Download International CLimate Policy

The Cost of Climate Change:
Sharing the Burden
Marzio Galeotti
(Università di Milano, FEEM, CMCC)
Fourth Annual Forum on Business Ethics and Corporate Social Responsibility
“Restoring Responsibility: The Accountable Corporation”
Milan September 13-14, 2007
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Outline
 Keywords of this presentation
 CC undisputed: it is under way
 CC: the chain of effects
 CC: causes, consequences, remedies
 CC: the impacts
 CC: crucial features – global externality, differentiated origins and
consequences in time and space, uncertainty
 Mitigation
 Sharing the Burden
 The problem of participation: actors and role
 Focus on Business
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Keywords
 Keywords of this presentation
 The keyword is *Differences* and variants (Differentiation,
Differential,…)
 Differences in CC as to:
– The causes
– The consequences
– The policies
– The actors
 Hence: Sharing the Burden
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Climate Impacts/1
CC undisputed: it is under way
A selection of probable impacts:

Temperature increase of the planet (since 1860: globalaverage surface temperature has increased by 0.6°C)

Increase in precipitation events

Increase in frequency and intensity of extreme climate events

Increase in risk of desertification

Shrinkage of glaciers

Sea-level rise (last 100 years: increase by ca. 10-25 cm)
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Global Warming: Climate Impacts/2
• The process is speeding up
• The concern is growing
4
Climate Cycle: The Chain of Effects
GHGs
Concentr
ations
GHGs
Emission
s
Thermodynamic
Response
Life style/Culture/Quality of
Life/ Risk Management
Climate
Change
Impacts
Production
Mitigation
Processes
Adaptation
LULUCF
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The Causes: Emissions/1
Carbon Dioxide (CO2) – Most prevalent GHG
Methane (CH4) – Second most common, 21x the potency of CO2
Nitrous Oxide (N2O) – 310x the potency of CO2
Other Gases – HFCs, PFCs, and SF6 = range 600 – 23900x potency of CO2
Transportation
Transport
Energy Generation
Industrial Processes
Land Use:
Agriculture & Forestry
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The Causes: Emissions/2
CO2 Global Emissions by sector
CFC
HFC
Fluorinati
7
The Causes: Emissions/3
CO2 Global Emissions by Fossil Fuel
Fonte: OECD/IEA World Energy Outlook 2006
Fonte: IEA World Energy Outlook 2006
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The Causes: Emissions/4
Energy-related CO2 Global Emissions by Region
Fonte: IEA World Energy Outlook 2006
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The Impacts/1
Changes in temperature, weather patterns and sea level rise
Coastal Areas:
Erosion and flooding
Inundation
Change in wetlands
Water Resources:
Changes in water supply
and water quality
Competition/Trans-border
Issues
Agriculture:
Changes in crop yields
Irrigation demands,
Productivity
Forests:
Change in Ecologies,
Geographic range of species,
and
Health and productivity
Human Health:
Weather related
mortality
Infectious disease
Air quality - respiratory
illness
Industry and
Energy:
Changes in Energy
demand
Product demand &
Supply
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Key Sectoral Impacts
(as a function of increasingglobal average temperature change)
(Impacts will vary by extent
of adaptation, rate of
temperature change, and
socio-economic pathway)
IPCC 4AR 2007 WG2
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Key Regional Impacts
(as a function of increasing global average temperature change)
Fonte: IPCC 4AR 2007 WG2
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Impact Assessment
Damages in physical units: 2.5° C temperature increase scenario
Non
EU USA FSU CHINA OECD
0,21 0,16 0,24 2,1
0,28
52 282 908 121
334
558 452 814 464
4326
54,2 92 54,6 17,1 142,7
15,3 32,7 24,7 32,2 168,5
133 176 51 24
514
1,6 10,7 23,9 0
99,5
9,9 11,1 9,8 11,9 219,1
16 8
n.a. 4
53
8,8 6,6 7,7 29,4 114,8
229 100 153 583
2279
Type of Damage
INDICATOR
Welfare loss (%GDP)
Agriculture
Area lost (Km2)
Forestry
Reduced Catch (1000 t)
Fishery
Incr. El. Dem. (TWh)
Energy
Reduced Avail. (Km3)
Water
Coastal Prot.
Annual Cost (m$/yr)
Area lost (Km2)
Dryland loss
Area lost (Km2)
Wetland loss
Ecosystem loss Nr. of Habitats Lost
Nr. of Deaths (1000)
Health
Nr. Of Migrants (1000)
Migration
Hurricanes
Casualties Nr. of Deaths (1000)
0
Damages m$
0
72 44
115 1
779
13
7687
124
OECD
0,17
901
2503
211,2
62,2
493
40,4
33,9
53
22,9
455
World
0,23
1235
6829
353,9
230,7
1007
139,9
253
106
137,7
2734
313
506
8000
630
Source: adapted from IPCC, 1996 SAR
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Global Warming: Key Features/1
UNCERTAINTY:
the knowledge of environmental and
socio-economic dynamics, and of the feedback between the
two is still affected by a large amount of uncertainty.
GEOGRAPHICAL
SCALE: climate change is a global
phenomenon affecting the whole world, at the same time
environmental and socio-economic impulses and responses
are highly differentiated across regions.
TIME
SCALE:
climate change is a long-term
phenomenon. Assessing impacts on environmental and
socio-economic systems requires a long-run perspective.
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Global Warming: Key Features/2
 EFFECTS INVOLVING INTERACTING SYSTEMS
characterized by:
• Non linearity (in environmental and economic systems)
• Discontinuity (“Jumps”, abrupt changes of state e.g. extreme
events, catastrophes, new technologies),
• Irreversibility (non-return point e.g. species extinction, irreversible
investments high sunk costs)
 WELFARE MEASUREMENT (ethical judgements):
•
•
•
Interpersonal utility comparison (is it possible to compare and
aggregate utility?)
Inter-temporal utility comparison (is it legitimate to discount and
what discount rate has to be used?)
Choice of a metric (money, loss of human life, multi-criteria
approach?)
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Uncertainties related to carbon cycle & climate system
The relation between stabilisation targets and resulting temperature
increases for different climate sensitivities (Source: Azar & Rhode 1997)

