Download Grand Policy Questions Economics of Climate Change

Grand Policy Questions
Economics of Climate Change
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What should global mitigation policy be?
Is compensation needed?
What should global adaptation policy be?
What about geoengineering?
University of Alabama at Birmingham
August 2008
Robert Mendelsohn
What causes climate change?
• Emissions of greenhouse gases largely
from energy consumption and to a lesser
extent from deforestation
• Emissions cause greenhouse gas
concentrations to rise
• Higher concentrations trap heat in the
atmosphere
What is mitigation?
• Mitigation is actions that are taken to
reduce the concentration of greenhouse
gases in the atmosphere
• Most common action is to reduce
emissions, for example, by reducing
burning of fossil fuels-especially coal
• Alternatively can act to store carbon in
forests, soils, or underground
(sequestration)
Objective of Mitigation
Free Rider Problem
• Minimize present value of sum of
mitigation costs plus climate damages
• Equate marginal cost of mitigation to
present value of the stream of net
marginal damages
• Optimal mitigation depends on impacts
• Bigger the impacts, the more mitigation is
justified
• Impacts are global in nature but mitigation
costs are local
• Incentive for every country to “free ride”
and let other countries control emissions
• Requires a global cost benefit perspective
to justify mitigation
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Efficient Mitigation
• Every source abates to same level of
marginal cost (price) in every sector in
every country
• Because marginal cost of abatement is
very steep, selective abatement in limited
countries is very costly
• Requires universal limits to be effective
With and Without Adaptation
Climate and Agriculture
Land value
1000
800
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0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Connection between mitigation and
adaptation
• Mitigation reduces impacts so need less
adaptation
• Adaptation reduces net impacts so need
less mitigation
• Optimal strategy is to rely on both
Are all impacts harmful?
• Most sectors have hill-shaped response
functions to temperature
• Places that are cooler than the optimal
temperature benefit from warming and
places that are warmer than the optimum
are damaged
• Recognizing the benefits of climate
change and potential of adaptation has
reduced predicted net impacts
Temperature
Net Global Market Impacts in 2100
(USD Billions/yr)
Low
CCC
5.5◦C
PCM
2.0◦C
CCSR
4◦C
+217
(+.01%)
-23
-50
(-.001%) (-.002%)
High +64
-94
-273
(+.002%) (-0.03%) (-0.1%)
Market Sector Break Downs
for CCC (USD Billions/yr)
Sector
Low
High
Agriculture
+3
-119
Coastal
-4
-16
Energy
-34
-80
Forestry
+6
+2
Water
-21
-60
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What are the nonmarket impacts of
climate change?
Global Net Market Impacts over
Time
• Ecosystem change
• Endangered species loss
• Health: Infectious diseases and
Heat stroke
• Undeveloped coastal resources
H AD 3 exp 2020
P C M exp 202 0
n o d a ta
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-5 0
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o ve r
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o ve r
P C M exp 2 060
no d a ta
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o ve r
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P C M exp 2 100
no d a ta
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Marginal impacts of Temperature
and Precipitation
H AD 3 exp 2100
n o d a ta
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0
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South American Farm Impacts in
2100: Spatial Distributions
Policies to Mitigate
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Shift to lower carbon fuels
Reduce energy use
Increase carbon storage
All of these alternatives are inexpensive if
done a little bit but rapidly become very
expensive if done to scale
• No incentive for individuals to mitigate
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Policy Tools
Timing
• Government must intervene
• Price: tax carbon emissions-efficient but
unpopular- creates government wealth
which may or may not be used well
• Regulations: limit carbon emissions-can
be inefficient
• Tradable Permits-efficient-budget neutral
Optimal Carbon Price Path
• Timing is critical
• Too much too soon raises cost of
abatement dramatically
• Too little too late raise damages of climate
change in long run
• Optimal policy is to start slowly and
increase stringency of regulations over
time
What can be done now?
• Start low cost regulations
• Build international agreements to toughen
regulations over time
• Develop universal coverage with all
countries
• Help developing countries come on board
$100
Price
$5
2010
Time
2100
What is adaptation?
Objective of Adaptation
• Change in behavior in response to climate
change.
• Examples: avoid running in hot weather,
buy air conditioning, change to heat-loving
crops, adjust water management, retreat
from coasts, build dams and sea walls
• Maximize net benefits (benefits minus
costs) given that the climate has changed
• Reduce the damages from climate change
for people who will face residual damages
• Maximize the gains for people who are
made better off by climate change
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Autonomous Adaptation
• Autonomous
– private benefit for actor
– self interest to perform
– will be done without help
• Examples:
Temperature effect on probability of
choosing a crop in South America
P
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– Cooling
– Crop and animal switching
– Timber species adjustments
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• Benefit many (jointly consumed)
• Require coordination (government)
• Examples
– Dams
– Sea Walls
– Flood control
– Technical change
Externalities
• Climate change may exacerbate some
externalities
• Infectious diseases will require a public
health response
• Secondary ozone pollution formation will
require tighter regulations on emissions
• Flooding will require land use and flood
control activities
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m
ai ze
squash
N
ot e:
Public Adaptations
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Problem of Common Property
• Requires collective action to protect
• Individual users will not adapt
• Overharvest common forests or fisheries,
overgraze grasslands, overutilize water
resources
• Climate change will make these current
problems worse by making these
resources more scarce
• Need to privatize these natural resources
Timing
• Timing is critical to adaptation
• Done too soon, raises cost and can be
ineffective (public health program before
disease materializes)
• Done too late, damages can be large (as if
there is no adaptation)
• Because adaptation must wait for potential
damages, the bulk of adaptations need to
be done in the second half of this century
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Geoengineering
What adaptation can be done now?
• Planning and research
• Institutional changes: improve public
management and privatize resources
(land, water, fisheries)
• Help developing countries grow and
become less dependent on climate
sensitive economic sectors- namely
agriculture
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Emit particles in upper atmosphere
Likely very inexpensive
Clearly justified if climate turns nasty
May be justified as best response to global
warming
• What climate do we want?
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