Economics of global warming
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2008-07-15T21:51:36Z
Shawine
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/* Benefits */ Should be estimated not calculated.
[[Image:Edccc.jpg|right|thumb|300px|As recent estimates of the rate of global warming have increased, so have the financial estimates of the damage costs; alternatively, the Stern Review is an [[outlier]]. <ref>Adapted from a portion of Figure 1 in Tol and Yohe (2006) "A Review of the Stern Review" ''World Economics '7'''(4): 233-50.</ref>]]
The '''economics of global warming''' refers to the projected size and distribution of the [[economics|economic]] [[Cost-benefit analysis|costs and benefits]] of [[global warming]], and to the economic impacts of actions aimed at the [[mitigation of global warming]]. Estimates come from a variety of sources, including integrated assessment models, which seek to combine [[Socioeconomics|socio-economic]] and biophysical assessments of [[climate change]].
At an [[Intergovernmental Panel on Climate Change]] (IPCC) conference in April 2007, delegates from 120 nations discussed the specific economic and societal costs of mitigating global warming, and eventually approved the [[IPCC Fourth Assessment Report]],<ref>[http://www.ipcc.ch/more_info_100407.htm Information page for Bangkok session (Working group III)], IPCC Publications, Accessed 5/7/07.</ref> which indicates general consensus that benefits of mitigation are worth the mitigation costs.<ref>{{cite news |url= http://news.yahoo.com/s/ap/20070504/ap_on_re_as/climate_report |title= Report: Climate change plan affordable |date= [[2007-05-04]] |last= Coleman |first= Joseph |publisher= [[Associated Press]] |accessdate=2007-05-04}}</ref><ref>{{cite news |url= http://news.yahoo.com/s/ap/20070504/ap_on_sc/climate_report|title= Climate plan arms world for key talks |date= [[2007-05-04]] |last= Casey |first= Michael |publisher= [[Associated Press]] |accessdate=2007-05-04}}</ref><ref>{{cite news |url= http://news.yahoo.com/s/afp/20070504/wl_asia_afp/unclimatewarming_070504152805;_ylt=AoklrG9aviCs1umCzzTjmLb9xg8F |title= Experts say nations have means to tackle global warming |date= [[2007-05-04]] |last= Malakunas |first= Karl |publisher= [[Agence France-Presse]] |accessdate=2007-05-04}}</ref>
== Economic impacts of global warming ==
{{main|Effects of global warming}}
Many estimates of aggregate net economic costs of projected damages and benefits from climate change across the globe are now available. These are often expressed in terms of the social cost of carbon (SCC), the aggregate of future net benefits and costs, due to global warming from carbon dioxide emissions, that are discounted to the present. Peer-reviewed estimates of the SCC for 2005 have an average value of US$43 per tonne of carbon (tC) (i.e., US$12 per tonne of carbon dioxide, tCO<sub>2</sub>) but the range around this mean is large. For example, in a survey of 100 estimates, the values ran from US$-10 per tonne of carbon (US$-3 per tonne of carbon dioxide) up to US$350/tC (US$95 per tonne of carbon dioxide.)<ref>[http://www.ipcc.ch/SPM13apr07.pdf 2007 IPCC Summary for Policymakers]</ref>
One of the most widely noted projections on this issue is the ''[[Stern Review]]'', a 2006 report <ref>{{cite web | url=http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/30_10_06_exec_sum.pdf |title="Stern Review executive summary" | author=Nicholas Stern | date=[[30 October]] [[2006]] | publisher=[[New Economics Foundation]]}}</ref> by the former [[World Bank Chief Economist|Chief Economist]] and Senior Vice-President of the [[World Bank]] [[Nicholas Stern]], predicts that climate change will have a serious impact on [[economic growth]] without mitigation. <ref>http://news.bbc.co.uk/1/hi/business/6096594.stm (''Report's stark warning on climate'')</ref> The report suggests that an investment of one percent of global [[GDP]] is required to mitigate the effects of climate change, with failure to do so risking a [[recession]] worth up to twenty percent of global [[GDP]].<ref>BBC News (30 October 2006) [http://news.bbc.co.uk/2/hi/business/6098362.stm "At-a-glance: The Stern Review"]</ref> The ''Stern Review'' has been criticized by some economists, saying that Stern did not consider costs past 2200, that he used an incorrect [[discount rate]] in his calculations, and that stopping or significantly slowing climate change will require deep emission cuts everywhere.<ref>[[Richard Tol| Tol]] and [[Gary Yohe| Yohe]] (2006) "A Review of the Stern Review" ''World Economics '7'''(4): 233-50. See also other critiques in ''World Economics '7'''(4).</ref> Other economists have supported Stern's approach <ref>{{web cite|url=http://delong.typepad.com/sdj/2006/12/do_unto_others.html|title= Do unto others...