Costing the Earth: Uncertainty and Climate Policy
Nafees MeahHead of Science
May 2010
Climate Change As ‘Hard’ Problem In Public Policy
As a public policy issue, climate change is a classic example of a ‘wicked’ problem
Notwithstanding the compelling scientific evidence, it is still contested
It is the case that there is and will always be irreducible scientific uncertainty – we cannot do a controlled experiment on the planet
Even if there is consensus on the science, that does not tell us what we ought to do: what are the trade-offs that the decision-makers need to consider?
Outline
Summary of the science of climate changeThe 2 degree target – AVOID ProgrammeKey questions in the economics of climate
changeEconomic modelling and cost-benefit analysisStern Review and its criticsBottom up technical/economic modelsThe task facing the decision maker
Carbon Dioxide Concentrations In The Atmosphere Since The Beginning Of The Industrial Revolution
MacKay (2009)
Evidence that CO2 is Man Made
Last decade has been the warmest since records began
Climate models show the observed warming is only explained by including human effects through GHG emissions
Excluding human influence
Incl
udin
g hu
man
influ
ence
Year to year range of modelled global temperatures
Observed Global Temperature Changes Not Explained by Natural Factors Alone
By 2100 Global Temperature is likely to be1.8 to 4oC Above 1990 Level
The scale of warming depends on emissions:
Low scenario 1.1 – 2.9oC
Best estimate 1.8 – 4.0oC
High scenario 2.4 – 6.4oC IPCC (2007)
Projected temperatures – land and polar regions warm more than oceans
IPCC (2007)
IPCC Fourth Assessment Report 2007
“Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea level” – p2, IPCC Synthesis Report
Temperature, Sea Level and Snow Cover
• The Earth’s surface has warmed by 0.75C since 1900
• Sea levels have risen by 20cm since 1900
• Now: glaciers, snow cover and sea ice are all declining
• Now: more heat-waves, droughts, extreme rain events and more intense cyclones
IPCC (2007)
Arctic Ocean September Ice Extent
Impacts of climate change
1°C 2°C 5°C4°C3°C
Sea level rise threatens major cities
Falling crop yields in many areas, particularly developing regions
FoodFood
WaterWater
EcosystemsEcosystems
Risk of Abrupt and Risk of Abrupt and Major Irreversible Major Irreversible ChangesChanges
Global temperature change (relative to pre-industrial)0°C
Falling yields in many developed regions
Rising number of species face extinction
Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system
Significant decreases in water availability in many areas, including Mediterranean and Southern Africa
Small mountain glaciers disappear – water supplies threatened in several areas
Extensive Damage to Coral Reefs
Extreme Extreme Weather Weather EventsEvents
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Possible rising yields in some high latitude regions
Cascade of uncertainty
Emission scenario
Atmospheric concentrations
Climate sensitivity
Climate change
Range of Impacts
Impacts may not increase linearly with warming
Lenton (2007)
Climate Sensitivity: Temperature Response of doubling [CO2]
AR4 concluded that best estimate of climate sensitivity was 30C with range of 2-4.50C (ca. 2SD)
IPCC (2007)
Q = F-λ∆T
Where Q = energy balance,F = forcing and λ = feedback parameter
At eqm Q=0
F = λ∆T
For the special case of doubling CO2
F’ = λS Where S = Climate sensitivity
Climate feedbacks include
Feedback
Water vapour This is the most important. Water vapour is a powerful greenhouse gas.
Cloud radiation Complex impact. Several processes involved. Sensitive to structure of clouds
Ocean-circulation Plays large part in determining earth’s climate. Large heat capacity and moves heat around.
Ice-albedo Ice and snow are a powerful reflector of solar radiation
Climate feedbacks affect the sensitivity of the climate.
Why a ‘fat’ tail?
AVOID Programme and the 2 degree target
AVOID examined variations in:
1. The year of peak emissions (2014 to 2030)
2. The emission rates leading up to the peak (BAU)
3. The emissions reduction rate following peak emissions (1 to 5% per year)
4. The net long-term level of emissions (zero to high levels)
Business as usual
Policy scenario
2 degree target agreed at Copenhagen Accord balances risks against technical and social feasibility in an informal way
AVOID Programme: 2 degree trajectories
AVOID uses a ‘tuned’climate model (MAGICC) Global average temperature determined by cumulative emissionsof GHGs (2.63TtCO2e 2000-2500)Approximates to the area under thecurveTake home message is that to stabilise temperature at 2 degrees is going to be a huge challenge - we need to peak soon and STRONG decline thereafter
GHG emission trajectories consistent with 2˚C increase in global average temperature at 2100 at a 50% probability level
Action on Climate Change
Key questions
1.How much will it cost to ‘stabilise’ the climate and avoid dangerous climate change?