uncertainty in climate sensitivity has a drastic impact on the expected temperature increase
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The importance of timing
The time scales involved to stabilise CO2 concentrations at any level
between 450 and 1000 ppmv (Source: IPCC)

CO2 concentrations, temperature and sea level continue to increase long after emissions
are reduced
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Stern Review: 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
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Summarizing: a cascade of uncertainty
Uncertainty on
climate change
Uncertainty on its
“physical” impacts
Uncertainty on socialeconomic evaluation
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Global Warming: Key Features/3
GHGs emissions:
externality +
“public bad”
Environmental effectiveness =>
“large” participation
Free-riding incentive
No super-national
enforcing
authority exists
Agreement based on “voluntary”
participation => Benefits > Costs
to participants
Countries are
different
Uneven distribution of costs and
gains among would-be
participants
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Putting the Policy in Context: ”IPCC AR4 WGIII”
SHORT TERM ACTION
•
In 2030 macro-economic costs for multi-gas mitigation, consistent with emissions trajectories towards
stabilization between 445 and 710 ppm CO2-eq, estimated at between a 3% decrease of global GDP and a
small increase, compared to the baseline. However, regional costs may differ significantly from global
averages
LONG TERM ACTION
•
In order to stabilize GHGs concentrations, emissions would need to peak and decline thereafter. The lower the
stabilization level, the more quickly this peak and decline would need to occur. Mitigation efforts over the next
two to three decades will have a large impact on opportunities to achieve lower stabilization levels
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Putting the Policy in Context: ”IPCC AR4 WGIII”
Costs in 2030 for Different Stabilization Trajectories
Estimated Costs and Potential for Mitigation
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What should we do: 2) According to the IPCC WG 3
•
•
With current climate change mitigation policies and related sustainable
development practices, global GHG emissions will continue to grow over
the next few decades
Both bottom-up and top-down studies indicate that there is substantial
economic potential for the mitigation of global GHG emissions over the
coming decades, that could offset the projected growth of global
emissions or reduce emissions below current levels
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Summarising:
 Scientific research emphasises need for action
 Support from the Precautionary Principle
 Complex issue and economic characteristics
highlight difficulty to cope with climate change
 International cooperation: International
environmental agreements
 Need for voluntary initiatives - the role of the
actors involved: consumers, business,
governments
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Sharing the Burden
Supposing we know the true value of the environment...
Environment should
be better off with than
without the policy
The policy should
achieve its targets at the
minimum cost possible
Effectiveness
Efficiency
Equity
Costs should be shared
“evenly”
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Sharing the Burden: the Kyoto Answer/1
Effectiveness
Binding
Emission
Reduction
Targets for industrialised (Annex I)
countries: 5.2% overall reduction of
greenhouse
gas
emissions
compared to their 1990 levels
between 2008-2012.
55% Clause
At least 55 Parties to the
Convention, representing at least
55% of 1990 carbon dioxide
emissions of AnnexI Parties, must
have ratified.
Equity/Responsibility
No emission reduction requirements for developing countries
Flexibility/Cost Efficiency
Where: ET, JI, CDM
When: 2008-2012
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Sharing the Burden: the Kyoto Answer/2
2002 EU, Japan,
Canada ratification
Possibility to buy hot air lowers
costs. Strong use of flex. mech.s
2004 Russia
ratification. KP into
force 16 Feb. 2005
Required
reduction
low
and
possibility to sell hot-air =>
agreement very profitable + no
incentive to free ride
2001 USA + Australia
withdrawal
Developing Countries
still to accept binding
targets
Notwithstanding flexibility the
agreement
is
perceived
as
excessively costly = non profitable.
Requiring “meaningful participation”
of LDCs = requiring a transfer from
LDCs. Non acceptable by LDCs
Effectiveness
seriously threatened
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EU and Kyoto
 EU emissions: historical trend (source: EEA)
… emissions must go to level 80 for Kyoto….
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Kyoto Gap
Kyoto Gap (source: Point Carbon, 19 June 2006)
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Sharing the Burden: the European Recipe/1
 The main recipe of the European C-E policy: “20-20-20” by
2020 (magic numbers)
 As for CO2 emissions:
− 20% unilateral reduction for the whole of EU27 by 2020 relative to
1990 levels
– 30% reduction for the whole of EU27 by 2020 relative to 1990
levels provided that the other DCs do the same and fast growing
LDCs participate according to their capacity
− 60% to 80% reduction for the whole of DCs by 2050 relative to
1990 levels
 As for the rest:
− 20% minimum share of renewable energy by 2020 (of which: 10%
biofuels)
− 20% increase in energy efficiency by 2020
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Sharing the Burden: An Assessment
Burden Sharing: while the discussion goes on…one preliminary study
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Summarising:
 Scientific research emphasises need for action
 Support from the Precautionary Principle
 Complex issue and economic characteristics
highlight difficulty to cope with climate change
 International cooperation: International
environmental agreements
 Need for voluntary initiatives - the role of the
actors involved: consumers, business,
governments
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The Role of Actors
 The Role of Individuals