|author=[[Brad DeLong]]}}</ref> <ref>{{web cite|url=http://johnquiggin.com/wp-content/uploads/2006/12/sternreviewed06121.pdf|title=Stern and the critics on discounting|author=[[John Quiggin]]}}</ref>, or argued that Stern's estimates are reasonable, even if the method by which he reached them is open to criticism. <ref>{{web cite|url=http://www.economics.harvard.edu/faculty/weitzman/files/JELSternReport.pdf|title=The Stern Review of the Economics of Climate Change|author=[[Martin Weitzman]]|accessdate=2008-02-19}}</ref>. Some research has suggested that structural uncertainty and low-probability high-impact risks are very important, and that "the influence on [[cost-benefit analysis]] of [[Fat tail|fat-tailed]] structural uncertainty about climate change, coupled with great unsureness about high-temperature damages, can outweigh the influence of discounting or anything else". <ref>{{web cite|url=http://www.economics.harvard.edu/faculty/weitzman/files/modeling.pdf|title=On Modeling and Interpreting the Economics of Catastrophic Climate Change|author=[[Martin Weitzman]]|accessdate=2008-02-19}}</ref>
In a 2004 comment on the economic effect of global warming in [[Copenhagen Consensus]], Professor [[Robert O. Mendelsohn]] of Yale School of Forestry and Environmental Studies, stated that
: "A series of studies on the impacts of climate change have systematically shown that the older literature overestimated climate damages by failing to allow for adaptation and for climate benefits (see Fankhauser et al 1997; Mendelsohn and Newmann 1999; Tol 1999; Mendelsohn et al 2000; Mendelsohn 2001;Maddison 2001; Tol 2002; Sohngen et al 2002; Pearce 2003; Mendelsohn and Williams 2004). These new studies imply that impacts depend heavily upon initial temperatures (latitude). Countries in the polar region are likely to receive large benefits from warming, countries in the mid-latitudes will at first benefit and only begin to be harmed if temperatures rise above 2.5C (Mendelsohn et al 2000). Only countries in the tropical and subtropical regions are likely to be harmed immediately by warming and be subject to the magnitudes of impacts first thought likely (Mendelsohn et al 2000). Summing these regional impacts across the globe implies that warming benefits and damages will likely offset each other until warming passes 2.5C and even then it will be far smaller on net than originally thought (Mendelsohn and Williams 2004)."<ref>[http://www.copenhagenconsensus.com/Default.aspx?ID=165 Copenhagen Consensus 2004 – addresses 10 major challenges in the world. - Climate Change<!-- Bot generated title -->]</ref>
McKibbin and Wilcoxen (2002) cite [[United Nations|the United Nations]] [[IPCC]] as concluding with 33 to 67 percent confidence that the aggregate [[market sector]] effect of a small increase in global temperatures could be "plus or minus a few percent of world GDP". [[Developed country|Developed countries]] are more likely to experience positive effects and developing countries are more likely to experience negative effects. Larger temperature rises would be more adverse across the board. McKibbin and Wilcoxen do not endorse GDP as a welfare measure.
=== Effects on agriculture ===
{{main|Global warming and agriculture}}
The impacts of climate change on agriculture are a mix of positive and negative effects. Higher temperatures will allow farmers to grow different crops. Rainfall will increase in some places at some times, but decrease in others. The negative effects of drought are mitigated by a higher concentration of carbon dioxide in the atmosphere, which will improve the water use efficiency of crops. As prices move in the opposite direction of yields, the market will dampen the impact of climate change on cropping patterns.
In the Summary for Policy Makers of the [[IPCC Fourth Assessment Report| 4th Assessment Report]], Working Group II of the [[Intergovernmental Panel on Climate Change]] states that: "Crop productivity is projected to increase slightly at mid- to high latitudes for local mean temperature increases of up to 1-3°C depending on the crop, and then decrease beyond that in some regions. At lower latitudes, especially seasonally dry and tropical regions, crop productivity is projected to decrease for even small local temperature increases (1-2°C), which would increase the risk of hunger. Globally, the potential for food production is projected to increase with increases in local average temperature over a range of 1-3°C, but above this it is projected to decrease."<ref>[http://www.ipcc.ch/pdf/assessment-report/ar4/wg2/ar4-wg2-spm.pdf AR4 WG2 SPM]</ref>
=== Insurance ===
An industry very directly affected by the risks is the [[insurance]] industry; the number of major natural disasters has trebled since the 1960s, and insured losses increased fifteen fold in real terms (adjusted for inflation).<ref>[http://www.aaisonline.com/communications/Climate%20Change.pdf American Association of Insurance Services<!-- Bot generated title -->]</ref> According to one study, 35–40% of the worst catastrophes have been climate change related (ERM, 2002). Over the past three decades, the proportion of the global population affected by weather-related disasters has doubled in linear trend, rising from roughly 2% in 1975 to 4% in 2001 (ERM, 2002).