2.Will the cost of avoiding dangerous climate change compete with other priorities such as development?
What action do we take in the light of the scientific evidence for climate change?
So if we applied the appropriate discount rate , then we might say that action would be justified on cost-benefit grounds if:
NPV = Present Value (benefits) – Present Value (costs) > 0
Or for a range of alternative policy actions, choose the one with highest NPV
Uncertainties in economic modelling of climate change
This is a formidable challenge because: We do not and cannot know the precise benefits of policy
action given the underlying uncertainty in the science We do not and cannot know what the future cost of the policy
will be given the long time horizons Costs and benefits functions are likely to be highly non-linear
- and we don’t know what they are If standard economic models are based on marginal
changes, how do we account for irreversibilities? Given the very long time horizons, what is the appropriate
discount rate to use?
Economic models for climate policy
Number of different kinds of economicmodels Much of the debate is about IntegratedAssessment Models (IAMS) which seek to integrate science and the economic theory to optimise climate policyThese are utility maximising models which seek to maximize, W, the social welfare, where
W = ∫ exp(-ρt)U[c(t)]dt
Where ρ is the rate of pure time preference,c(t) is the consumption at time t, andU is the utility function specifying how much utility is derived from a particular level of consumption
Outputs from Integrated Assessment Models
Time
Global economic activity
Reference case withoutimpacts
Reference case withimpacts
Cost of policy
Benefits of policy
Stern Review
Uses PAGE 2002 Integrated Assessment Model Takes account of risk and uncertainty through Monte Carlo simulations
on the climate sensitivity parameter, assumptions on risk aversion and equity
Key finding Cost of trajectory consistent with 550ppm CO2e stabilisation
averages 1% of global GDP per year (range -1% to 3.5%) Avoided damages would be 11% of GDP (range 2-27%) for
Baseline climate and 14% (range 3-32%) for High climate This contrasts with other IAMs which suggest a higher level of cost and
lower level of damage – DICE, MERGE, FUND Other models propose ‘policy ramp’ and modest rates of GHG reduction
The critics
Main criticism in the literature has been over the choice discount rate used by the Stern Review – should instead have used a market rate (i.e. 3 – 7%)
In the Ramsay formula, the social discount rate is given by:
Social discount rate = + ( x consumption/cap growth rate)
Reflects pure rate of time preference (which Stern suggest should be 0) and risk of human extinction (which Stern select as 0.1).
Elasticity of marginal utility of consumption (Stern suggest this is 1, which assumes society is moderately adverse to income inequality).
Growth in per capita consumption varies over time and according to extent of climate change damages. For baseline climate scenario with market impacts only, the 5-95% range of time-averaged growth is 1.08% - 1.14%.
Therefore in Stern, discount rate = 0.1 + (1*(1.08 to 1.14%)) = 1.18 to 1.24%
Discount rate have an important effect on the present value of climate change impacts
Value of £100 over time using different discount rates
90.479
81.865
60.577
36.69636.603
13.53313.262
1.7590.623
0.00000010.0030102030405060708090
100
0 10 20 30 40 50 60 70 80 90 100
110
120
130
140
150
160
170
180
190
200
Years
£
0.1% 0.5%
1.0% 2.0%
5.0% 10.0%
0.004
On Extreme Uncertainty of Extreme Climate Change – Martin Weitzman
Implication of the fat tail of climate sensitivity Translating the pdf of climate sensitivity into confidence levels for temperature change as a
function of GHG concentrations gives:
So at 550 ppm there is a 10% of T >4.8 ˚C. This is disturbing and can’t be ignored in formal economic modelling.
Damage function
Thought experiment on the damage function, which often takes the quadratic form in IAMs of:
C*(T) = 1/ 1+aT2
Where C*(T) is defined as the ‘welfare equivalent’ consumption as a fraction of what the consumption would be at T=0, and a=0.003
However, it is impossible to know a priori what the functional form should be for high temperatures
What if we used quartic or exponential form then the estimated damages would be very different
For a quartic exponential function, C*(T) = exp(-bT4), then at 10˚C C*(T) is 0.08% i.e. a catastrophic loss of ‘welfare equivalent’ consumption
Technical feasibility models - McKinsey Marginal Abatement Cost Curve – Bottom up estimates
Generally optimistic – it can be done and at comparatively small cost!
Choices facing the decision makers
Is formalised cost-benefit analysis appropriate for climate change policy?
If the answer is ‘no’ what other approach should we adopt? Given that a 2 ˚C has been adopted, should economic
analysis focus on seeking the cost effective pathway Is a risk based approach formalising the ‘precautionary
principle’ the appropriate way forward? Do we need more scientific knowledge on threshold
temperatures for major discontinuities or catastrophe’s? What else is there any other approach that we should
consider?
Thank you for your attention
Finally....
Top Related