Energy Saving
Production of Waste
Wise Shopping
Sensible Investors – Shareholders impose an
environmental discipline on corporations
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Summarising:
 Dasgupta, Laplante, Wang, and Wheeler (2002) argue that higher income and
education empower local communities to enforce higher environmental standards.
It should also be noted that in developed countries pressure for environmental
protection created by market agents is likely to be stronger. Thus, for instance,
banks may refuse credit if worried about environmental liability; consumers may
avoid products of firms known to be heavy polluters.
 Evidence is building up showing, for instance, that multinationals are sensitive and
positively react to the close scrutiny from consumers and environmental
organizations (Dowell, Hart, and Yeung, 2000).
 Finally, investors appear to play an important role in encouraging especially quoted
companies to adopt clean production processes (Konar and Cohen, 1997; Lanoie,
Laplante, and Roy, 1998). Similar effects of environmental news on stock prices
have been identified in developing countries such as Argentina, Chile, Mexico, and
the Philippines (Dasgupta, Laplante, and Mamigi, 2001).
 By the same token, it is observed that low income communities frequently penalize
dangeorus pollutants even when formal regulation is weak or absent. Evidence
from Asia and Latin America documents that neighboring communities can strongly
influence factories’ environmental performance (Pargal and Wheeler, 1996; Hettige,
Huq, Pargal, and Wheeler, 1996). Thus, the role of regulation is important in low
income countries, not only in rich ones.
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The Role of Actors
 The Role of Governments
 Pledge to reduce emissions – Demand for federal
regulations
 The Case of U.S. States: RGGI, WEI (California,
Arizona, New Mexico, Oregon, Washington, Utah,
Manotiba, British Columbia)
 The Case of EU Member States (“20-20-20”)
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The Role of Actors
 The Role of Business




Scientific Studies
Environmental Dumping/Pollution Haven/Race to the Bottom
Porter Hypothesis (implications for EU ETS)
Regulation and Competitiveness




Current initiatives
UN Global Compact
WBCSD World Business Council for Sustainable Development
Greening of business (The Economist May 31st, June 8th,
2007)
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The Role of Actors
 The Role of Business
 Demand for Government Regulation
 Inevitability of CC
 Need for certainty framework for planning capital
investment and R&D efforts
 Need to keep fossil fuels prices “high” to go green
 Counting on fiscal incentives
 Profit opportunities: financial markets, energy
markets (spillovers on society from employment
creation and inventive activity)
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The Role of Actors
 The Role of Business
 However: not all initiatives, while certainly
profit-driven, are genuinely environmentfriendly.
 The case of biofuels
 Governments, NGOs, Consumer
associations, public opinion has to watch
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References
Dasgupta, S., B. Laplante, H. Wang, and D. Wheeler (2002), “Confronting the Environmental
Kuznets Curve”, Journal of Economic Perspectives, 16, 147-168.
Dowell, G., S. Hart, and B. Yeung (2000), “Do Corporate Global Environmental Standards
Create Dasgupta, S., B. Laplante, N. Mamigi (2001), “Pollution and Capital Markets in
Developing Countries”, Journal of Environmental Economics and Management, 42, 310-335.
or Destroy Market Value?”, Management Science, 46,1059-1074.
Hettige, H., M. Huq, S. Pargal, and D. Wheeler (1996), “Determinants of Pollution Abatement in
Developing Countries: Evidence from South and Southeast Asia”, World Development, 24, 18911904.
Konar, S. and M. Cohen (1997), “Information as Regulation: The Effect of Community Right to
Know Laws on Toxic Emissions”, Journal of Environmental Economics and Management, 32,
109-124.
Lanoie, P., B. Laplante, and M. Roy (1998), “Can Capital Markets Create Incentive for Pollution
Control?”, Ecological Economics, 26, 31-41.
Pargal, S. and D. Wheeler (1996), “Informal Regulation of Industrial Pollution in Developing
Countries: Evidence from Indonesia”, Journal of Political Economy, 104, 1314-1327.
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