of future emissions will be the combination of thepatterns set by industrialized countries and the capacity of developing countries toleapfrog towards higher-income but lower-emitting patterns of development

I outline specific issues surrounding the economics of mitigation below. Here I note widerissues around the relationship of emissions to development. Development economics hasincreasingly emphasized the scope of development choices and their dependence uponinstitutional capacity in developing countries (Meier, 2001). The same is likely to be truewith respect to emissions, and since one impact of weak institutions is that economies operatefurther from the efficiency frontier it cannot a priori be concluded that stronger institutionsand resulting higher economic growth will result in higher emissions. Higher dependenceupon fossil fuels is not intrinsically good for development and carries numerous attendantproblems ranging from other environmental impacts to exposure to international fossil fuelprice variability. Institutional capacity to accelerate efficiency improvements and fosterlower fossil fuel paths could put countries on pathways that are both lower emitting and

better for development the ideal being capacity to leapfrog the inefficiencies displayed intraditional models of development (the IPCC Fourth Assessment, WG3 report, contains achapter (12) covering these issues in depth).

The concept of developing countries leapfrogging to more advanced conditions is notnew, but it tends to have been confined to academic discussion far from the realities of theongoing struggle for economic development. It is a central conclusion of this paper thatleapfrogging can neither be confined to the margins of debate any longer, nor does itrepresent one simplistic view of what could in theory be done. It is rather a necessity thatrepresents a set of specific opportunities, to which I now turn.


25/30

25

B. Four opportunities

1. Opportunities for enhancing energy and economic efficiencyThere is a long-standing literature on the apparently favourable economics of improvingenergy efficiency (eg. IPCC Third Assessment, WGIII). Global studies date back toGoldemberg (1988). Even in developed countries that had made large strides during the1980s and 1990s, considerable cost-effective potential remains.11 Numerous World Bankstudies have highlighted the potential in developing countries tends to be even greater[WDR/which are best refs?]. Many factors explain the wastage the literature on barriers toenergy efficiency is similarly enormous. One specific factor is the continuing degree ofenergy sector subsidies, which are generally recognized to be macroeconomicallydetrimental.12

Reforming subsidies, or introducing stronger regulatory measures around energyefficiency, is not easy. There are strong obstacles of political economy. In such conditions it

is not uncommon that additional issues can offer leverage to achieve reforms that wouldanyway be desirable. It is perfectly possible that climate change could help to play such a role blaming the medicine on the need to tackle emissions make be one factor in making iteasier to swallow.

2. Co-benefitsWhilst stronger measures around energy efficiency and removal of fossil fuel subsidies maysimply improve the internal efficiency of the energy sector, there are wider potential co-benefits, in both forestry and energy / transport sectors. Energy is a source of multipleemissions, for example sulphur dioxide. Higher energy consumption also means greaterexposure to the impacts of price volatility in international fuel markets. The list is

surprisingly extensive and studies indicate that such co-benefits could themselves justify asignificant degree of measures that also reduce CO2 emissions (covered in depth in IPCCFourth Assessment, Chapters 11 and 12).

3. Leapfrogging in infrastructureIn the context of developing countries, the most important single consideration may beharnessing the pace of construction of new capital stock. Most of the sectors indicated inFigure 9 are also characterised by huge inertia. Industrial equipment that consumes,generates or processes energy has a lifetime typically measured in decades. The buildings thatconsume energy, the road and rail systems that determine transport demands, and even thepipeline and port infrastructures required for direct fuel delivery, can set infrastructure

patterns for a Century or more.We have learned a great deal since rich countries started locking themselves in to

higher emitting patterns of infrastructure. The wasteful nature of the UK building stockremains one of greatest headaches for the governments energy policy. North Americas/exceptional energy intensity, and resulting dependence on oil imports, is to an importantdegree driven by choices in the transport sector made in the first half of the 20th Century.

11 eg. the UK improved its national energy productivity (ratio of GDP to energy consumption) by over 20%during the 1990s, but the governments Performance Intelligence Unit still estimated the potential net value ofadditional energy savings to the UK economy in 2000 at over 2bn/yr).12 WDR refs? Cite data or is this all too well known anyway now?


26/30

26

Inefficient industrial equipment installed during those decades is frequently still operating,with continual cycles of refurbishment that can rarely bring performance up to the standard ofnew plant (Alic et al, 2003). Leapfrogging in infrastructure, by trying to make choices at the

leading edge for the long term, is thus a huge opportunity in the course of development.

