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SUMMARY FOR POLICYMAKERS:
THE ECONOMIC AND SOCIAL DIMENSIONS
OF CLIMATE CHANGE

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potential for irreversible damages or costs, a very long planning horizon, long time lags between emissions and effects, wide regional variation in causes and effects, the irreducibly global scope of the problem, and the need to consider multiple greenhouse gases and aerosols. Yet another complication arises from the fact that effective protection of the climate system requires global cooperation.

Working Group III of the Intergovernmental Panel on Climate Change (IPCC) was restructured in November 1992 and charged with conducting "technical assessments of the socio-economics of impacts, adaptation and mitigation of climate change over both the short and long term and at the regional and global levels". Working Group III responded to this charge by further stipulating in its work plan that it would place the socio-economic perspectives in the context of sustainable development and, in accordance with the UN Framework Convention on Climate Change (UNFCCC), provide comprehensive treatment of both mitigation and adaptation options while covering all economic sectors and all relevant sources of greenhouse gases and sinks.

Still, a number of insights that may be useful to policymakers can be drawn from the literature:

This report assesses a large part of the existing literature on the socioeconomics of climate change and identifies areas in which a consensus has emerged on key issues and areas where differences exist?. The chapters have been arranged so that they cover several key issues. First, frameworks for socio-economic assessment of costs and benefits of action and inaction are described. Particular attention is given to the applicability of cost-benefit analysis, the incorporation of equity and social considerations, and consideration of intergenerational equity issues. Second, the economic and social benefits of limiting greenhouse gas emissions and enhancing sinks are reviewed. Third, the economic, social and environmental costs of mitigating greenhouse gas emissions are assessed. Next, generic mitigation and adaptation response options are reviewed, methods for assessing the costs and effectiveness of different response options are summarized, and integrated assessment techniques are discussed. Finally, the report provides an economic assessment of policy instruments to combat climate change.

• Analyses indicate that a prudent way to deal with climate change is

a portfolio of actions aimed at mitigation, adaptation and improvement of knowledge. The appropriate portfolio will differ for each country. The challenge is not to find the best policy today for the next 100 years, but to select a prudent strategy and to adjust it over time in the light of new information. Earlier mitigation action may increase flexibility in moving toward stabilization of atmospheric concentrations of greenhouse gases (UN Framework Convention on Climate Change, Article 2). The choice of abatement paths involves balancing the economic risks of rapid abatement now (that premature capital stock retirement will later be proved unnecessary) against the corresponding risk of delay (that more rapid reduction will then be required, necessitat

ing premature retirement of future capital stock), • The literature indicates that significant "no-regrets"? opportunities

are available in most countries and that the risk of aggregate net damage due to climate change, consideration of risk aversion, and application of the precautionary principle provide rationales for

action beyond no regrets. • The value of better information about climate change processes

and impacts and society's responses to them is likely to be great. In particular, the literature accords high value to information about climate sensitivity to greenhouse gases and aerosols, climate change damage functions, and variables such as determinants of economic growth and rates of energy efficiency improvements. Better information about the costs and benefits of mitigation and

In accordance with the approved work plan, this assessment of the socio-economic literature related to climate change focuses on economic studies; material from other social sciences is found mostly in the chapter on equity and social considerations. The report is an assessment of the state of knowledge – what we know and do not know -- and not a prescription for policy implementation. Countries can use the information in this report to help take decisions they believe are most appropriate for their specific circumstances.

1 The UN Framework Convention on Climate Change defines climate change as a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods. The question as to whether such changes are potential or can already be identified is analyzed in the volume on the science of climate change of the IPCC Second Assessment Report (SAR).

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"No regrets" measures are those whose benefits, such as reduced energy costs and reduced emissions of local/regional pollutants equal or exceed their cost to society, excluding the benefits of climate change mitigation. They are sometimes known as "measures worth doing anyway.