According to a 2005 report from the Association of British Insurers, limiting carbon emissions could avoid 80% of the projected additional annual cost of tropical cyclones by the 2080s.<ref>Association of British Insurers (2005) [http://www.abi.org.uk/Display/File/Child/552/Financial_Risks_of_Climate_Change.pdf "Financial Risks of Climate Change"] summary report</ref> A June 2004 report by the Association of British Insurers declared "Climate change is not a remote issue for future generations to deal with. It is, in various forms, here already, impacting on insurers' businesses now."<ref>Association of British Insurers (June 2005) [http://www.abi.org.uk/Display/File/364/SP_Climate_Change5.pdf "A Changing Climate for Insurance:] A Summary Report for Chief Executives and Policymakers"</ref> It noted that weather risks for households and property were already increasing by 2-4 % per year due to changing weather, and that claims for storm and flood damages in the UK had doubled to over £6 billion over the period 1998–2003, compared to the previous five years. The results are rising insurance premiums, and the risk that in some areas [[flood insurance]] will become unaffordable for some.
Financial institutions, including the world's two largest insurance companies, [[Munich Re]] and [[Swiss Re]], warned in a 2002 study that "the increasing frequency of severe climatic events, coupled with social trends" could cost almost [[U.S. dollar|US$]]150 billion each year in the next decade.<ref>UNEP (2002) [http://www.unepfi.org/fileadmin/documents/CEO_briefing_climate_change_2002_en.pdf "Key findings of UNEP’s Finance Initiatives study"] ''CEObriefing''</ref> These costs would, through increased costs related to insurance and disaster relief, burden customers, taxpayers, and industry alike.
In the United States, insurance losses have also greatly increased. According to Choi and Fisher (2003) each 1% increase in annual precipitation could enlarge catastrophe loss by as much as 2.8%.<ref>Choi, O. and Fisher, A. (2003) [http://www.ingentaconnect.com/content/klu/clim/2003/00000058/F0020001/05109227 "The Impacts of Socioeconomic Development and Climate Change on Severe Weather Catastrophe Losses: Mid-Atlantic Region (MAR) and the U.S."] ''Climatic Change '58'''(1-2): 149-170</ref> Gross increases are mostly attributed to increased population and property values in vulnerable coastal areas, though there was also an increase in frequency of weather-related events like heavy rainfalls since the 1950s<ref>{{cite journal |journal=Science |year=1999 |volume=284 |issue=5422 |pages=1943–7 | doi=10.1126/science.284.5422.1943 | title=Mitigation Emerges as Major Strategy for Reducing Losses Caused by Natural Disasters |author=Board on Natural Disasters | pmid=10373106}}</ref>
=== Infrastructure ===
Roads, airport runways, railway lines and pipelines, (including [[oil pipeline]]s, [[sewer]]s, [[water main]]s etc) may require increased maintenance and renewal as they become subject to greater temperature variation and are exposed to weather that they were not designed for.<ref>[[Richard Tol]] (forthcoming), [http://ideas.repec.org/p/sgc/wpaper/116.html Why worry about climate change: A research agenda], Environmental Values</ref> Regions already adversely affected include areas of [[permafrost]], which are subject to high levels of [[subsidence]], resulting in buckling roads, sunken foundations, and severely cracked runways. <ref>[http://www.airportbusiness.com/article/article.jsp?id=2258&siteSection=4 AirportBusiness.com » Article » Studies Show Climate Change Melting Permafrost Under Runways in Western Arctic<!-- Bot generated title -->]</ref>
=== Investment ===
Venture capitalists and other investors have noted potential opportunities arising from global warming, as massive sums of money are needed for enhanced infrastructure as well as clean technologies that could help reduce emissions of global warming gases. As[[Joel Makower]], a noted expert on business and the environment, has pointed out, "For all the handwringing over the negative bottom-line impacts of climate change for most companies, a handful of large corporate interests may come out winners, creating potentially profitable opportunities for forward-thinking investors." These include companies investing in [[clean energy]] technologies such as [[solar energy]] and [[wind power]], but also companies in other sectors: agriculture (to produce [[biofuels]] as well as biobased plastics that supplant petroleum-based ones), information technology companies (producing switches, routers, and software intended to create a more efficient, "[[smart grid]]", chemical companies (producing "[[green chemistry]]" alternatives to petrochemicals), and producers of more efficient motors for aircraft, automobiles, and industrial use.
