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The Economics of Climate Change:
Reflections on the Stern Report
Dennis Anderson
Imperial College Centre for Energy Policy and Technology
(ICEPT)
February 2007
Origins
1.
Ministries of Finance Increasingly Engaged:
a)
b)
c)
d)
Intervening in newly liberalised energy markets
Taxing energy and pollution, financing R&D….
Effects on prices of Feed-in Tariffs, Obligations, Standards etc
Effects on economic growth………
2.
Economists—many sceptical
3.
Need to move beyond Kyoto—to involve US and
developing countries especially
4.
… and a sense that innovation offers a way forward
Scope (1)
1.
Approach: assumptions of ‘traditional’ cost-benefit
analysis questioned:
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ethical precepts;
limits of marginal analysis;
uncertainties and risks;
long-term nature of problem
2.
Economic Impacts of Climate Change
3.
Economics of Stabilization—benefits and costs
4.
Policies for Mitigation
5.
Policies for Adaptation
6.
International collective action
Scope (2)
Benefits of Mitigation: (1) Temperature Rises
Benefits of Mitigation: (2) Human and Physical Impact
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Falling crop yields in Africa
Loss of glaciers and melt-water for irrigation in Asia
Increased rates of run-off and flooding
Extreme weather events
Loss of Greenland Ice-cap
Loss of Gulf Stream
Intensification of greenhouse effect through thawing of permafrost
………
……thought possible for some time ( ~ 2% probability in 2000)
……now thought likely—such scenarios are no longer ‘alarmist’
(recent estimate is > 50% probability at 3 ˚C)
Benefits of Mitigation: (3) Raw Economic Effects
Mitigation: estimating the costs
1.
Estimate two emission trajectories
•
•
Without policies in place (BAU)
Trajectory to stabilise accumulations at 450—550 ppm
2.
Compare costs of alternatives with fossil fuels
3.
Examine alternative portfolios, bearing in mind
constraints and energy system requirements
4.
Allow for changes in income elasticities of demand
5.
Calculate costs per ton of abatement
6.
Add up the costs statistically (all the above are
uncertain)
Costs of Mitigation: (1) Emission Trajectories
(2) Incremental Costs of Low Carbon Options
as % Costs of Fossil Fuels
(3) Portfolios considered. An example.
• Above include hydrogen production for transport and dCHP
• 20,000 ‘trials’ Using Monte Carlo Analysis
(4) Changes in Income Elasticity (energy efficiency)
Per Capita Income Elasticity of Energy Demand vs Per
Capita Income
1.5
1
Is it moving downwards?
Elasticity 0.5
0
-0.5
0
2000
4000
6000
8000
Per capita income (ppp, 1985 US$)
Source: Plotted from Judson, Schmalensee and Stoker (1999).
10000
(5) Costs per ton of CO2 Abated
Low oil and gas prices; lower rate of innovation
High oil and gas prices; higher rate of innovation
(6) Costs as % of World Product
World product should grow by ~ 200% by 2050:
•
125% in the OECD economies
•
350% in the developing economies
Climate Change Mitigation Policies
1.
Carbon pricing—carbon taxes or tradable permits
2.
Double R&D effort, which declined by 50% since 1974
3.
3-5 fold increase in finance for innovation over the next 10
years, from $35 billion/year today. Instruments:
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4.
Feed-in tariffs
Renewables obligations (transport and power)
Tax incentives, grants and credits …..
Address ‘barriers’ to uptake of efficiency
5.
Take up ‘win-win’ opportunities---remove fossil fuel subsidies;
congestion pricing…
6.
Above as basis for international co-operation, supported by
CDM and Clean Energy Investment Facility of World Bank
The Decline of the R&D Effort in the OECD 1974-present
OECD: Million USD, 2004 prices and exchange rates
25,000
Other
20,000
Power & Storage technologies
15,000
Nuclear Fusion
Nuclear Fission
10,000
Renewable Energy
Fossil Fuels
5,000
Conservation
1974 1979 1984 1989 1994 1999 2004
Stern Report: Constructive and Optimistic (?)
Economic
growth
1000 EJ of output from ‘clean’ technologies
10 million MW of investment in electricity
New international framework—linked to national policies
Development of national policies
2007
Industry increasingly engaged
Some policy experience over past 15 years
Technological options proven and available—and not prohibitively expensive
Science established, and reasonably conclusive