CLIMATE CHANGE 1995: IPCC SECOND ASSESSMENT REPORT

adaptation measures and how they might change in coming

decades also has a high value. • Analysis of economic and social issues related to climate change,

especially in developing countries where little work of this nature has been carried out, is a high priority for research. More generally, research is needed on integrated assessment and analysis of deci. sion-making related to climate change. Further, research advancing the economic understanding of non-linearities and new theories of economic growth is also needed. Research and development related to energy efficiency technologies and non-fossil energy options also offer high potential value. In addition, there is also a need for research on the development of sustainable consumption patterns.

concentration, the emissions path toward this level, the discount rate, and assumptions concerning the costs and availability of

technologies and practices. • Despite its widespread use in economic policy evaluation, Gross

Domestic Product is widely recognized to be an imperfect measure of society's well-being, largely because it fails to account for degradation of the environment and natural systems. Other methodologies exist that try to take these nonmarket values and social and ecological sustainability into account. Such methodologies would provide a more complete indication of how

climate change might affect society's well-being. • Given the interrelated nature of the global economic system,

attempts to mitigate climate change through actions in one region or sector may have offsetting economic effects that risk increasing the emissions of other regions and sectors (so-called leakages). These emission leakages can be lessened through coordinated actions of groups of countries. The literature suggests that flexible, cost-effective policies relying on economic incentives and instruments, as well as coordinated instruments, can considerably reduce mitigation or adaptation costs or increase the cost-effectiveness of emission reduction measures.

A portfolio of possible actions that policymakers could consider, in accordance with applicable international agreements, to implement low-cost and/or cost-effective measures to reduce emissions of greenhouse gases and adapt to climate change can include:

Equity considerations

In considering equity principles and issues related to greenhouse gas emissions, it is important for policy consideration to take into account in particular Articles 3, 4.2a and 11.2 of the UN Framework Convention on Climate Change, Principle 2 of the Rio Declaration and general principles of international law.

Scientific analyses cannot prescribe how equity should be applied in implementing the UN Framework Convention on Climate Change, but analysis can clarify the implications of alternative choices and their ethical basis.

• Implementing energy efficiency measures, including the removal of

institutional barriers to energy efficiency improvements; • Phasing out existing distortionary policies and practices that increase

greenhouse gas emissions, such as some subsidies and regulations, non-internalization of environmental costs and distortions in trans

port pricing • Implementing cost-effective fuel switching measures from more to

less carbon-intensive fuels and to carbon-free fuels such as renewables; • Implementing measures to enhance sinks or reservoirs of greenhouse

gases, such as improving forest management and land use practices; • Implementing measures and developing new techniques for reducing

methane, nitrous oxide and other greenhouse gas emissions; • Encouraging forms of international cooperation to limit greenhouse

gas emissions, such as implementing coordinated carbon/energy

taxes, activities implemented jointly and tradable quotas; • Promoting the development and implementation of national and

international energy efficiency standards; • Promoting voluntary actions to reduce greenhouse gas emissions; • Promoting education and training, implementing information and

advisory measures for sustainable development and consumption

patterns that will facilitate climate change mitigation and adaptation; • Planning and implementing measures to adapt to the consequences

of climate change; • Undertaking research aimed at better understanding of the causes and

impacts of climate change and facilitating more effective adaptation

to it; • Conducting technological research aimed at minimizing emissions of

greenhouse gases from continued use of fossil fuels and developing

commercial non-fossil energy sources; • Developing improved institutional mechanisms, such as improved

insurance arrangements, to share the risks of damages due to climate change.

• Developing countries require support for institutional and endo

genous capacity building, so that they may effectively participate

in climate change decision-making. • It is important that both efficiency and equity concerns be

considered during the analysis of mitigation and adaptation measures. For the purposes of analysis, it is possible to separate efficiency from equity. This analytical separation pre-supposes that (and is valid, for policy purposes, only if) effective institutions exist or can be created for appropriate redistribution of climate change costs. It may be worthwhile to conduct analyses of the equity implications of particular measures for achieving efficiency, including their social considerations and impacts.

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Contribution of economics

Since climate change is a global issue, comprehensive analyses of mitigation, adaptation and research measures are needed to identify the most efficient and appropriate strategy to address climate change. International decision-making related to climate change, as established

.