=== Migration ===
Some [[Pacific Ocean]] island nations, such as [[Tuvalu]], are concerned about the possibility of an eventual evacuation, as flood defense may become economically inviable for them. Tuvalu already has an ad hoc agreement with [[New Zealand]] to allow phased relocation.<ref>[http://www.guardian.co.uk/climatechange/story/0,12374,1063181,00.html Andrew Simms: Unnatural disasters | Environment | The Guardian<!-- Bot generated title -->]</ref>
In the 1990s a variety of estimates placed the number of [[environmental refugee]]s at around 25 million. (Environmental refugees are not included in the official definition of [[refugee]]s, which only includes migrants fleeing persecution.) The Intergovernmental Panel on Climate Change (IPCC), which advises the world’s governments under the auspices of the UN, estimated that 150 million environmental refugees will exist in the year 2050, due mainly to the effects of coastal flooding, shoreline erosion and agricultural disruption (150 million means 1.5% of 2050’s predicted 10 billion [[world population]]).<ref>[http://www.risingtide.nl/greenpepper/envracism/refugees.html Hidden statistics: environmental refugees<!-- Bot generated title -->]</ref><ref>[http://web.archive.org/web/20050223042051/http://www.risingtide.nl/greenpepper/envracism/refugees.html Hidden statistics: environmental refugees<!-- Bot generated title -->]</ref>
=== Northwest Passage ===
[[Image:Arctic Ice Thickness.gif|300px|right|thumb|Arctic ice thicknesses changes from 1950s to 2050s simulated in one of [[Geophysical Fluid Dynamics Laboratory|GFDL]]'s R30 atmosphere-ocean [[general circulation model]] experiments]]
Melting [[Arctic]] ice may open the [[Northwest Passage]] in summer, which would cut 5,000 [[nautical mile]]s (9,000 km) from shipping routes between Europe and Asia. This would be of particular relevance for [[supertanker]]s which are too big to fit through the [[Panama Canal]] and currently have to go around the tip of South America. According to the [[Canadian Ice Service]], the amount of ice in Canada's eastern [[Canadian Arctic Archipelago|Arctic Archipelago]] decreased by 15% between 1969 and 2004.<ref>http://www.washingtontimes.com/specialreport/20050612-123835-3711r.htm</ref>
While the reduction of summer ice in the Arctic may be a boon to shipping, this same phenomenon threatens the Arctic ecosystem, most notably polar bears which depend on ice floes. Subsistence hunters such as the [[Inuit]] peoples will find their livelihoods and cultures increasingly threatened as the ecosystem changes due to global warming.
=== Development ===
The combined effects of global warming may impact particularly harshly on people and countries without the resources to [[mitigation of global warming|mitigate]] those effects. This may slow [[economic development]] and [[poverty reduction]], and make it harder to achieve the [[Millennium Development Goals]].<ref>[http://www.odi.org.uk/iedg/publications/climate_change_web.pdf pagecover4_final.p65<!-- Bot generated title -->]</ref><ref>[http://news.independent.co.uk/world/africa/story.jsp?story=648282 Independent Online Edition - Africa News - Independent.co.uk<!-- Bot generated title -->]</ref>
In October 2004 the [[Working Group on Climate Change and Development]], a coalition of development and environment [[Non-governmental organization|NGO]]s, issued a report
[http://www.iied.org/pubs/display.php?o=9512IIED Up in Smoke] on the effects of climate change on development. This report, and the July 2005 report [http://www.iied.org/pubs/display.php?o=9560IIED Africa - Up in Smoke?] predicted increased hunger and disease due to decreased rainfall and severe weather events, particularly in [[Africa]]. These are likely to have severe impacts on development for those affected.
At the same time, in developing countries, the poorest often live on flood plains, because it is the only available space, or fertile agricultural land. These settlements often lack infrastructure such as dykes and early warning systems. Poorer communities also tend to lack the insurance, savings or access to credit needed to recover from disasters.<ref>[http://lnweb18.worldbank.org/ESSD/envext.nsf/46ParentDoc/ClimateChange?Opendocument World Bank Group | Climate Change<!-- Bot generated title -->]</ref>
=== Environmental ===
Secondary evidence of global warming — reduced snow cover, rising sea levels, weather changes — provides examples of consequences of global warming that may influence not only human activities but also [[ecosystem]]s. Increasing global temperature means that ecosystems may change; some [[species]] may be forced out of their habitats ([[extinction risk from climate change|possibly to extinction]]) because of changing conditions, while others may flourish. A 2004 study published in ''[[Nature (journal)|Nature]]'' estimates that between 15 and 37% of known plant and animal species will be 'committed to extinction' by 2050.<ref name=Thomas2004>{{cite journal | author = Thomas, C.D. | coauthors = Cameron, A.; Green, R.E.; Bakkenes, M.; Beaumont, L.J.; Collingham, Y.C.; Erasmus, B.F.N.; Siqueira, M.F.D.; Grainger, A.; Hannah, L. | year = 2004 | title = Extinction risk from climate change | journal = Nature | volume = 427 | issue = 6970 | pages = 145–148 | doi= 10.1038/nature02121 | url = http://www.mnp.nl/bibliotheek/digitaaldepot/20040108nature.pdf |format= [[Portable Document Format|PDF]] | accessdate = 2008-04-15}}</ref> Few of the [[terrestrial ecoregions]] on Earth could expect to be unaffected.
Increasing carbon dioxide may increase ecosystems' productivity to a point.{{Fact|date=June 2008}} Ecosystems' unpredictable interactions with other aspects of [[climate change]] makes the possible environmental impact of this unclear, though. An increase in the total amount of [[biomass]] produced may not be necessarily positive: [[biodiversity]] can still decrease even though a relatively small number of species are flourishing.
