More on the Intergovernmental Panel on Climate Change

Bjart Holtsmark and Knut H Alfsena1 take issue with one of the criticisms made by David Henderson in his article on the IPCC in the January Newsletter.

Other articles on this theme published in the Newsletter include:
 •
The treatment of economic issues by the Intergovernmental Panel on Climate Change (Jan 2005)
Nicholas Stern's Immaculate Conception (July 2006)
Letter from America - on transatlantic vices (or, 'Stern in America') (October 2007)
Climate Change, Ethics and the Economics of the Global Deal (January 2008)
Climate change, the Stern Review and Discounting the Future (April 2008)
Climate change and its mitigation (April 2013)

In this article we dissent from the claim from David Henderson in the last issue of the Newsletter (no. 128, January 2005) that the Intergovernmental Panel on Climate Change (IPCC) has exaggerated estimates of future greenhouse gas emission growth by the use of GDP-measures corrected by market exchange rates (MER).

Ian Castles,2 and David Henderson3 have for a couple of years criticized the IPCC’s Special Report on Emissions Scenarios (SRES). An important part of the criticism has been that SRES exaggerated future emission projections due to a methodological mistake. This claim has been given a lot of attention (see for example, the Economist of 15 February and 8 November 2003, and 3 February 2005). When this weakly founded claim is restated in the last issue of this Newsletter, we find it appropriate to give a comment.

The methodological mistake made by the scenario-makers was to compare GDP across countries on the basis of market exchange rates (MERs) instead of purchasing power parity (PPP) converters. These MER based comparisons greatly overstate the differences in GDP per capita between developing regions and OECD member countries. The consequence is that non-OECD countries generally appear to be poorer than they actually are. This is important because the size of the income gap between rich and poor countries is a key driving force in the scenarios. A basic premise has been that the income gap between rich and poor countries has to be considerably reduced by the end of the century. We fully agree when Henderson points to the fact that an overstated income gap in 1990 gives rise to exaggerated projected economic growth in the poor countries in order to reduce the gap. Unfortunately, however, he didn’t stop there. In our view it is obvious that he was wrong when he claimed ‘[…] this in turn is reflected in higher projected emissions.’

Although we agree that it is crucial to use PPP-based conversion factors in comparing per capita income levels between countries, we would claim that the methodological mistake have not given rise to overestimated emissions projections. In a paper that was made available to Castles and Henderson in March last year we argued that their conclusion on exaggerated emission growth is based on a logical short cut.4 In this comment we will sketch our arguments very briefly. The interested reader is directed to the mentioned paper.

Our point is that there is not one, but two gaps to be closed in the scenarios. The first one is the income gap. The second one is the emission-intensity gap. Using MER constitutes an overestimation of the economic growth necessary to close or narrow the income gap. On the other hand, it also represents a corresponding overestimation of the potential for energy efficiency improvements in the developing countries. In other words, the use of MER overvalues the energy efficiency improvements that will take place in the developing countries in a process where the emission-intensity gap is narrowed. Hence, the scenario-assumptions have two types of implications that draw in different directions, and in fact these two mistakes neutralize one another. We thus argue that if gap closure is accepted as the driving force behind both economic growth and reduction of emission intensities in the non-OECD countries, the choice of MER-based GDP-converters has not necessarily given exaggerated emissions growth. As far as we can see, David Henderson finally accepted our arguments and this conclusion in his recent evidence to the House of Lords.5

We agree that Castles and Henderson’s critique of IPCC partly has been appropriate and have emphasized that in another paper.6 However, the claim related to overestimated emission projections due to this methodological mistake, a claim which is restated in Henderson’s recent article in this Newsletter, is based on an oversimplification.

Notes:

1. Bjart Holtsmark (bjj@ssb.no) and Knut H. Alfsen are Research Fellow and Research Director at Statistics Norway.

2. Ian Castles is at the Asia Pacific School of Economics and Government, Australian National University, and was formerly the head of Australia’s national office of statistics.

3. David Henderson is Professor at Westminster Business School, formerly the chief economist of the OECD.

4. Cf Holtsmark, B and Alfsen, K H, 2005, ‘PPP Correction of the IPCC Emission Scenarios: Does It Matter?’ Climatic Change 68 (1), pp 11-19.

5. Cf Henderson’s answer to questions Q97, Q 116, Q121 of the evidence, see http://www.publications.parliament.uk/pa/ld/lduncorr
/econ2501p.pdf

6. Cf Holtsmark, B and Alfsen, K H, 2004, ‘The use of PPP or MER in the construction of emission scenarios is more than a question of “metrics”,’ Climate Policy 4 (2), pp 205-216.

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