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Projected impacts of climate change
0°C
Food
Water
Global temperature change (relative to pre-industrial)
1°C
2°C
3°C
4°C
5°C
Falling crop yields in many areas, particularly
developing regions
Falling yields in many
Possible rising yields in
developed regions
some high latitude regions
Small mountain glaciers
disappear – water
supplies threatened in
several areas
Significant decreases in water
availability in many areas, including
Mediterranean and Southern Africa
Sea level rise
threatens major cities
Ecosystems
Extensive Damage
to Coral Reefs
Rising number of species face extinction
Extreme
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Weather
Events
Risk of Abrupt and
Increasing risk of dangerous feedbacks and
Major Irreversible
abrupt, large-scale shifts in the climate system
Changes
Stabilisation and eventual change in
temperature
5%
400ppm CO2e
95%
450ppm CO2e
550ppm CO2e
650ppm CO2e
750ppm CO2e
Eventual temperature change (relative to pre-industrial)
0°C
1°C
2°C
3°C
4°C
5°C
Estimates of climate sensitivity from IAMs
compared to GCMs
FUND 2.8
DICE/RICE-99
PAGE2002
IPCC AR4 ‘likely’ range
Meinshausen 90%
Eventual temperature change (relative to pre-industrial)
0°C
1°C
2°C
3°C
4°C
5°C
‘Non-Market’
Market
Projection
Limit of coverage
of some studies,
including
Mendelsohn
Socially
contingent
None
Some studies,
e.g. Tol
Bounded
risks
None
System
change/
surprise
Limited to
Nordhaus and
Boyer/Hope
None
None
Models only have partial coverage of impacts
Values in the literature are a sub-total of impacts
Source: Watkiss, Downing et al. (2005)
Dos and don’ts of discounting
Modelling value judgements
• Do discount future if we will be richer
• More/less ‘egalitarian’ doesn’t change story
• Do discount for existential risk
• Do not discount for agent relative perspective
• Good company, Pigou, Sen, Keynes...
• Do ethical parameters ‘feel’ right? Match our
concerns about long term?
• Short-term market rates are the wrong place to look to derive ethics
Sensitivity analysis: discounting
Value of £100 over time using different discount rates
£
100
90.5
90
80
70
60.6
60
50
0.1%
0.5%
40
1.0%
5.0%
2.0%
10.0%
36.6
30
20
13.3
10
0
0
10
20
30
40
50
60
70
80
90
0.6
0.0
100
Years
7
Delaying mitigation is dangerous & costly
100
450ppm CO2e
90
500ppm CO2e (falling to
450ppm CO2e in 2150)
Global Emissions (GtCO2e)
80
70
550ppm CO2e
60
50
Business as Usual
40
50GtCO2e
30
65GtCO2e
20
70GtCO2e
10
0
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
Stabilising below 450ppm CO2e would require emissions to peak by
2010 with 6-10% p.a. decline thereafter
If emissions peak in 2020, we can stabilise below 550ppm CO2e if we
achieve annual declines of 1 – 2.5% afterwards. A 10 year delay
almost doubles the annual rate of decline required
Growth, change and opportunity
• Strong mitigation may cost 1% p.a. worldwide
• Strong mitigation fully consistent with growth in
poor and rich countries (business as usual is not)
• Costs will not be evenly distributed:
•Competitiveness impacts can be reduced by acting together.
•New markets will be created.
• Mitigation policy can also be designed to support
other objectives:
•energy - air quality, energy security and energy access
•forestry - watershed protection, biodiversity, rural livelihoods
Cost estimates
• Review examined results from bottom-up (Ch 9) & top-down
(Ch 10) studies: concluded that world could stabilise below
550ppm CO2e for around 1% of global GDP
• Subsequent analyses Edenhofer/IPCC top down have
indicated lower figures
• So too have bottom-up IEA and McKinsey. Options for
mitigation: McKinsey analysis examines approach of chapter
10 of Review in more detail
• Starting planning now with clear targets and good policies
allows measured action and keeps costs down. Delayed
decisions/actions (or “slow …”), lack of clarity, bad policy will
increase costs
McKinsey bottom-up approach
(Love it or hate it?)
2030
Cost of abatement
EUR/tCO2e
40
30
20
10
0
-10 0
-20
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-130
-140
-150
-160
Smart transit
Small hydro
Industrial non-CO2
Airplane efficiency
Stand-by losses
1
2
3
4
5
Industrial
feedstock substitution
Forestation
Livestock/
Wind;
CCS EOR;
soils
low
New coal
Solar
Forestation
pen.