Estimates of the costs and benefits of stabilizing greenhouse gas concentrations are sensitive, inter alia, to the ultimate target

SUMMARY FOR POLICYMAKERS: THE ECONOMIC AND SOCIAL DIMENSIONS OF CLIMATE CHANGE

by the UNFCCC, is a collective process in which a variety of concerns Application of the literature on decision-making to climate change such as equity, ecological protection, economics, ethics and poverty. provides elements that can be used in building collective and/or related issues, are of special significance for present and future market-oriented strategies for sharing risks and realizing mutual generations. Treatments of decision-making under uncertainty, risk benefits. It suggests that actions be sequential (temporally aversion, technology development and diffusion processes, and distri- distributed), that countries implement a portfolio of mitigation, butional considerations are at present relatively poorly developed in adaptation and research measures, and that they adjust this international environmental economics, and especially in the climate portfolio continuously in response to new knowledge. The potential change literature.

for transfers of financial resources and technology to developing

countries may be considered as a part of any comprehensive Decision-making related to climate change must take into account analytical framework. the unique characteristics of the “problem”: large uncertainties (scientific and economic), possible non-linearities and irreversibili- Elements of a market-related strategy concern insurance and markets ties, asymmetric distribution of impacts geographically and for risk. Pooling risk does not change the risk, but it can improve temporally, the very long time horizon, and the global nature of economic efficiency and welfare. Although insurance capable of climate change with the associated potential for free riding. Beyond sharing climate change risks on a global basis currently does not scientific uncertainties (discussed in the volume on the science of exist, one of the important potential gains from cooperating in a climate change of the IPCC Second Assessment Report (SAR)) and collective framework, such as the UN Framework Convention on impact uncertainties (the volume on the scientific-technical analyses Climate Change, is that of risk sharing. Creating an insurance system of impacts, adaptations and mitigation of dimate change of the IPCC to cover the risks of climate change is difficult and the international Second Assessment Report (SAR)), socio-economic uncertainties relate to community has not yet established such sophisticated instruments. estimates of how these changes will affect human society (including This, however, does not preclude future international action to estabdirect economic and broader welfare impacts) and to the socio- lish insurance markets sufficient for some international needs. economic implications of emission abatement.

The other dimension that magnifies uncertainties and complicates 4. EQUITY AND SOCIAL CONSIDERATIONS decision-making is geographical: climate change is a global problem encompassing an incredibly diverse mix of human societies, with Equity considerations are an important aspect of climate change differing histories, circumstances and capabilities. Many developing policy and of the Convention. In common language equity means countries are in relatively hot climates, depend more heavily on "the quality of being impartial" or "something that is fair and just'. agriculture, and have less well developed infrastructure and social The UNFCCC, including the references to equity and equitable in structures; thus, they may suffer more than average, perhaps much Articles 3.1, 4.2.a and 11.2, provides the context for efforts to apply more. In developed countries, there may also be large climate equity in meeting the purposes and the objective of the change impacts.

Convention. International law, including relevant decisions of the

International Court of Justice, may also provide guidance. The literature also emphasizes that delaying responses is itself a decision involving costs. Some studies suggest that the cost of delay A variety of ethical principles, including the importance of meeting is small; others emphasize that the costs could include imposition people's basic needs, may be relevant to addressing climate change, of risks on all parties (particularly the most vulnerable), greater but the application to relations among states of principles originally utilization of limited atmospheric capacity and potential deferral of developed to guide individual behaviour is complex and not desirable technical development. No consensus is reflected in the straightforward. Climate change polides should not aggravate existliterature.

ing disparities between one region and another nor attempt to

redress all equity issues. The global nature of the problem - necessitating collective action by sovereign states — and the large differences in the circumstances Equity involves procedural as well as consequential issues. of different parties raise consequential as well as procedural issues. Procedural issues relate to how decisions are made while conse Consequential issues relate to outcomes while procedural issues quential issues relate to outcomes. To be effective and to promote relate to how decisions are made. relation to climate change, the cooperation, agreements must be regarded as legitimate, and equity existence of an agreed legal framework involves a collective process is an important element in gaining legitimacy. within a negotiated framework (the UNFCCC). Accordingly, decision-making can be considered within three different categories Procedural equity encompasses process and participation issues. It of frameworks, each with different implications and with distinct requires that all parties be able to participate effectively in internafoci: global optimization (trying to find the globally optimal result), tional negotiations related to climate change. Appropriate measures procedural decision-making (establishing and refining rules of procedure) and collective decision-making (dealing with distributional issues and processes involving the interaction of

Without knowing the extent of potential impacts, the ability of private numerous independent decision makers).

markets to insure against losses associated with climate change is unknown.

