8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 1/28
Economics of Climate Change
Costs of action and inaction
Surender Kumar TERI University
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 2/28
Nature of the problem
• GHG emissions – an externality and thus a market failure
• Distinctive features
– long-term
– global
– major uncertainties
– huge scale of possible damages
• Implications for economic analysis
– ethical treatment of values within and betweengenerations
– incentives for global cooperation
– treatment of risk
– non-marginal changes
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 3/28
The process of human-induced
climate change
• Five key links (Stern, 2008):
– from people to emissions
– from emissions to stocks
– from stocks to rising temperature
– from rising temperature to climate change
– from CC to the human impact
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 4/28
Drivers of emissions growth
• The Kaya identity (Kaya, 1990):
CO2 emissions from energy = Population X
(GDP per head) X (energy use/GDP) X
(CO2 emissions/energy use)
Country/Grouping
CO2 emissions
GDP per head
Carbonintensity
Energyintensity
Population
World 1.4 1.9 - 0.1 - 1.7 1.4
Annual growth rates in energy-related CO2 emissions and their
components, 1992-2002 (%)
Source: WRI, 2006
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 5/28
Country Annual growth
(%)USA 1.0
China 4.7
EU 15 -0.3
Indonesia 12.7Brazil 3.1
Russia -2.4
India 3.6
Japan 1.3Germany -1.3
Canada 1.9
Mexico 2.1
Annual growth rate of GHG
emissions (including deforestation)
for major emitters, 1990-2005
Source: WRI, 2009Source: Brohe et al, 2009
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 6/28
Concentration levels and probabilities
of temperature increases
The cost of inaction is the high probability of devastating impacts
resulting from dangerous increases in global temperature
Source: Stern 2008
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 7/28
Projected impacts of climate change
1°C 2°C 5°C4°C3°C
Sea level rise
threatens major cities
Falling crop yields in many areas, particularly developing regionsFoodFood
Water Water
EcosystemsEcosystems
Risk of Abrupt andRisk of Abrupt and
Major IrreversibleMajor Irreversible
ChangesChanges
Global temperature change (relative to pre-industrial)0°C
Falling yields in many
developed regions
Rising number of species face extinction
Increasing risk of dangerous feedbacks and
abrupt, large-scale shifts in the climate system
Significant decreases in water
availability in many areas, including
Mediterranean and Southern Africa
Small mountain glaciers
disappear – water
supplies threatened in
several areas
Extensive Damage
to Coral Reefs
ExtremeExtremeWeather Weather
EventsEvents
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Possible rising yields in
some high latitude regions
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 8/28
The costs of inaction
Types of costs associated with climate change
Source: OECD (2008) Costs of Inaction on Key Environmental Challenges, OECD.
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 9/28
The Modelled Damages from Climate Change with
Increasing Global Temperatures
Source: Stern 2008
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 10/28
-5.3-7.3
-13.8
-4 0
-3 5
-3 0
-2 5
-2 0
-1 5
-1 0
-5
0
2000 2050 2100 2150 2200
%
l o s s i n G D P p e r c
High C l ima te, market im pacts + r isk of catastrophe +
non-marke t impac ts
Base l ine C l im ate, market impa cts + r isk of catastrophe
High C l ima te, market im pacts + r isk of catastrophe
• Essential to take account of risk and uncertainty
• Models do not provide precise forecasts
• Assumptions on discounting, equity, and risk aversion affect results
Mean losses in income per capita from scenarios
of climate change
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 11/28
The Stern Review, 2006
• “…. the costs of inaction could be from 5-
20 percent of GDP… The investment that
takes place in the next 10-20 years will
have a profound effect on the climate inthe second half of this century and the
next.”
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 12/28
BAU emissions and stabilisation trajectories for 450 - 550ppm CO2e
Source: Stern, N et al. (2006) The Stern Review: The Economics of Climate Change,Cambridge University Press, Cambridge. (Figure 8.3)
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 13/28
Source: Stern 2008
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 14/28
The costs of action
• Bottom up energy technology models
– e.g. McKinsey’s Global GHG abatement cost curve for
2030
• Top down economy wide models
– Stern’s estimates
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 15/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 16/28
Abatement Cost Curve shows that
• There are many available options; some involvenegative cost.
• Whole range of options and each should beexplored in detail.
• Emission savings from one option will depend onwhat it replaces
• Policy plays important role; bad policy will lead tothe uptake of more expansive options
• Technical progress is important and should bepromoted to widen the options and reduce costs.
• Timing is important; act now.
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 17/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 18/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 19/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 20/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 21/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 22/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 23/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 24/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 25/28
Cost of Action
• The costs of action to the global economy
would be roughly 1 percent of GDP to
achieve the target of stabilization at 550
ppm CO2e.
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 26/28
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 27/28
Cost of Electricity for Different Technologies
8/6/2019 Economics of Climate Change_intro(2)
http://slidepdf.com/reader/full/economics-of-climate-changeintro2 28/28
Public Energy R&D Investments as a Share of GDP