Nuclear
6
7
8
9
Soil
CCS;
coal
retrofit
Avoid
deforestation
WasteAsia
Coal-togas shift
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Cellulose Industrial
ethanol non-CO2
Sugarcane
biofuel
Co-firing
biomass
CCS;
new coal
Avoided
deforestation
America
Industrial motor
systems
Fuel efficient vehicles
Water heating
Industrial
CCS
Abatement
GtCO2e/year
Air Conditioning
Lighting systems
Fuel efficient
commercial
vehicles
• ~27 Gton CO2e below 40 EUR/ton (-46% vs.
•
•
BAU)
~7 Gton of negative and zero cost opportunities
Fragmentation of opportunities
Insulation improvements
11
The recent rise in the Brent spot price, US $ per
barrel (2003 prices)
$120/tCO2
70
$100/tCO2
60
$80/tCO2
Carbon price
equivalent $110/TC
50
$60/tCO2
40
$40/tCO2
2003
Average
$20/tCO2
30
20
Oct-05
Oct-03
Oct-01
Oct-99
Oct-97
Oct-95
Oct-93
Oct-91
10
Mitigation policy instruments
• Pricing the externality- carbon pricing via tax or
trading, or implicitly through regulation
• Bringing forward lower carbon technology - research,
development and deployment
• Overcoming information barriers and transaction
costs– regulation, standards
• Promoting a shared understanding of responsible
behaviour across all societies – beyond sticks and
carrots
Trade/Tax/Standards
• Trade/quotas give greater quantity certainty and incentives to
bring in developing countries; ambition, transparency,
credibility are key
• Tax may be simpler for some countries and/or sectors
• Tax or trade: identify single policy instrument for sector
• Regulation may accelerate change and lower costs by reducing
uncertainty and achieving economies of scale
• But complications of interactions e.g. renewables targets and
size of carbon market
Trade/Design
• Auctioning: adjustment issues; path to
auctioning
• Price volatility: deep markets (sectors,
countries, intertemporal banking)
• Price volatility: floors/ceilings; safety vales;
put-options etc
• Linking markets: trading schemes must be able
to interact
Commitments: percentages
• G8 Heiligendamm – 50% by 2050 (consistent with stabilisation
around 500ppm C02e)
• California (and US under e.g. H. Clinton) - 80% from 1990
levels by 2050
• France – 75% by 2050 (Factor 4), relative to 1990
• EU Spring Council: 60-80% by 2050 and 20-30% by 2020,
relative to 1990
• Germany – 40% by 2020, relative to 1990
Target: stocks, history, flows
• Current stocks around 430ppm; pre-industrial stocks 280ppm.
Current 40-45 GtCO2e p.a.
• The United States and the EU countries combined accounted for
over half of cumulative global emissions from 1900 to 2005
• 50% reduction by 2050 requires per capita global GHG
emissions of 2-3T/capita (20-25 Gt divided by 9 billion population)
• Currently US ~ 20+, Europe ~10+, China ~5+, India ~2+ T/capita
• Thus 80% reductions would bring Europe, but not US, down to
world average. Many developing countries would have to cut
strongly too if world average of 2-3 T/capita is to be achieved
The GHG ‘reservoir’
• Long-term stabilisation at 550ppm CO2e implies that only a further 120ppm
CO2e can be ‘allocated’ for emission (given that we start at 430ppm, or
further 70ppm if targeting 500ppm)
• Can view the issue as the use of a “collective reservoir” of 270ppm CO2e (i.e.
550 minus the 280 of 1850) over 200 years
• Over half of reservoir already used mainly by rich countries. Or could “start
the clock” at XT, the stock when problem was first recognised at T (e.g.