4. Leapfrogging in technologyFinally, in some of the major developing countries there is the possibility of moving to thefrontier of technological developments, in both domestic investment and capturing a growingshare of the global market for energy efficient and low CO2 technologies. Indias embrace ofIT is a classic example, but in the energy sector, Brazils dominance of biofuel technology now reaping large rewards - is perhaps more relevant. Technological development based onthe large investment needs in key areas is a real opportunity, with solar PV technologyperhaps being the biggest prize of all, because of the almost unlimited resource in which

developing countries excel.Time is not on our side. In energy use and supply, emission patterns will be set by

how the world chooses to invest tens of US$trillions capital over the next few decades,investments that will have irreversible impacts throughout the century.The uncertaintiesaround global emissions growth trends, and the extent to which it depends upon choices madeabout the deployment of capital, are underlined by the IEA's World Energy Outlook (IEA,2004), which estimates that about US$16tr will be invested in energy supplies up to 2030(about US$10tr of this in the power sector), divided roughly equally between industrialisedand developing countries. In their reference scenario most of the generation investmentsare in carbon-intensive stock; their alternative scenario involves more rapid growth in lesscarbon intensive investments, and although this is more expensive per unit, the scenario

actually requires less capital investment overall because of the increased efficiency of end use(even when the end-use investments are included). The choice of path out to 2030 will haveprofound implications for the structure of capital stock, and its carbon intensity, well into thesecond half of this Century and even beyond.

13

None of this that should deflect attention from the need for industrialized countries to gettheir emissions on a declining course. Indeed, as emphasized by a leading Chinese researcher(Zhou, 2005), it will be much harder for developing countries to achieve progress unless theworlds industrial powerhouses simultaneously develop the requisite lower-carbontechnologies, businesses, capacities and institutional models. But a debate which ignores thecrucial importance of emissions growth in developing countries is simply not a maturedebate. And, nor would ignoring the opportunities be in the interests of developing countries

themselves, for the reasons set out here, over and above their exposure to climate change.

13Ulph (1997) noted that 'information acquisition and irreversibility could make a significant difference topolicy advice, but models of irreversibility effects (Pindyck (2000), Kolstad (1996a and 1996b)) appear tohave treated carbon and non-carbon intensive investments asymmetrically, assuming only the latter to beirreversible.13 In practice both embody considerable inertia: every major investment is a decision withirreversible consequences. The dominant net irreversibility is then carbon in the atmosphere and associateddamages. Uncertainty about impacts (relative to best estimate) consequently increase the attractiveness oflow carbon paths, to a degree that depends on the potential damages, risks and degrees of irreversibility(see also section 3).


27/30

27

The brake on embracing such opportunities appears to be partly political (the position inthe global negotiations that developing countries have no responsibility to act), partlyinstitutional (the sheer difficulty of thinking long-term in the crush of development

pressures), and partly motivated by fears of economic consequences. In the final part of thispaper, I turn more formally to the policy and macroeconomic issues.

Part III: Policy and macroeconomic dimensions

Family illness has prevented completion of the third part of this paper prior to the ABCDEconference; it will be completed for the final published proceedings. It will draw i.a. upon studies of

the global economics of atmospheric stabilisation published in Vurren, Weyant and de la Chesnaye

(2006), Edenhofer et al, eds (2006), and studies of the economics of emissions trading and the

future of the European Trading System (Grubb and Neuhoff, eds, 2006)

Annex: References

Alic, J.A., D.C. Mowery and E.S. Rubin, (2003): U.S. Technology and Innovation Policies- Lessonsfor Climate Change. Prepared for Pew Center on Global Climate Change.

Alverson, K., R. Bradley, K. Briffa, J. Cole, M. Hughes, I. Larocque, T. Pedersen, L. Thompson andS. Tudhope (2001) Letter: A Global Paleoclimate Observing System. Science 293(5527): P.47 - 48.

Baron, R. and ECON-Energy, (1997): Economic/fiscal instruments: competitiveness issues related tocarbon/energy taxation. OECD/IEA.

Barro, R.J., and X. Sala-i-Martin, (1997): Technological diffusion, convergence, and growth. Journalof Economic Growth, 2(1), pp. 1-26.

Benson, C., Clay, E., (2004).Understanding the economic and financial impact of naturaldisasters. The International Bank for Reconstruction and Development. The World Bank,Washington D.C.

Butt, T. A., B. A. McCarl and A. O. Kergna (2006) Policies for reducing agricultural sectorvulnerability to climate change in Mali. Climate Policy 5(6).