==== Water scarcity ====
Positive [[eustasy]] (sea-level rise) may contaminate [[groundwater]], affecting drinking water and agriculture in coastal zones. Increased evaporation will reduce the effectiveness of reservoirs. Increased extreme weather means more water falls on hardened ground unable to absorb it, leading to flash floods instead of a replenishment of soil moisture or groundwater levels. In some areas, shrinking glaciers threaten the water supply.<ref>[http://www.opendemocracy.net/globalization-climate_change_debate/kazakhstan_2551.jsp Kazakhstan: glaciers and geopolitics | openDemocracy<!-- Bot generated title -->]</ref> The availability of freshwater [[surface runoff|runoff]] from mountains for natural systems and human uses may also be impacted.<ref>http://www.un.org/News/Press/docs/2002/UNEP114.doc.html</ref>
Higher temperatures will also increase the demand for water for the purposes of cooling and hydration.
In the [[Sahel]], there has been on average a 25% decrease in annual rainfall over the past 30 years.
=== Health ===
==== Direct effects of temperature rise ====
Rising temperatures have two opposing direct effects on [[death|mortality]]: higher temperatures in winter reduce deaths from cold; higher temperatures in summer increase heat-related deaths.
The distribution of these changes obviously differs. Palutikof ''et al.'' calculate that in England and Wales for a 1 °C temperature rise the reduced deaths from cold outweigh the increased deaths from heat, resulting in a reduction in annual average mortality of 7000. However, in the United States, only 1000 people die from the cold each year, while twice that number die from the heat.<ref>[http://www.epa.gov/climatechange/effects/health.html Health | Climate Change - Health and Environmental Effects | U.S. EPA<!-- Bot generated title -->]</ref>
The [[2006 United States heat wave]] has killed 139 people in California as of 29 July 2006. [Deaths of livestock have not been well-documented.] [[Fresno, California|Fresno]], in the central California valley, had six consecutive days of 110 degree-plus [[Fahrenheit]] temperatures. <ref>http://www.suntimes.com/output/news/cst-nws-heat29.html</ref>
The [[European heat wave of 2003]] killed 22,000–35,000 people, based on normal mortality rates (Schär and Jendritzky, 2004). It can be said with 90% confidence that past human influence on climate was responsible for at least half the risk of the 2003 European summer heat-wave (Stott et al 2004).
==== Spread of disease ====
Global warming is expected to extend the favourable zones for [[Vector (biology)|vectors]] conveying [[infectious disease]] such as [[malaria]].<ref>[http://www.guardian.co.uk/climatechange/story/0,12374,1517940,00.html Health hazard | Environment | The Guardian<!-- Bot generated title -->]</ref> In poorer countries, this may simply lead to higher incidence of such diseases. In richer countries, where such diseases have been eliminated or kept in check by [[vaccination]], draining swamps and using pesticides, the consequences may be felt more in economic than health terms, if greater spending on preventative measures is required.<ref>[http://www.cdc.gov/ncidod/eid/vol6no1/reiter.htm From Shakespeare to Defoe: Malaria in England in the Little Ice Age<!-- Bot generated title -->]</ref>
==Contamination by sector and cost of reducing fossil fuel use==
Reducing greenhouse gas emissions depends in part on lowering consumption of fossil fuels. The key challenge is that nearly all forms of economic activity rely on fossil fuel energy sources, from transportation fuel, electricity from coal-fired plants, industrial furnaces to home and office heating. Reducing emissions can be achieved through gains in efficiency - producing the same benefits with smaller amounts of fossil energy, or by displacing fossil sources with non- or low-emitting sources. Low emission [[renewable energy]] sources such as wind, solar and biomass still represent only a small fraction of total energy consumption [http://www.eia.doe.gov/neic/infosheets/renewableenergy.htm]. The scale of current fossil energy dependence poses a substantial challenge. Gaining [[energy efficiency]] typically requires up-front investment, such as adding insulation, replacing energy-inefficient devices and processes, or buying hybrid vehicles. Some such investments can pay for themselves in the savings on energy bills, and the economic case for choosing them depends on the [[payback period]]. If an upgrade's payback is better than the risk-free interest rate, economic theory predicts individuals will choose the higher return of making the efficiency investment [http://www.eere.energy.gov/consumer/your_home/insulation_airsealing/index.cfm/mytopic=11360]. If current pricing is not leading to this outcome, the cost of fossil energy is not yet high enough to drive adoption of available efficiency gains. (Social science researchers Kurani and Turrentine [http://www.its.ucdavis.edu/publications/2004/UCD-ITS-RR-04-31.pdf reported] in 2004 that consumers often fail to make choices that have favorable payback period. They attribute the "uneconomic" choices to [[risk aversion]], weighing potential losses much higher than potential gains.)
Advocates of mitigating climate change hold that greenhouse gas emissions must carry a price, so the market can internalize the [[externality]] of the impact of their emission. This could take the form of a [[carbon tax]] or of [[emission cap]]s, with a market created for trading [[emissions trading|emission permits]], much as was done in the USA for sulfate emissions blamed for [[acid rain]]. Thus the economic impact of avoiding greenhouse gas emissions depends on how much consumption will have to be avoided, and how quickly the economy can incorporate efficiency gains.