around 20 years ago)
• Equity requires discussion of the appropriate use of this reservoir given history
• Thus convergence of flows does not fully capture the equity story, from
emissions perspective
• Equity issues arise also in adaptation, given responsibilities for past increases
Key elements of a global deal /
framework (I)
Targets and Trade
• Confirm Heiligendamm 50% cuts in world emissions by
2050 with rich country cuts at least 75%
• Rich country reductions & trading schemes designed to be
open to trade with other/developing countries
• Supply side from developing countries simplified to allow
much bigger markets for emissions reductions: ‘carbon
flows’ to rise to $50-$100bn p.a. by 2030. Role of
sectoral/technological benchmarking in ‘one-sided’ trading
• Strong initiatives, with public funding, on deforestation to
prepare for inclusion in trading. Demonstration and sharing
of technologies
Nature of deal / framework
• Combination of the above can, with appropriate market
institutions, help overcome the inequities of climate change and
provide incentives for developing countries to play strong
role in global deal, eventually taking on their own targets
• Within such a framework each country can advance with some
understanding of global picture
• Individual country action must not be delayed (as e.g. WTO)
until full deal is in place
• Main enforcement mechanism, country-by-country, is domestic
pressure
• If we argue that, “it is all too difficult” and the world lets stocks
of GHGs rise to 650, 700 ppm or more, must be clear and
transparent about the great magnitude of these risks
Conclusion from Stern analysis
• Our understanding of the risks of climate change
has advanced strongly
• We understand the urgency and scale of action
required
• We know that the technologies and economic
incentives for effective action are available or
can be created
• We are in a much better position now to use our
shared understanding to agree on what goals to
adopt and what action to take
www.sternreview.org.uk
22
SRES Scenario Emissions
Total Emissions (CO2 Equivalent)
160.0
140.0
120.0
100.0
80.0
Population, technology,
production, consumption
IS92a
A1T
A1FI
B2
B1
A2
A1B
Emissions
60.0
40.0
Atmospheric concentrations
20.0
0.0
1990
2010
2030
2050
2070
Cumulative CO2 Emissions
Working with Uncertainty
2090
Radiative forcing
Temperature rise and global
climate change
Temperature Increase
% Change in Cereal
Production
0
-2
0
1
2
3
4
-4
Direct impacts (e.g. crops,
forests, ecosystems)
-6
-8
-10
-12
Without Carbon Fertilisation
With Carbon Fertilisation
Socio-economic impacts
Probability
% Change in Global Cereal Production
The modelled costs of climate
change with increasing global
temperatures
4
Percent of world GDP
2
Hope
0
-2 0
1
2
3
4
5
6
Mendelsohn
Nordhaus, output
-4
Nordhaus, population
-6
Tol, output
-8
Tol, equity
-10
-12
Global mean temperature
Schematic Representation of How to
Select a Stabilisation Level
Marginal
Costs/benefits
Marginal
benefits
Marginal
mitigation
cost
High impacts
Low impacts
High costs
Low costs
`
Range for the target
450?
550?
BAU
Stabilisation target
II Costs
Strategies for Emission Reduction
Four ways to cut
emissions:
• reducing demand
• improving efficiency
• lower-carbon technologies
• non-energy emissions
Avoiding deforestation
• Curbing deforestation is
highly cost-effective, and
significant
• Forest management
should be shaped and led
by nation where the forest
stands
• Large-scale pilot
schemes could help
explore alternative
approaches to provide
effective international
support
Illustrative Marginal Abatement Option
Cost Curve
Illustrative Distribution of Emission Savings
by Technology
Contributions to Carbon Abatement 2025
Efficiency
CCS
Nuclear
Biofuels
dCHP
Solar
Wind
Hydro
Contributions to Carbon Abatement, 2050
Abatement 11 GtCO2
Efficiency
CCS
Nuclear
Biofuels
dCHP
Solar
Wind
Hydro
Abatement 43 GtCO2
Average Cost of Reducing Fossil Fuel
Emissions to 18 GtCO2 in 2050
Cost of carbon abatement ($/tCO2)
150
$/tCO2
100
50
0
-50
2000
2010
2020
2030
2040
2050
-100
T
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The Relationship Between the Social Cost of
Carbon and Emissions Reductions
Social cost of
carbon
Marginal abatement
costs
2005
2050
Marginal abatement
costs rise
Innovation may
reduce average costs
Time
Emissions
reductions
II b Costs
Vulnerable industries
Price sensitivity and trade exposure, per cent
Price change
Export and import intensity is defined as exports of goods and services as a percentage of total supply of goods and services, plus
imports of goods and services as a percentage of total demand for goods and services. Output is defined as gross, so the maximum
value attainable is 200.
