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The Economics of Climate Change
Adair Turner
Sustainable Development Commission
7th February 2007
Greenhouse gases and temperature: the long-term
Thousands of years before 1850
Source: Hansen, Clim. Change, 68, 269, 2005.
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Stern’s conclusion
“If we don’t act, the overall costs and risks of climate change
will be equivalent to losing at least 5% of global GDP each
year, now and forever. If a wider range of risks and impacts is
taken into account, the estimate of damage could rise to 20%
of GDP or more.
In contrast, the costs of action – reducing greenhouse gas
emissions to avoid the worst impacts of climate change – can
be limited to around 1% of GDP each year.”
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The economics of climate change
Compare through time
• The economic and social costs of climate change
• The costs of mitigating climate change
• The costs of adapting to climate change
Maximise the net present value of human welfare, given the changing
pattern of the costs through time, and using appropriate discount rates
to compare the value of different people’s welfare at different points in
time.
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Emissions scenario
Fossil fuel related emissions: BAU and emission
abatement scenario (GtCO2)
80
70
GtCO2
60
BAU emissions
50
40
30
Abatement scenario
20
10
0
2000
Source: Stern Review, Part III, Chapter 9
2025
2050
2075
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Growth in UK Living Standards:
with 60% Emissions Cut
GDP per capita 2006=100
300
338
0.3 – 2.0%
lower
225
150
75
100
0
2006
2020
2030
2040
2050
Business as usual
60% emissions cut
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The economic cost of cutting emissions
Nil or
Low Cost
Nil Cost
Improved energy
efficiency:
-In households
- in companies
Changes in lifestyle
Renewable /
low carbon
energy
sources
Low Cost as % of GDP
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The impact of climate change
Measurable
market impacts
Changes in agricultural yields
Costs of sea defences
Losses from extreme weather events
Directly
effect GDP
Non-market
impacts
Direct human
welfare
Deaths from heatwaves / less deaths
from cold
Spread of tropical diseases
Flooding of coastal areas
“Socially
contingent”
Political and social disruption
• movement of people
Subjective
Environmental balance, species,
landscape
Expressable
as GDP
equivalents?
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Non-linear adverse consequences
Adverse consequences
y = ex ?
y = x3 ?
y = x2 ?
Trigger points?
Temperature Increase
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Probability of occurrence
Impact of a given level of GGH concentration
Temperature Increase
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The impact of discount rates
£1000 in
2150 is
worth
Assuming 2% per
annum growth: 1% of
GDP today is worth
 at 4% real
£3.67 today
16.1% of GDP in 2150
 at 2% real
£59 today
1% of 2150 GDP
Discounted
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Choosing the discount rate: description versus
prescription
Descriptive
Discount rate set by observed
market returns, e.g. 4% real
•
The rate at which you could
invest to grow future GDP
•
The rate which reveals
underlying preferences /
utility functions
Prescriptive
Discount rate set to reflect a
priori logic and ethical value
judgements
•
What should be the relative
importance attached to
future generations’ welfare
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Prescriptive approach
r = η (g) + δ
Utility
η = the elasticity of the marginal
utility of consumption
g = growth rate
Consumption
δ = the rate of pure
time preference
Stern’s base case η = 1
g = 1.9
δ = 0.1
r = 2.0%
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Arguments against descriptive approach
Simple descriptive
approach
• Fund for future
generations
unrealistic
• Future actual rates
of return unknown
Restated descriptive
approach
• Derive values of η
and δ to be
compatible with
observed market
rate, e.g.
 η = 1.5
 δ = 1.0
Problems with
restated approach
• Individual choice
within own life
span different
from the issue of
intergenerational
equity
• Individuals can
be myopic –
even in relation
to their own selfinterest
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Complexities in setting a discount rate/rates
Aggregating market and
non-market impacts
If “quality of environment” falling over
time but consumption rising
• Environment specific discount rate
negative
• Consumption specific discount rate
positive
Aggregation to one discount rate
depends crucially on relative weights.
Winners and losers
between and within
generations
Average Briton today sacrifices for
average Briton in 2010
positive
discount rate since latter is richer
Average Briton today sacrifices for poorer
African in 2010
lower and possibly
negative discount rate
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Sensitivity of results to changing
η
Costs of climate change in % of GDP equivalent
Baseline climate
High climate
Including catastrophe risk
Including catastrophe risk
Market
impacts
only
Market and
non-market
impacts
Market and
non-market
impacts
1.0
5.0
10.9
14.4
1.25
3.8
8.7
12.1
1.5
2.9
6.5
10.2
η
Source: Stern Review, Table PA.2.
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The Copenhagen Consensus Question
“Where should the world invest,
say, $50bn extra over the next
four years to do most good?”
Source: Björn Lomborg, Global Challenges, Global Solutions
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The economic cost of cutting emissions
Nil or
Low Cost
Nil Cost
Improved energy
efficiency:
-In households
- in companies
Changes in lifestyle
Renewable /
low carbon
energy
sources
Low Cost as % of GDP
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