Carbon Trust (2005), The UK Climate Change Programme: potential evolution for businessand public sector,www.thecarbontrust.co.uk/carbontrust/about/publications/CTC518_CCPR2.pdf

Carbon Trust (2004), The European Emissions Trading System: implications for industrialcompetitiveness, [online] http://www.thecarbontrust.co.uk/carbontrust/about/publications

Carraro, C. and D. Siniscalco, (1998). International Environmental Agreements: Incentivesand Political Economy,European Economic Review, 42: 561-572.

Carraro, C., (1999). The Structure of International Agreements on Climate Change, in C. Carraro,ed.,International Environmental Agreements on Climate Change, Kluwer Academic Pub.: Dordrecht.

Carraro, C. and B. Buchner,(2005). Economic and Environmental Effectiveness of a Technology-based Climate Protocol, Climate Policy, 4(3).


28/30

28

Carraro, C. and B. Buchner, (2005).Regional and Subglobal Climate Blocs. A Game-TheoreticPerspective on Bottom-up Climate Regimes, FEEM Nota di Lavoro 21.05 and CEPR DP.5034.Forthcoming in C. Carraro and C. Egenhofer, eds.,Bottom-up Approaches towards a Global Climate

Agreement, E. Elgar.

Dadi (2005), We need a development model of low emissions, presentation to Exeter conference onavoiding dangerous climate change, http://www.stabilisation2005.com/day3/Zhous_Dadi.pdf

Delay T. and M.Grubb, (2005). Solutions to climate change that also make money, Financial Times,5 Oct 2005.

Dixon, P. and Maureen T. Rimmer (2005), Analysing convergence with a multi-country computablegeneral equilibrium model: PPP versus MER, Energy and Environment, 16/6. [online]

Downing, T.E., Anthoff, D., Butterfield, B., Ceronsky, M., Grubb, M., Guo, J., Hepburn, C., Hope,C., Hunt, A., Li, A., Markandya, A., Moss, S., Nyong, A., Tol, R.S.J., and Watkiss, P. 2005. Scoping

uncertainty in the social cost of carbon. London: Defra(http://www.defra.gov.uk/environment/climatechange/carbon-cost/sei-scc/index.htm).

Edenhofer O., C. Carraro, J.Kohler and M. Grubb (eds), Endogenous technological change and theecnomics of atmospheric stabilisation, Energy Journal Special Issue 2006.

Edenhofer et al (2006), Induced Technological Change: Exploring its Implications for the Economicsof Atmospheric Stabilization Synthesis Report from the Innovation Modelling Comparison Project,Energy Journal.

Ellis, J. and M. Bosi, (2005) Exploring Options for Sectoral Crediting Mechanisms, OECD/IEAPublication.

Grubb M. (2004), The Climate Change Challenge, Carbon Trust, London, 2004.

http://www.carbontrust.co.uk/Publications/publicationdetail.htm?productid=CTC502Grubb, M., (2005), Technology Innovation and Climate Change Policy: an overview of issues andoptions, Keio Economic Studies, 41/2:103-132.

Grubb, M., (2004) Kyoto and the Future of International Climate Change Responses: From Here toWhere?, International Review for Environmental Strategies, 5/1:15-38.

Grubb, M. 2001, "Who's afraid of atmospheric stabilisation? Making the link between energyresources and climate change", Energy Policy, 29:837-845.

Grubb M. and K.Neuhoff (eds), Allocation and competitiveness in the European Emissions TradingSystem, Climate Policy, Vol.6:1 Special Issue, 2006.

Grubb, M. & Ulph, D. (2002), "Energy, the Environment and Innovation", Oxford Review of

Economic Policy, 18(1):92-106.

Groom, B., C. Hepburn, P. Koundouri and D. Pearce (2003) Valuing the Future. World Economics 4.

Heal, G. M. (1998): Valuing the future: economic theory and sustainability, Columbia UniversityPress.

Hallegatte, S. and J.-C. Hourcade, (2005), Why economic growth matters in assessing climatechange impacts: illustration on extreme events, submitted to Ecological Economics.

Holtsmark, B.J., and K.H. Alfsen, (2004a): PPP correction of the IPCC emission scenarios does itmatter? Climatic Change, 68(1-2), pp. 11-19.


29/30

29

Holtsmark, B.J., and K.H. Alfsen, (2004b): The Use of PPP or MER in the construction of emissionscenarios is more than a question of 'metrics'. Climate Policy, 4(2), pp. 205-216.