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CLIMATE CHANGE 1995: IPCC SECOND ASSESSMENT REPORT

manner.

to enable developing country parties to participate effectively in It is important that both efficiency and equity concerns should be negotiations increase the prospects for achieving effective, lasting considered during the analysis of mitigation and adaptation and equitable agreements on how best to address the threat of

measures. It may be worthwhile to conduct analyses of the equity climate change. Concern about equity and social impacts points to implications of particular measures for achieving efficiency, includthe need to build endogenous capabilities and strengthen institu- ing their social considerations and impacts. tional capacities, particularly in developing countries, to make and implement collective decisions in a legitimate and equitable

5. INTERTEMPORAL EQUITY AND

DISCOUNTING Consequential equity has two components: the distribution of the costs of damages or adaptation and of measures to mitigate climate Climate policy, like many other policy issues, raises particular queschange. Because countries differ substantially in vulnerability, tions of equity among generations, because future generations are wealth, capacity, resource endowments and other factors listed not able to influence directly the policies being chosen today that below, the costs of the damages, adaptation and mitigation may be could affect their well-being and because it might not be possible to borne inequitably, unless the distribution of these costs is addressed compensate future generations for consequent reductions in their explicitly.

well-being.

Climate change is likely to impose costs on future generations and on Sustainable development is one approach to intergenerational equity. regions where damages occur, including regions with low greenhouse Sustainable development meets 'the needs of the present without gas emissions. Climate change impacts will be distributed unevenly. compromising the ability of future generations to meet their own

needs”. A consensus exists among economists that this does not imply The Convention recognizes in Article 3.1 the principle of common that future generations should inherit a world with at least as much of but differentiated responsibilities and respective capabilities. every resource. Nevertheless, sustainable development would require Actions beyond 'no-regrets” measures impose costs on the present that use of exhaustible natural resources and environmental degrageneration. Mitigation policies unavoidably raise issues about how dation are appropriately offset – for example, by an increase in to share the costs. The initial emission limitation intentions of productive assets sufficient to enable future generations to obtain at Annex I parties represent an agreed collective first step of those least the same standard of living as those alive today. There are differparties in addressing climate change.

ent views in the literature on the extent to which infrastructure and

knowledge, on the one hand, and natural resources, such as a healthy Equity arguments can support a variety of proposals to distribute environment, on the other hand, are substitutes. This is crucial to mitigation costs. Most of them seem to cluster around two main applying these concepts. Some analysts stress that there are exhaustible approaches: equal per capita emission allocations and allocations resources that are unique and cannot be substituted for. Others believe based on incremental departures from national baseline emissions that current generations can compensate future generations for (current or projected). Some proposals combine these approaches in decreases in the quality or quantity of environmental resources by an effort to incorporate equity concerns not addressed by relying increases in other resources. exclusively on one or the other approach. The IPCC can clarify scientifically the implications of different approaches and pro Discounting is the principal analytical tool economists use to compare posals, but the choice of particular proposals is a policy judgment. economic effects that occur at different points in time. The choice of

discount rate is of crucial technical importance for analyses of climate There are substantial variations both among developed and change policy, because the time horizon is extremely long and mitideveloping countries that are relevant to the application of equity gation costs tend to come much earlier than the benefits of avoided principles to mitigation. These include variations in historical and damages. The higher the discount rate, the less future benefits and the cumulative emissions, current total and per capita emissions, more current costs matter in the analysis. emission intensities and economic output, and factors such as wealth, energy structures and resource endowments. The literature Selection of a social discount rate is also a question of values since is weak on the equity implications of these variations both among it Inherently relates the costs of present measures, to possible developed and developing countries.

damages suffered by future generations if no action is taken. How

best to choose a discount rate is, and will likely remain, an unreIn addition, the implications of dimate change for developing coun- solved question in economics. Partly as a consequence, different tries are different from those for developed countries. The former often have different urgent priorities, weaker institutions, and are generally more vulnerable to climate change. However, it is likely that develop- A related (somewhat stronger) concept is that each generation is entitled to ing countries' share of emissions will grow further to meet their social Inherit a planet and cultural

resource base at least as good as that of previous and developmental needs. Greenhouse gas emissions are likely to

generations. become increasingly global, even whilst substantial per capita dispar. SA social discount rate is a discount rate appropriate for use by governments ities are likely to remain.

in the evaluation of public policy.