Some pundits have criticized such attempts at calculating the costs of mitigating climate change by avoiding fossil fuel consumption, pointing out that the [[opportunity cost]]s of avoiding consumption are not (and cannot) be calculated and are likely to be more important than the expected benefits [http://georgereisman.com/blog/2006/11/britains-stern-review-on-global.html] [http://www.reason.com/news/show/116401.html].
Many estimates of aggregate net economic costs of damages from climate change across the globe (i.e., the social cost of carbon (SCC), expressed in terms of future net benefits and costs that are discounted to the present) are now available. Peer-reviewed estimates of the SCC for 2005 have an average value of US$43 per tonne of carbon (tC) (i.e., US$12 per tonne of carbon dioxide) but the range around this mean is large, primarily due to the variation in discount rates used. For example, in a survey of 100 estimates, the values ran from US$-10 per tonne of carbon (US$-3 per tonne of carbon dioxide) up to US$350/tC (US$95 per tonne of carbon dioxide.)<ref>[http://www.ipcc.ch/SPM13apr07.pdf 2007 IPCC Summary for Policymakers]</ref>
== Mitigation and adaptation ==
{{main|Mitigation of global warming}}
{{seealso|Adaptation to global warming}}
The costs of mitigating (reducing) global warming depend on a number of factors. One fundamental factor is the target level of atmospheric carbon dioxide: the lower the level, the sooner action must be taken if increases beyond the target level are to be avoided. The sooner action must be taken, the shorter the period over which costs must be spread, and the higher the absolute costs, as cheaper technologies which might emerge later are not yet available. A common target level (assumed by [[United Kingdom|the United Kingdom]]) is 550ppm (current levels are around 380ppm, and rising at 2-3ppm per year). Signatories of the [[Kyoto Protocol]] committed themselves to targets that require lowering their national [[greenhouse gas]] emissions to a specified level relative to their actual 1990 emissions. Many nations set targets to reach a small percentage below 1990 levels, during the target period for Kyoto of 2008-2012.
Another crucial factor in estimating the costs of climate change is the [[discount rate]] to apply. Normally a relatively high rate (e.g. 5%-10%) is applied, reflecting the cost of capital. However, where intergenerational issues involve potential irreversibilities such as climate change, a low discount rate (e.g. 1%-4%) may be applied. The difference is dramatic: at 4% (a typical rate for [[social issues]]), avoiding $1m worth of climate change damage in 100 years' time is valued at nearly $20,000 today ([[net present value]]), whereas at 8% it is valued at less than $500.
Another area for debate is the relationship between [[Technology|technological development]] and regulatory incentives: if regulation can induce substantial [[technological change]], the costs of mitigation may be much lower.
=== Cost estimates ===
IPCC TAR (Synthesis Report) suggested values of $78bn to $1141bn annual mitigation costs, amounting to 0.2% to 3.5% of current world GDP (which is around $35 trillion), or 0.3% to 4.5% of GDP if borne by the richest nations alone. As [[economic growth]] is expected to continue, the percentage would fall. In terms of cost per tonne of carbon emission avoided, the range (for a target of 550ppm) is $18 to $80.<ref>[[House of Lords]], [[6 July]] 2005, [http://meteo.lcd.lu/globalwarming/House_of_Lords/economics_of_climate_change.pdf The Economics of Climate Change], House of Lords, [[Select Committee (Westminster System)|Select Committee]] on Economic Affairs, 2nd Report of Session 2005-06</ref>
These cost estimates refer to reductions achieved through tradable emissions permits when those permits are given away to polluters. If the reductions are achieved through emission taxes or auctioned permits, and the revenue is used to reduce distortionary taxes, the TAR III synthesis report concludes that "[depending] on the existing tax structure, type of [[tax cut]]s, [[Labour economics|labour market]] conditions and method of recycling... it is possible that the economic benefits may exceed the costs of mitigation." This is in contrast to McKibbin and Wilcoxen's (2002) report that Nordhaus and Boyer calculated that the present value cost of [[Kyoto Protocol|the Kyoto Protocol]] would be $800 billion to $1,500 billion if implemented as efficiently as possible. They also cite a study by [[Richard Tol]] that estimated the net present value cost to be more than $2.5 trillion.
Azar and Schneider (2002) observe that global output in 1990 was around $20 trillion. If it grew steadily at 2.1 percent per annum it would be just short of $200 trillion by 2100. They thereby make the point that the calculated [[present value]] costs of mitigation would look smaller if scaled against 2100 output than if scaled against 1990 output. However, neither comparator is relevant to the question of whether the likely benefits from mitigation exceed the costs.