Whole-economy competitiveness
• Energy-intensive industries account for a small (and
falling) proportion of UK output
• Illustrative carbon price $30/tCO2 applied
• Only the 19 (out of 123) most carbon intensive UK
sectors (account for < 5% of total output) would see
variable costs increase of more than 2%
• Only 6 would undergo an increase of 5%+:
•
Gas supply and distribution (28%); Refined petroleum (24%);
Electricity production and distribution (19%); Cement (9%);
Fertilisers (5%); Fishing (5%)
Long run: whole-economy competitiveness
• Whole-economy competitiveness depends on factors
that determine productivity growth
• Carbon intensive economies with limited mitigation
options will have most “work to do”
• Economies with high skills, technological capacity and
flexible markets and governments that anticipate trends
will manage the transition best
• Mitigation can promote innovation in clean technology &
steer comparative advantage into ‘clean’ income elastic
sectors, potentially large knowledge externalities
• The gains from carbon mitigation in terms (energy
efficiency, innovation) diffuse, spread across economy,
hard to identify
• Some countries better positioned than others
Short run – whole economy competitiveness
• Main objective of mitigation is to shift resources
away from carbon-intensive activities
• The challenge will be managing the transition to
coordinated international action
• Flexibility avoid adjustment hysterisis
Relocation
• Exaggerated impact on GHG-intensive with few
mitigation options if others don’t move
• Avoid “carbon leakage” – a relocation story
• Relocation unlikely if action is taken at an EU
level (which is vital), but important not to
exaggerate threat if UK acted unilaterally
Competitiveness & expectations of collective action
• Trade diversion & relocation are less likely, the
stronger the expectation of global action
• Not acting alone: action has been taken in
many countries including China and the US:
• Energy efficiency;
• R&D in low-carbon technologies;
• Carbon trading schemes
• Critical mass changes incentives to game
III Mitigation Policy
Trade/Technology
• Some arguments for differential policies given nature
of technologies and distance from markets
IV Global Deal / targets
Key elements of a global
deal / framework (II)
Funding Issues
• Strong initiatives, with public funding, on deforestation to
prepare for inclusion in trading. For $10-15 bn p.a. could have a
programme which might halve deforestation. Importance of
global action and involvement of IFIs
• Demonstration and sharing of technologies: e.g. $5 bn p.a.
commitment to feed – in tariffs for CCS coal would lead to 30+
new commercial size plants in the next 7-8 years
• Rich countries to deliver on Monterrey and Gleneagles
commitments on ODA in context of extra costs of development
arising from climate change: potential extra cost of development
with climate change upwards of $80bn p.a.
Trade/Types of markets
• National and regional (EUETS, NE US States,
Australia)
• Sectoral
• Voluntary
• Kyoto
Trade/Design (I)
• Auctioning: adjustment issues; path to
auctioning
• Price volatility: deep markets (sectors,
countries, intertemporal)
• Price volatility: floors/ceilings; put options etc
• Linking markets: trading schemes must be able
to interact
Trade/Institutional structure
• Conventions, types of reduction or
transaction admissible
• Simplicity/complexity of certification
• Monitoring of emissions
• Credibility and ratings of instruments
Carbon markets can grow, but to be effective, require good
design
20000
18000
Million tonnes CO 2 emissions, 2002
Markets need to be based
on:
• Scarcity
• Credible, long-term
trading periods
• Open, deep and
liquid markets
• Efficient allocation
methods
16000
Total emissions from fossil fuels
Emissions from power and industrial sectors (estimated)
14000
12000
10000
8000
6000
4000
2000
0
European Union United States of China, India,
(25)
America
Mexico, Brazil,
South Africa
(+5)
G7
EU25, Jap, Aus,
Can, USA
OECD
Top 20 Global
emitters
Key principles of policy
Climate change policy:
– Carbon pricing
– R,D&D
– Related market failures and behavioural
change
Consistency with other policy goals –
growth and energy security
Starting point: Carbon dioxide energy emissions
EIA Reference Case, MtCO2 (from
energy): 2002-2025
Country
2002
2025
World
24,410
38,791
2.00%
58.90%
Annex I
14,169
18,258
1.10%
28.90%
non-Annex I
10,241
20,533
3.10%
100.50%
United States of America
5,752
7,980
1.40%
38.70%
Western Europe
3,550
3,953
0.50%
11.40%
China
3,323
8,134
4.00%
144.80%
India
1,026
1,993
2.90%
94.30%
Brazil
341
678
3.00%
98.90%
Source: Climate Analysis Indicators Tool (CAIT) Version 4.0.
(Washington, DC: World Resources Institute, 2007).
Avg. Annual Growth
Total Growth
Global Deal (2); package
Key elements of a global deal: I
Targets and Trade
•Rich countries to take on strong individual targets, creating
demand side for reductions
•Rich country reductions and trading schemes designed to be
open to trade with other countries, including developing
countries
•Supply side from developing countries simplified to allow
much bigger markets for emissions reductions, through
sectoral or technological benchmarking
Key elements of a global deal: II
Funding Issues
• Strong initiatives, with public funding, on deforestation to
prepare for inclusion in trading
• Demonstration and sharing of technologies
• Rich countries to deliver on Monterrey and Gleneagles
commitments on ODA in context of extra costs of development
arising from climate change
Combination of the above can, with appropriate market
institutions, help overcome the inequities of climate change and
provide incentives for developing countries to play strong role
in global deal, eventually taking on their own targets.
