Costing Climate Change and its Mitigation

From the early 1990s onward, economists have engaged with the issue of climate change, in order to brief governments on some of the likely costs of prevention and increasingly of mitigation of the worst effects. In this article, Aart and Wiebina Heesterman1 distinguish three distinct phases of engagement.

Other articles on this theme published in the Newsletter include:
The treatment of economic issues by the Intergovernmental Panel on Climate Change (Jan 2005)
More on the Intergovernmental panel on climate change (April 2005)
Nicholas Stern’s Immaculate Conception (July 2006)
Letter from America - on transatlantic vices (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)

To begin with, the emphasis was on the cost of using less energy. The scientific reality that the continuing use of fossil fuels cannot fail to worsen the greenhouse count of the atmosphere with the concomitant alteration of the planet’s climate had not yet entered public consciousness. The main implication was the fact that deep carbon cuts would become increasingly costly. Avoiding the next tonne would always be more expensive than the previous (Boero et al. 1991). At this juncture the question of whether a sustainable level of emissions is possible and what that might be is not asked.

Subsequently the attention shifted toward the redirection of marketable resources from the manufacture of consumer goods to the creation of renewable energy systems. The early 2000s saw the publication of the landmark The Economics of Climate Change (Stern 2006) as well as Nordhaus’s A Question of Balance (2008). Both assume that the cost could conceivably be met by a modest level of carbon pricing. It would stimulate more commercially cost-effective renewable energy technologies. The moot point is to whom or to what should the proceeds be disbursed? There is no known body responsible for the atmosphere.

We are used to a deep-seated assumption of a natural tendency for growth. Therefore our descendants will be more affluent and hence can more readily afford additional burdens. However, Stern questioned the morality of bequeathing the next generations with a degraded earth, arguing that the cost of building the necessary capacity of renewable energy installations to prevent climate change would be relatively modest. According to his estimate one percent of annual GDP growth for a transitional period of perhaps half a century would be sufficient, provided it was done promptly. Now in an interview with correspondents of the Observer in Davos (2013), Stern calls for increased investment in greening the economy, saying: ‘It’s a very exciting growth story’ In our view this had best be implemented opting for greater pan-European cooperation. Nordhaus considered Stern’s figure unnecessarily costly. His model did not apply the traditional version of cost benefit analysis, which generally discounts the value of the future at a set rate. He conceded that environmental degradation could invalidate the assumption of economic growth continuing at a known rate and that a more affluent future generation could therefore afford more. However, his optimistic perception of the impact of climate change on human society reduces the relevance of this caveat. His DICE (Dynamic Integrated model of Climate and Economics) model took the 2007 IPCC predictions as the last word. This did not leave any room to take account of as yet little discussed climate feedback mechanisms. We mention two examples. The first is the diminishing capacity of tropical rainforests to sequester carbon, because of logging and wild fires. The second is the melting of Arctic summer ice. During the summer the widening expanse of dark open water constantly absorbs the sun’s heat instead of reflecting it back into space as did the former white ice cover. If Nordhaus’s version of CBA had taken account of the possibility that adverse climate events might make the world poorer by 1.5 percent or more, it might have resulted in an upcount instead of the usual discount.

Then there is the issue that the consequences of climate change will have to be borne by the whole of society, undoubtedly with income distribution implications (Jackson, 2011). For instance, should tropical forests capable of soaking up carbon be left standing without compensation for those who live near them? Also the importation of goods from low labour countries conceals the way emissions are counted away from the user economies towards the manufacturing countries, creating ‘virtual emission’'. Which nation should be responsible? The definition of a framework for a fairer world would imply a strong case to pay to take these concerns into account. According to a German energy specialist (Czicsh, 2011) renewable energy is becoming cheaper than the use of fossil fuel, but necessitates increased international cooperation. As yet few governments apart from Germany seriously embrace a policy of renewable energy stimulation.

More recent economic thinking turns increasingly to the adaptation and mitigation of the already noticeable consequences of climate change. Edenhofer et al. conclude that, for reasons of social and political inertia, the target of less than 2 degrees warming cannot be met (2012). Adaptation to a world of four degrees may be the only option. In the States, Wagner and Weitzman (2011) discuss ‘the high cost of doing nothing’, wondering whether climate engineering might be the only way out, despite its risks. Even before the bill for Hurricane Sandy, they estimated the cost of each tonne of CO2 at $20 worth of damage, rising to $50 by 2050.

Even before the bill for Hurricane Sandy, they estimated the cost of each tonne of CO2 at $20 worth of damage, rising to $50 by 2050. Undoubtedly a politically agreed form of carbon pricing leading to a rapid build-up of renewable energy capacity would result in a payment to those regarded entitled to this by energy users.

Notes:

1. Aart Heesterman was a senior lecturer at the University of Birmingham, UK, where he supervised Ph.D. theses and managed the degree programme in economic planning. He has a degree in political and social sciences from the University of Amsterdam and has also taught and published in the areas of econometrics and mathematics. Previously, he was a research officer at the Central Planning Bureau of the Netherlands’ Ministry of Economic Affairs. He is the author of numerous books and articles. Wiebina Heesterman has degrees in information science and information technology and a PhD in Law from the University of Warwick in the UK and has assisted in the creation of human rights databases in Tanzania and Zimbabwe. Fully conversant with the latest climate and environmental research, the authors have travelled extensively in developing countries witnessing how poverty is aggravated by erratic weather patterns.

Their latest book is Rediscovering Sustainability: Economics of the Finite Earth, published by Gower. More details and samples:
http://www.gowerpublishing.com/isbn/9781409444565

References:

Boero G, Clarke R and Winters A L 1991. The Macroeconomic Consequences of Controlling Greenhouse Gases: A Survey. London: HMSO, Department of the Environment.

Czisch G 2011, Scenarios for a Future Electricity Supply: Cost-optimised variations on supplying Europe and its neighbours with electricity from renewable energies. The Institution of Engineering Technology. (German original: Thesis, University of Kassel, 2005).

Edenhofer O, Wallacher J, Lotze-Campen H, Reder M, Knopf and B Müller (eds.). 2012. Climate Change Justice and Sustainability Linking Climate and Development Policy, Springer.

Jackson T 2011. Prosperity without Growth: Economics for a Finite Planet, London: Earthscan.

Nordhaus W D 2008. A Question of Balance. Weighing the Options on Global Warming Policies. New Haven/London: Yale U P.

Stern N 2006. The Economics of Climate Change; A Report to the UK Prime Minister and Chancellor of the Exchequer,
http://www.hm-treasury.gov.uk/independent_reviews/stern_
review_economics_climate_change/stern_review_report.cfm
.

Stewart H and Elliott L 2013. ‘Nicholas Stern: “I got it wrong on climate change - it is far, far worse”’, The Observer, 26 January 2013.

Wagner G and Weitzman M L 2012. ‘Playing God. Foreign Policy’, http://www.foreignpolicy.com/articles/2012/10/22/playing_god?page=0,2&wp_login_redirect=0.

From issue no. 161, April 2013, pp. 7 and 23.

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