SUMMARY FOR POLICYMAKERS: THE ECONOMIC AND SOCIAL DIMENSIONS OF CLIMATE CHANGE

discount rates are used in different countries. Analysts typically cost option to achieve an objective specified using other criteria. conduct sensitivity studies using various discount rates. It should Multicriteria analysis is designed to deal with problems where some also be recognized that the social discount rate pre-supposes that all benefits and/or costs are measured in nonmonetary units. Decision effects are transformed to their equivalent in consumption. This analysis focuses specifically on making decisions under uncertainty. makes it difficult to apply to those nonmarket impacts of climate change which for ethical reasons might not be, or for practical In principle, this group of techniques can contribute to improving reasons cannot be, converted into consumption units.

public policy decisions concerning the desirable extent of actions to

mitigate global climate change, the timing of such actions and the The literature on the appropriate social discount rate for climate methods to be employed. change analysis can be grouped into two broad categories. One approach discounts consumption by different generations using the Traditional cost-benefit analysis is based on the concept that the "social rate of time preference," which is the sum of the rate of level of emission control at each point in time is determined such "pure time preference" (impatience) and the rate of increase of that marginal costs equal marginal benefits. However, both costs welfare derived from higher per capita incomes in the future. and benefits may be hard, sometimes impossible, to assess. This may Depending upon the values taken for the different parameters, the be due to large uncertainties, possible catastrophes with very small discount rate tends to fall between 0.5% and 3.0% per year on a probabilities, or simply because there is no available consistent global basis — using this approach. However, wide variations in methodology for monetizing the effects. In some of these cases, it regional discount rates exist, but these may still be consistent with may be possible to apply multicriteria analysis. This provides polia particular global average.

cymakers with a broader set of information, including evaluation of

relevant costs and benefits, estimated within a common framework. The second approach to the discount rate considers market returns to investment, which range between 3% and 6% in real terms for long. Practical application of traditional cost-benefit analysis to the problem term, risk-free public investments. Conceptually, funds could be of climate change is therefore difficult because of the global, regional invested in projects that earn such returns, with the proceeds being and intergenerational nature of the problem. Estimates of the costs of used to increase the consumption for future generations.

mitigation options also vary widely. Furthermore, estimates of poten

tial physical damages due to climate change also vary widely. In The choice of the social discount rate for public investment projects addition, confidence in monetary estimates for important conseis a matter of policy preference but has a major impact on the quences (especially nonmarket consequences) is low. These economic evaluation of climate change actions. For example, in uncertainties, and the resolution of uncertainty over time, may be decitoday's dollars, $1,000 of damage 100 years from now would be sive for the choice of strategies to combat climate change. The objective valued at $370 using a 1% discount rate (near the low end of the of decision analysis is to deal with such problems. Furthermore, for range for the first approach) but would be valued at $7.60 using a some categories of ecological, cultural and human health impacts, 5% discount rate (near the upper end of the range for the second widely accepted economic concepts of value are not available. To the approach). However, in cost-effectiveness analyses of policies over extent that some impacts and measures cannot be valued in monetary short time horizons, the impact of using different discount rates is terms, economists augment the traditional cost-benefit analysis much smaller. In all areas analysts should specify the discount approach with such techniques as multicriteria analysis, permitting rate(s) they use to facilitate comparison and aggregation of results. some quantitative expression of the trade-offs to be made. These tech

niques do not resolve questions involving equity – for example,

determining who should bear the costs. However, they provide impor. 6. APPLICABILITY OF COST AND

tant information on the incidence of damage, mitigation, and BENEFIT ASSESSMENTS

adaptation costs and on where cost-effective action might be taken.

Many factors need to be taken into account in the evaluation of Despite their many imperfections, these techniques provide a valuable projects and public policy issues related to climate change, includ- framework for identifying essential questions that policymakers muse ing the analysis of possible costs and benefits. Although costs and face when dealing with climate change, namely: benefits cannot all be measured in monetary terms, various tech

• By how much should emissions of greenhouse gases be reduced? niques exist which offer a useful framework for organizing

• When should emissions be reduced? information about the consequences of alternative actions for How should emissions be reduced? addressing climate change.

These analytical techniques assist decision makers in comparing the The family of analytical techniques for examining economic envi- consequences of alternative actions, including that of no action, on ronmental policies and decisions includes traditional project level a quantitative basis — and can certainly make a contribution to cost-benefit analysis, cost-effectiveness analysis, multicriteria analy. resolution of these questions. sis and decision analysis. Traditional cost-benefit analysis attempts to compare all costs and benefits expressed in terms of a common

Despite the differences in the value of the discount rate, policies developed monetary unit. Cost-effectiveness analysis seeks to find the lowest- on the basis of the two approaches may lead to similar results.

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