Conclusion from Stern analysis
Unless emissions are curbed, climate change will bring
high costs for human development, economies and the
environment
– Concentrations of 550ppm CO2e and above - very high risks of serious
economic impacts
– Concentrations of 450ppm CO2e and below - extremely difficult to achieve
now and with current and foreseeable technology
Limiting concentrations within this range is possible. The
costs are modest relative to the costs of inaction.
Decisive and strong international action is urgent: delay
means greater risks and higher costs
52
Mitigation Policy Instruments
• Pricing the externality- carbon pricing via tax
or trading, or implicitly through regulation
• Bringing forward lower carbon technologyresearch, development and deployment
• Overcoming information barriers and
transaction costs– regulation, standards
• Promoting a shared understanding of
responsible behaviour across all societies –
beyond sticks and carrots
Aggregate Impacts Matrix
• Essential to take
account of risk and
uncertainty
• Models do not provide
precise forecasts
• Assumptions on
discounting, risk
aversion and equity
affect the results
Market
impacts
Broad
impacts
Baseline
climate
5%
(0-12%)
11%
(2-27%)
High
climate
7%
(1-17%)
14%
(3-32%)
Rough estimate of equity
weighting: 20%
STABILISATION
MITIGATION
COSTS
Strategies for Emission Reduction
Four ways to cut
emissions:
• reducing demand
• improving efficiency
• lower-carbon technologies
• non-energy emissions
POLICY
Adaptation
Adaptation is inevitable: climate change is with us and
more is on the way
Adaptation cannot be a substitute for mitigation
– only reduce the costs of climate change...
– ...but these are rising rapidly
– for severe impacts there are limits to what adaptation
can achieve
– Doesn't address risks and uncertainty
Adaptation crucial in developing countries
59
The PAGE model and other Integrated Assessment models
Percent of world GDP p
4
2
Global mean temperature
0
-2
0
1
2
3
-4
-6
-8
-10
-12
Hope
Mendelsohn
Nordhaus, output
Nordhaus, population
Tol, output
Tol, equity
4
5
6
Global carbon markets can be expanded
20000
18000
2 emissions, 2002
16000
Total em
issionsfromfossil fuels
E
m
issionsfrompow
erandindustrial sectors(estim
ated)
14000
12000
10000
MiliontonnesCO
8000
6000
4000
2000
0
E
uropeanU
nionU
nitedS
tatesof C
hina, India,
(25)
A
m
erica
M
exico, B
razil,
S
outhA
frica
(+5)
G
7
E
U
25, Jap, A
us,
C
an, U
S
A
O
E
C
D
Top20G
lobal
em
itters
• Increasing the size of global carbon markets – by
expanding schemes to new sectors or countries, or
linking regional schemes – can drive large flows across
countries and promote action in developing countries
Additional points in critiques:
• Alarmist science
• IPCC emission scenarios (high with implausible
population assumptions)
• Double counted risk
• Adaptation will dramatically reduce costs
• Confuse income and consumption
• Comparability of mitigation costs and impacts
• Bias/underestimation of mitigation costs
• High optimal tax rate
• No peer review
Key principles of international action
Effective action requires:
– Long-term quantity goals to limit risk; shortterm flexibility to limit costs
– A broadly comparable global price for
carbon
– Cooperation to bring forward technology
– Moving beyond sticks and carrots
– Equitable distribution of effort
– Transparency and mutual understanding of
actions and policies
Spreading awareness of other countries actions
• EU – Strategic Energy Review –
rejection of national plans
• US – State/City level action and
technology support
• China – overall and firm level efficiency
targets, standards, reforestation, export
duty on energy efficient good
Much more to be done but positives
elsewhere
Building international
co-operation – a 6 point plan
• Agree stabilisation level – resultant emissions
pathway
• Determine equity consideration
• National emissions targets (2050 60-80%
developed countries – on course by 2020)
• Reducing costs through global carbon price
(transfers through trading building coalitions)
• Addressing deforestation and technology
policy
• Enforcement mechanism is the will of the
domestic population – responsible behaviour
Conclusion
• Our understanding of the risks of climate
change has advanced strongly.
• We understand the urgency and scale of
action required.
• We know that the technologies and
economic incentives for effective action
are available or can be created
• We are in a much better position now to use
our shared understanding to agree on
what goals to adopt and what action to take.
www.sternreview.org.uk
What is the economics of climate change and
how does it depend on the science?