A 2008 study, not peer-reviewed, by the consulting company [[McKinsey & Company|McKinsey Global Institute]] uses [[cost curve]] analysis to estimate that it is possible to stabilize global greenhouse gas concentrations at 450 to 500 ppm CO2-e with macroeconomic costs in the order of 0.6-1.4% of global GDP by 2030.<ref>McKinsey Global Institute, [http://www.mckinsey.com/mgi/publications/Carbon_Productivity/index.asp The carbon productivity challenge: Curbing climate change and sustaining economic growth], June 2008</ref>
Lord [[Peter Levene, Baron Levene of Portsoken|Peter Levene]], chairman of [[Lloyd's of London]], said on [[12 April]] [[2007]] that the threat of climate change must be an integral part of every company’s risk analysis.<ref>Business Insurance, [[12 April]] [[2007]], [http://www.businessinsurance.com/cgi-bin/news.pl?newsId=9970]</ref>
===Benefits===
McKibbin and Wilcoxen also report that Nordhaus and Boyer estimated that the present value of benefits from mitigation under the Kyoto Protocol would be $120 billion, far below the likely costs. McKibbin and Wilcoxen report that "[o]ther studies reach similar conclusions". They cite [[Richard Tol]] as concluding that "the emissions targets agreed in the Kyoto Protocol are irreconcilable with economic rationality."
However, the [[Stern Review]] produced much larger benefit estimates, of between 5 per cent and 20 per cent of GDP. The difference reflected a number of factors, the most important of which were the choice of discount rate, the use of welfare weighting for effects on people in poor countries, a greater weight on damage to the natural environment and the use of more up-to-date scientific estimates of likely damage.
In addition to avoiding the costs of the business-as-usual scenario, mitigation actions can bring other benefits, depending on factors such as the technology used. These include, for example, the reduced economic impact from [[Oil reserves|oil supply]] disruptions and/or price rises, if mitigation reduces oil dependence. This may be of particular benefit to non-oil-exporting [[developing country|developing countries]], which suffer greater economic impact from oil price rises. [http://www.heatisonline.org/contentserver/objecthandlers/index.cfm?id=5164&method=full] Co-benefits from ending deforestation include protection of biodiversity, benefits for indigenous people, research and development possibilities, tourism, and some protection from extreme weather events. ([[Stern Review]], page 280)
== Optimal strategies for mitigation ==
Financial and technological strategies can have a major impact on reaching a particular target atmospheric greenhouse gas concentration.
* [[Carbon tax]]
* [[Carbon emissions trading]]
* A hybrid between a carbon tax and an emissions trading scheme, this can be thought of as an emissions trading scheme with a price cap, a price floor, or both. A price cap can be realized by governments being able to sell an unlimited amount extra permits at a given price (the price of the cap)<ref>P.J. Wilcoxen, W.J. McKibbin [http://www.brookings.edu/press/review/spring2002/mckibbin.htm Climate Change after Kyoto: A Blueprint for a Realistic Approach]</ref>. A price floor can be realized by governments buying back permits if the price goes below the value of the floor, or by emitters paying a fee when they exercise the permit (so the effective carbon price is equal to the sum of the permit price and the exercise fee).
* Regulation
* Reducing the [[carbon intensity]] of energy via [[Nuclear power]] or [[Renewable Energy]]
* [[Energy efficiency]]
"No regrets" policies - notably reducing [[fossil fuel]] subsidies, which is predicted to increase growth whilst reducing CO2 emissions. Article 2 of the Kyoto Protocol specifies a progressive removal of subsidies and reform of taxes as a means of achieving reduction commitments. [http://www.oecd.org/dataoecd/58/50/29173911.pdf]
McKibbin and Wilcoxen (2002) argue that a combination of long term carbon price signals and short terms caps on [[Opportunity cost|economic cost]] is needed to address both [[Efficiency (economics)|economic efficiency]], equity sharing and political feasibility.
The [[Stern Review]] recommends adopting a quantative global stabilisation target range for the stock of greenhouse gases as a foundation for policy. It suggests that this target range would be likely to be somewhere between 450-550 ppm CO<sub>2</sub>-e. It also recommends a carbon price signal through the use of a carbon tax or emissions trading scheme.
Brink et al (2005) showed that the costs of mitigation can be reduced by considering the inter-relationships of different [[greenhouse gas]], and the differential impact that different technological decisions may have on their emissions.
== Cost distribution ==
The costs and benefits of global warming are distributed quite unequally.
* low-lying countries' risk of floods
* many countries subject to increased drought are poor [[Africa|African countries]]
* ability of poor countries to mitigate / adapt (margin)
* GW increases variability of weather, which implies greater capital requirements for water storage systems, flood defenses, etc as well as individual requirements to cope with wider variation in weather patterns
The costs of mitigation may also be distributed unequally, both within and between countries. [http://www.earth.columbia.edu/about/director/pubs/jeem2002.pdf] Wier et al (2005) showed that carbon taxes, particularly [[direct tax]]es on households, are regressive (more so than [[VAT]]), suggesting that in order to maintain social acceptance the regressive effect needs to be compensated for either within the [[Ecotax|environmental tax]] structure, or in other parts of the tax system. [[Indirect tax]]es (on business) are less regressive, and petrol taxes are found to be progressive.
== Inter-relationships ==
=== Between countries ===
Bastianoni et al (2004) note the differences between methodologies for assigning responsibility for greenhouse gas emissions, which include the geographical approach, based on the IPCC guidelines for GHG inventory; the consumer responsibility approach, based on the [[Ecological footprint|Ecological Footprint]] methodology; and the Carbon Emission Added (CEA) approach, which resembles the accounting of a [[Value added tax|Value Added Tax]]. Different methodologies can produce quite different results in terms of responsibility for emissions, with consequent impact on policy.