Hourcade, J.C., R. Crassous and O. Sassi (2006). Endogenous Structural Change and ClimateTargets: Modelling experiments with Imaclim-R, Energy Journal Special Issue, forthcoming.

International Energy Agency, (2004): World Energy Outlook 2004. www.worldenergyoutlook.org.

Jaffe, A. B., R. G. Newell and R. N. Stavins (2003): Technological change and the environment. pp.461-516 in K.-G. Mler and J. R. Vincent (eds), Handbook of Environmental Economics, ElsevierScience B.V.

Jones, C., (1997), Convergence revisited. Journal of Economic Growth, 2(2), pp. 131-153.

Kolstad, C. D., (1996b): Fundamental irreversibilities in stock externalities. Journal of PublicEconomics 60(2): 221-233.

Kolstad, C.D. (1996a): Fundamental irreversibilities in stock externalities, Journal of Public

Economics 60(2): 221-233.Lutz, W., and W. Sanderson, (2001): The end of world population growth. Nature 412(6846), pp.543-545.

Meier, G.M., (2001): The old generation of development economists and the new. In: Frontiers ofdevelopment economics. The Future in perspective. Oxford University Press, New York

Mendelsohn R., W.Morrison, M.Schlesinger and N.Adronova, Country-specific market impacts fromClimate Change, Climatic Change, 45 (2000), 553-569

Mendelsohn, R., W. D. Nordhaus and D. Shaw (1994) The Impact of Global Warming on Agriculture:A Ricardian Analysis. American Economic Review 84: P.753-71.

Mendelsohn, R. and L. Williams (2004) Comparing Forecasts of the Global Impacts ofClimate Change. Mitigation and Adaptation Strategies for Global Change 9(4).

Nordhaus W.D. (1991): To slow or not to slow: the economics of the greenhouse effect.EconomicJournal, 101(407) 920-937.

Nordhaus, W.D., (2005): Notes on the use of purchasing power parity or actual market prices inglobal modeling systems.IPCC Seminar on Emission Scenarios. IPCC, Washington DC.

Olsen (2006), National ownership in the implementation of global climate policy in Uganda,Climate Policy, Vol.5:6

Pindyck Robert S. (2000), Irreversibilities and the timing of environmental policy, Resource andEnergy Economics (2000), Vol.22:233-259

Quah, D., 1993: Galton's fallacy and tests of the convergence hypothesis. Scandinavian Journal ofEconomics, 95(4), pp. 427-443.

Quah, D.T., 1996: Convergence empirics across economies with (some) capital mobility.Journal ofEconomic Growth, 1(1), pp. 95-124.

Riahi, K., 2005: Present and expected research activities (EMF-21) and gaps in knowledge instabilization/emissions scenarios. IPCC Expert Meeting on Emissions Scenarios.IntergovernmentalPanel on Climate Change, Washington, D.C.


30/30

30

Schellnhuber J. and H. Held, adapted from How Fragile is the Earth System?, in J.Briden, andT.Downing, T.(Eds.), Managing the Earth: the Eleventh Linacre Lectures, Univ. Press., Oxford(2002).

Shrestha, R. M., (2004): Technological Implications of the Clean Development Mechanism for thePower Sector in Three Asian Countries. International Review for Environmental Strategies 5(1): 273-288.

Ulph, A. and D. Ulph, (1997): Global Warming, Irreversibility and Learning. The Economic Journal107(442): 636-650.

UK Treasury, (2004, The Green Book: appraisal and evaluation in central government,http://greenbook.treasury.gov.uk/

United Nations Department of Economic and Social Affairs Population Division, (2005): Worldpopulation prospects : the 2004 revision. CD-Rom edition - extended dataset.

United States Bureau of the Census (USBC), 2005: International data base - data updated. Dataupdated 4-26-2005.

Vurren v., J.Weyant, F.de la Chesnaye (2006), Multigas scenarios to stabilise radiative forcing,Energy Economics, 28 : 102-120.

World Bank, (2005): World development indicators - CD-ROM.

Weitzman, M. L. (1998) Why the Far-Distant Future Should Be Discounted at Its Lowest PossibleRate. Journal of Environmental Economics and Management 36(3): P.201-208.

Zhang, Z. and A. Baranzini, (2004): What do we know about carbon taxes? An inquiry into their im-pacts on competitiveness and distribution of income. Energy Policy 32 (2004): 507-518.

Zhou, Dadi (2005), We need a development model of low emissions, presentation to Exeter

conference on avoiding dangerous climate change,http://www.stabilisation2005.com/day3/Zhou_Dadi.pdf

michael grubb climate change

Documents