Climate change is an externality with a difference:
• Global
• Uncertain
• Long-term
• Potentially large and irreversible
68
Understanding Disaggregated Impacts
• Developing countries (especially vulnerable)
- Rising water stress
- Falling agricultural yields/incomes
- Malnutrition and disease
- Migration and conflict
• Developed countries (not immune)
- Water stress in S. Europe and California
- Costs of extreme weather events
- Sea level rise
- Higher insurance costs
69
‘Balanced Growth Equivalents’
Log of
consumption
Growth path with no
climate change
phenomenon
Growth paths with unabated
climate change
‘Balanced growth equivalent’ path for consumption
Time
70
Discounting
Pure time
discount rate
(%)

Probability of
human race
surviving 100
years
0.1
0.905
0.5
0.607
1.0
0.368
1.5
0.223
Discount Rate:  x GDP growth rate + 
71
Key research questions for policy
• Linking and expanding emissions
trading schemes
• Developing and deploying CCS and
other key technologies globally
• Planning for adaptation
Sensitivity analysis of cost estimates – model structure
Variation
Emissions scenario (population)
Increasing the damage function
exponent
Growth
Terminal conditions
Incorporating further risk and
uncertainty
Aversion to irreversibilities
Rise in price of environmental
goods relative to consumption
goods
40% lower
Stochastic - 3
1% higher
Continued growth
past 2200 or decline
More parameter and
baseline uncertainty
Equivalent loss in
consumption
Change in %
consumption
damages (BGE)
-4
+20
+
High Sensitivity
++
+3
+
++
Bold – direct calculation (others are from other studies or ‘back of the envelope’)
Sensitivity analysis of cost estimates – value judgements
Variation
Increasing the elasticity of
marginal utility of consumption
(inequality and risk aversion)
Increasing the pure rate of time
preference
Intra-generational income
distribution/regional equity
weighting
1-2
Change in %
consumption
damages (BGE)
-7
0.1-1.5%
-8
Regional distribution
+6
Bold – direct calculation (others are from other studies or ‘back of the envelope’)
Key principles of international action
Effective action requires:
– Transparency and mutual understanding of
actions and policies
– Long-term quantity goals to limit risk
– Short-term flexibility to limit costs
– A broadly comparable global price for carbon
– Moving beyond sticks and carrots
– Cooperation to bring forward technology
– Equitable distribution of effort
– Informing and mobilising public opinion
75
Adaptation
Adaptation is inevitable: climate change is with us and
more is on the way
Adaptation cannot be a substitute for mitigation
– only reduce the costs of climate change...
– ...but these are rising rapidly
– for severe impacts there are limits to what adaptation
can achieve
– Doesn't address risks and uncertainty
Adaptation crucial in developing countries
76
Adaptation
• Development increases
resilience
• Adaptation will put strong
pressure on developing
country budgets and ODA:
essential to meet 2010 and
2015 commitments
• International action also
has a key role in supporting
global public goods for
adaptation
– Disaster response
– Crop varieties and technology
– Forecasting climate and weather
77
Conclusion from Stern analysis
Unless emissions are curbed, climate change will bring
high costs for human development, economies and the
environment
– Concentrations of 550ppm CO2e and above - very high risks of serious
economic impacts
– Concentrations of 450ppm CO2e and below - extremely difficult to achieve
now and with current and foreseeable technology
Limiting concentrations within this range is possible. The
costs are modest relative to the costs of inaction.
Decisive and strong international action is urgent: delay
means greater risks and higher costs
78
Mitigation policy instruments
• Pricing the externality- carbon pricing via tax
or trading, or implicitly through regulation
• Bringing forward lower carbon technologyresearch, development and deployment
• Overcoming information barriers and
transaction costs– regulation, standards
• Promoting a shared understanding of
responsible behaviour across all societies –
beyond sticks and carrots
Financing international action
International finance flows should be scaled up for
effective and equitable mitigation; arrangements such
as the Clean Development Mechanism must be
transformed to support much larger flows.
Carbon finance works best where national policies
and programmes support low carbon development,
and where a range of financial instruments for foreign
and domestic investment are combined
The IFIs can play a very strong role in shaping
investment frameworks and piloting new approaches
– eg through the World Bank Energy Investment
Framework
80
Policy for mitigation:
Establishing a carbon price
Price signals can be established in different ways:
greenhouse gas taxes; capping emissions and setting
up a market in permits; or implicitly through regulation.