=== Gradual change vs climate surprises ===
Baranzini et al (2003) conclude that "(i) gradual, continuous uncertainty in the global warming process is likely to delay the adoption of abatement policies as found in previous studies, with respect to the standard CBA; however (ii) the possibility of climate catastrophes accelerates the implementation of these policies as their net discounted benefits increase significantly."
==References==
* Australian Greenhouse Office (2004), [http://www.greenhouse.gov.au/impacts/publications/pubs/costing.pdf "Economic Issues Relevant to Costing Climate Change Impacts"]
* Christian Azar and [[Stephen Schneider|Stephen H. Schneider]] (2002) [http://iis-db.stanford.edu/pubs/20076/shseconomic.pdf "Are the economic costs of stabilising the atmosphere prohibitive?"], ''Ecological Economics'' 42 (1-2)
* Andrea Baranzini, Marc Chesney and Jacques Morisset (2003), [http://www.sciencedirect.com/science?_ob=IssueURL&_tockey=%23TOC%235713%232003%23999689991%23390543%23FLA%23&_auth=y&view=c&_acct=C000049044&_version=1&_urlVersion=0&_userid=946889&md5=d7f530ea35f31351a9f352210513a84d "The impact of possible climate catastrophes on global warming policy"], ''Energy Policy'' 31(8)
* Simone Bastianoni, Federico Maria Pulselli and Enzo Tiezzi (2004), "The problem of assigning responsibility for greenhouse gas emissions", ''Ecological Economics'' 49(3)
* P. Buonanno, C. Carraro and M. Galeotti (2003), "Endogenous induced [[technical change]] and the costs of Kyoto", ''Resour. Energy Econ.'' 25 (2003), pp. 11–34.
* Corjan Brink, Ekko van Ierland, Leen Hordijk and Carolien Kroeze (2005), "Cost-effective emission abatement in agriculture in the presence of interrelations: cases for the Netherlands and Europe", ''Ecological Economics'' 53(1)
* [[Congressional Budget Office]] (2005), [http://www.cbo.gov/ftpdocs/60xx/doc6061/01-24-ClimateChange.pdf "Uncertainty in Analyzing Climate Change: Policy Implications"], January 2005 - emissions caps vs taxes
* Congressional Budget Office (2003), [http://www.cbo.gov/showdoc.cfm?index=4171&sequence=0 "The Economics of Climate Change: A Primer"], April 2003
* DeCanio, Stephen J. (1997), [http://www.rprogress.org/newpubs/1998/ecc.pdf The Economics of Climate Change], Redefining Progress (also [http://www.rff.org/Documents/RFF-DP-98-32.pdf Michael Toman])
* [[Friends of the Earth]] (1997), "[http://www.foe.co.uk/pubsinfo/briefings/html/19971215150449.html Putting costs into perspective - economic benefits from fighting climate change]", [[1997|February 1997]]
* Mette Wier, Katja Birr-Pedersen, Henrik Klinge Jacobsen and Jacob Klok (2005), "Are CO2 taxes regressive? Evidence from the Danish experience", ''Ecological Economics'' 52(2)
* [[Warwick McKibbin]] and Peter Wilcoxen (2002) ‘The Role of Economics in Climate Change Policy”, [[Journal of Economic Perspectives]], vol 16, no 2, pp107-130. re-printed in R. Stavins ed(2005) “Economics of the Environment: Selected Readings”, pp479-502. [[W. W. Norton|WW Norton]] and Co, New York
* [[Warwick McKibbin]] and Peter Wilcoxen (2002) Climate Change Policy after Kyoto: A Blueprint for a Realistic Approach, [[Brookings Institution]], December, 133 pages (ISBN 0-8157-0608-1)
{{reflist}}
== See also ==
* [[Avoiding Dangerous Climate Change]]
* [[Steady state (macroeconomics)]]
* [[Stern Review]]
* [[Tragedy of the commons]]
* [[Low-carbon economy]]
* [[List of scientists opposing the mainstream scientific assessment of global warming]]
== External links ==
* [[Cooler Heads Coalition]], [http://www.globalwarming.org/economics.php Economics of global warming]
* [[Pew Center on Global Climate Change]], [http://www.pewclimate.org/global-warming-in-depth/economics/ Economics of global warming]
* [http://www.heatisonline.org/contentserver/objecthandlers/index.cfm?id=5168&method=full EIA: Emissions Cuts Much Cheaper Than Previously Thought]
* [http://www.brookings.edu/es/research/projects/glclimate/glclimate.htm The Brookings Institution global climate change project]
* [http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm The Stern Review] UK Government's Chief Economic Advisor on Climate Change
* [http://digitalmedia.worldbank.org/sar/climatechange/ World Bank Data and Statistics on Climate Change in South Asia]
{{global warming}}
[[Category:Climate change policies]]
[[Category:Global warming]]
[[Category:Environmental economics]]