Emissions trading is one powerful route to support
international co-operation.
Credibility, flexibility and predictability are key if policy is
to influence investment decisions by companies.
81
Sensitivity analysis: discounting
Damage
function
exponent
Utility
discount
rate
Baseline
climate;
market
impacts +
risk of
catastrophe
Base climate;
market
impacts +
risk of
catastrophe +
non-market
impacts
High climate;
market
impacts +
risk of
catastrophe +
non-market
impacts
Low range
0.1
5.0
10.9
14.4
0.5
3.6
8.1
10.6
1.0
2.3
5.2
6.7
1.5
1.4
3.3
4.2
0.1
6.0
14.2
21.9
0.5
4.3
10.2
15.8
1.0
2.7
6.4
9.8
1.5
1.7
4.0
5.9
High range
82
Sensitivity analysis: damage function and elasticity of marginal utility of consumption
Damage
function
exponent
Low range
High range
Elasticity of
marginal utility
of consumption
Baseline
climate; market
impacts + risk of
catastrophe
Baseline
climate; market
impacts + risk of
catastrophe +
non-market
impacts
High climate;
market impacts
+ risk of
catastrophe +
non-market
impacts
Mean (5th
percentile, 95th
percentile)
Mean (5%, 95%)
Mean (5%, 95%)
1.0
5.0 (0.6-12.4)
10.9 (2.2-27.4)
14.4 (2.7-32.6)
1.25
3.8 (0.6-9.6)
8.7 (2.2-21.7)
12.1 (2.7-26.0)
1.5
2.9 (0.5-7.1)
6.5 (1.7-16.5)
10.2 (2.0-20.0)
1.0
6.0 (0.8-15.5)
14.2 (2.8-32.2)
21.9 (3.7-51.6)
1.25
4.6 (1.8-12.0)
11.3 (2.6-25.2)
18.2 (3.8-41.9)
1.5
3.4 (0.3-9.0)
8.7 (1.8-19.2)
15.3 (2.8-33.1)
83
Historical and projected GHG emissions by sector
(by source)
Power (CO2)
Transport (CO2)
90
Manufacturing &
construction (CO2)
Buildings (CO2)
80
70
GtCO2e
60
CO2
50
40
Fugitive emissions
(CO2)
Industrial processes
(CO2)
Land use (CO2)
30
Agriculture (non-CO2)
20
nonCO2
10
0
1990
2000
2010
2020
2030
2040
Source: WRI (2006), IEA (in press), IEA (2006), EPA
(forthcoming), Houghton (2005).
2050
Waste (non-CO2)
Energy-related
emissions (non-CO2)
Industrial processes
(non-CO2)
All non-CO2
emissions
Damages
2000
0
2050
2100
2150
% loss in GDP per capita
-5
2200
-5.3
-7.3
-10
-13.8
-15
-20
Baseline Climate, market impacts + risk of catastrophe
-25
High Climate, market impacts + risk of catastrophe
-30
High Climate, market impacts + risk of catastrophe +
non-market impacts
-35
-40
45
‘Output gap’ between the ‘550ppm C02e and 1%
GWP mitigation cost’ scenario and BAU scenario,
mean and 5th – 95th percentile range
Percentagepoint differenceGrossW
orldProduct
40
35
30
25
20
15
10
5
0
2000
-5
2020
2040
2060
2080
2100
2120
2140
2160
2180
2200
There are more than enough proven reserves to get to 1000ppm CO2
Peak oil is not the
answer… Nonconventional sources of
oil (tar sands, coal
liquefaction etc) are far
more carbon intensive
than conventional oil
deposits
Large reserves of coal
available for cheap and
reliable energy in many
large and fast-growing
economies
Source: Lenton et al (2006), IPCC
Competitiveness - key messages
•
•
•
•
•
Main objective of mitigation is to change relative prices of
carbon-intensive goods; reallocate resources away from carbonintensive activities!
The challenge will be managing the transition to coordinated
international action; acting at the EU level will be vital
Total fossil fuel energy costs account for 3% of variable costs in
UK production; introducing a £10/tC carbon price would have a
similar size of impact on economy as a 6% rise in oil and gas
prices
UK Input-Output tables tables & empirical studies suggest
carbon-intensive tradable industries are unlikely to divert trade
significantly or relocate if action is taken at an EU level
Action may boost long-term growth for economies/firms that
anticipate change, have the skills, flexibility and technological
capacity to take advantage of them
Product price increases from £70/tC pricing (full
pass-through), percent
Gas
Coal
Oil
30
20
10
0
Agr Fish Ref Che Cem Iron Fer Ele Gas Tra
icul ing ined mic ent an tilise ctric dis nspo
dst rs ity trib rt
ture
als
p
e
eel
trol
(pro utio
, fo
e
rest
d/ds n
u
m
ry
pro
itr)
d
Has energy policy risen to meet the climate change challenge?
Energy RD&D more generally shows a similar pattern
Renewable energy RD&D remains at around 8% of
total energy RD&D
Action at EU level
Key aim is multilateral agreement, but managing the
transition argues for EU proceeding ASAP, and ahead
of the pack if necessary:
• key step in getting the institutions in place to build a global
consensus for climate action
• promoting trust; improving the chances of bringing others in
• avoiding replacing obsolescent capital with long-lived, highcarbon plant and machinery, which would have to be
replaced later;
• developing a comparative advantage in ‘clean tech’,
potentially high-growth, areas; and
• ancillary benefits such as clean air and energy security
Vulnerable industries
Price sensitivity and non-EU trade exposure, per cent
70
Export & import intensity
Metal ores
Mining
60
Jewelry
50
Textiles
Electronics
Non-Ferrous metals
Organic chemicals
Water
transport
Pesticides
Oil and gas Air transport
30
20
Iron Steel
Pulp & paper
Fishing
Plastics Oils
inorganic chemicals
Furniture
Fertilisers
Land transport
Clay
0
2
4
40
Total industry
10
Cement
0
6
8
Price change
10
Export and import intensity is defined as UK exports of goods and services to non-EU as a percentage of total supply of goods and
services, plus UK imports of goods from non_EU and services as a percentage of total demand for goods and services. Output is defined as
gross, so the maximum value attainable is 200.
Competitiveness - Conclusion
• Main objective of mitigation is to reallocate resources
away from carbon-intensive activities
• The challenge will be managing the transition to
coordinated international action
• Total fossil fuel energy costs account for a small part of
whole economy costs
• Carbon-intensive tradable industries are unlikely to divert
trade significantly or relocate, especially if action is taken
at an EU level (which is vital), but important not to
exaggerate threat if UK acted unilaterally
• Action may boost long-term growth for economies that
anticipate change, have the skills, flexibility and
technological capacity to adapt
Stabilisation scenarios
SRES Scenario Emissions
160.0
IS92a
Total Emissions (CO2 Equivalent)
140.0
A1T
A1FI
120.0
B2
B1
100.0
A2
A1B
80.0
60.0
40.0
20.0
0.0
1990
2010
2030
2050
2070
2090
Costs
Costs
Costs
II Costs
Cost estimates
• Review examined results from bottom-up (Ch 9) & top-down
(Ch 10) studies: concluded that world could stabilise below
550ppm CO2e for around 1% of global GDP
• Subsequent analyses Edenhofer/IPCC top down have indicated
lower figures
• So too have bottom-up IEA and McKinsey
• Options for mitigation: McKinsey analysis examines approach
of chapter 10 of Review in more detail
III Mitigation Policy; trading
Mitigation policy instruments
• Pricing the externality- carbon pricing via tax or
trading, or implicitly through regulation
• Bringing forward lower carbon technology- research,
development and deployment
• Overcoming information barriers and transaction
costs– regulation, standards
• Promoting a shared understanding of responsible
behaviour across all societies – beyond sticks and
carrots
Trade/Tax/Standards
• Trade quotas give greater quantity certainty and incentives to
bring in developing countries; ambition, transparency,
credibility are key
• Tax may be simpler for some countries and/or sectors
• Tax or Trade: Identify single policy instrument for sector
• Regulation may accelerate change and lower costs by reducing
uncertainty and achieving economies of scale
• But complications of interactions e.g. renewables targets and
size of carbon market
Trade/Design (I)
• Auctioning: adjustment issues; path to
auctioning
• Price volatility: deep markets (sectors,
countries, intertemporal)
• Price volatility: floors/ceilings; put options etc
• Linking markets: trading schemes must be able
to interact
The recent rise in the Brent spot price, US $ per
barrel (2003 prices)
£300/TC
70
£250/TC
60
£200/TC
Carbon price
equivalent £260/TC
50
£150/TC
40
£100/TC
2003
Average
£50/TC
30
20
Oct-05
Oct-03
Oct-01
Oct-99
Oct-97
Oct-95
Oct-93
Oct-91
10
Trade/Institutional structure
• Conventions, types of reduction or
transaction admissible
• Simplicity/complexity of certification
• Monitoring of emissions
• Credibility and ratings of instruments
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