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CLIMATE CHANGE 1995: IPCC SECOND ASSESSMENT REPORT

7.

THE SOCIAL COSTS OF ANTHROPOGENIC CLIMATE CHANGE: DAMAGES OF INCREASED GREENHOUSE GAS EMISSIONS

The literature on the subject in this section is controversial and mainly based on research done on developed countries, often extrapolated to developing countries. There is no consensus about how to value statistical lives or how to aggregate statistical lives across countries. Monetary valuation should not obscure the human consequences of anthropogenic climate change damages, because the value of life has meaning beyond monetary valuation. It should be noted that the Rio Declaration and Agenda 21 call for human beings to remain at the centre of sustainable development. The approach taken to this valuation might affect the scale of damage reduction strategies. It may be noted that, in virtually all of the literature discussed in this section, the developing country statistical lives have not been equally valued at the developed country value, nor are other damages in developing countries equally valued at the developed country value. Because national circumstances, including opportunity costs, differ, economists sometimes evaluate certain kinds of impacts differently amongst countries.

The benefits of limiting greenhouse gas emissions and enhancing sinks are: (a) the climate change damages avoided; and (b) the secondary benefits associated with the relevant policies. Secondary benefits include reductions in other pollutants jointly produced with greenhouse gases and the conservation of biological diversity. Net climate change damages include both market and nonmarket impacts as far as they can be quantified at present and, in some cases, adaptation costs. Damages are expressed in net terms to account for the fact that there are some beneficial impacts of global warming as well, which are, however, dominated by the damage costs. Nonmarket impacts, such as human health, risk of human mortality and damage to ecosystems, form an important component of available estimates of the social costs of climate change. The literature on monetary valuation of such nonmarket effects reflects a number of divergent views and approaches. The estimates of nonmarket damages, however, are highly speculative and not comprehensive.

Nonmarket damage estimates are a source of major uncertainty in assessing the implications of global climate change for human welfare. While some regard monetary valuation of such impacts as essential to sound decision-making, others reject monetary valuation of some impacts, such as risk of human mortality, on ethical grounds. Additionally, there is a danger that entire unique cultures may be obliterated. This is not something that can be considered in monetary terms, but becomes a question of loss of human diversity, for which we have no indicators to measure economic value.

The assessed literature contains only a few estimates of the monetized damages associated with doubled CO2 equivalent concentration scenarios. These estimates are aggregated to a global scale and illustrate the potential impacts of climate change under selected scenarios. Aggregating individual monetized damages to

obtain total social welfare impacts implies difficult decisions about equity amongst countries. Global estimates are based upon an aggregation of monetary damages across countries (damages which are themselves implicit aggregations across individuals) that reflects intercountry differences in wealth and income - this fundamentally influences the monetary valuation of damages. Taking income differences as given implies that an equivalent impact in two countries (such as an equal increase in human mortality) would receive very different weights in the calculations of global damages.

To enable choices between different ways of promoting human welfare to be made on a consistent basis, economists have for many years sought to express a wide range of human and environmental impacts in terms of monetary equivalents, using various techniques. The most commonly used of those techniques is an approach based on the observed willingness to pay for various nonmarket benefits.8 This is the approach that has been taken in most of the assessed literature.

Human life is an element outside the market and societies may want to preserve it in an equal way. An approach that includes equal valuation of impacts on human life wherever they occur may yield different global aggregate estimates than those reported below. For example, equalizing the value of a statistical life at a global average could leave total global damage unchanged but would increase markedly the share of these damages borne by the developing world. Equalizing the value at the level typical in developed countries would increase monetized damages several times, and would further increase the share of the developing countries in the total damage estimate.

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

gauged from the literature. The range of estimates cannot be interpreted as a confidence interval, given the widely differing assumptions and methodologies in the studies. As noted above, aggregation is likely to mask even greater uncertainties about damage components.

Regional or sectoral approaches to estimating the consequences of climate change include a much wider range of estimates of the net economic effects. For some areas, damages are estimated to be significantly greater and could negatively affect economic development. For others, climate change is estimated to increase economic production and present opportunities for economic development. For countries generally having a diversified, industrial economy and an educated and flexible labour force, the limited set of published estimates of damages are of the order one to a few per cent of GDP. For countries generally having a specialized and natural resource-based economy (e.g., heavily emphasizing agriculture or forestry), and a poorly developed and land-tied labour force, estimates of damages from the few studies available are several times larger. Small islands and low-lying coastal areas are particularly vulnerable. Damages from possible large-scale catastrophes, such as major changes in ocean circulation, are not reflected in these estimates. There is little agreement across studies about the exact magnitude of each category of damages or relative ranking of the damage categories. Climate changes of this magnitude are not expected to be realized for several decades, and damages in the interim could be smaller. Damages over a longer period of time might be greater. 10

IPCC does not endorse any particular range of values for the marginal damage of CO2 emissions, but published estimates range between $5 and $125 (1990 U.S.) per tonne of carbon emitted now. This range of estimates does not represent the full range of uncertainty. The estimates are also based on models that remain simplistic and are limited representations of the actual climate processes in being and are based on earlier IPCC scientific reports. The wide range of damage estimates reflects variations in model scenarios, discount rates and other assumptions. It must be emphasized that the social cost estimates have a wide range of uncertainty because of limited knowledge of impacts, uncertain future technological and socio-economic developments, and the possibility of catastrophic events or surprises.

8.

• A large potential for cost-effective energy conservation and efficiency improvements in energy supply and energy use exists in many sectors. These options offer economic and environmental benefits in addition to reducing emissions of greenhouse gases. Various of these options can be deployed rapidly due to small unit size, modular design characteristics and low lifetime costs.

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The options for CO2 mitigation in energy use include alternative methods and efficiency improvements, among others in the construction, residential, commercial, agriculture and industry sectors. Not all cost-effective strategies are based on new technology; some may rely on improved information dissemination and public education, managerial strategies, pricing policies and institutional reforms.

Estimates of the technical potential for switching to less carbonintensive fuels vary regionally and with the type of measure and the economic availability of reserves of fossil and alternative fuels. These estimates also have to take account of potential methane emissions from leakage of natural gas during production and distribution.

• Renewable energy technologies (e.g., solar, hydroelectric, wind, traditional and modern biomass, and ocean thermal energy conversion) have achieved different levels of technical development, economic maturity and commercial readiness. The potential of these energy sources is not fully realized. Cost estimates for these technologies are sensitive to site-specific characteristics, resource variability and the form of final energy delivered. These cost estimates vary widely.

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Nuclear energyll is a technology that has been deployed for several decades in many countries. However, a number of factors have slowed the expansion of nuclear power, including: (a) wary public perceptions resulting from nuclear accidents, (b) not yet fully resolved issues concerning reactor safety, proliferation of fissile material, power-plant decommissioning and long-term disposal of nuclear waste, as well as, in some instances, lower-thananticipated levels of demand for electricity. Regulatory and siting difficulties have increased construction lead times, leading to higher capital costs for this option in some countries. If these issues, including inter alia the social, political and environmental aspects mentioned above, can be resolved, nuclear energy has the potential to increase its present share in worldwide energy production.

• CO2 capture and disposal may be ultimately limited for technical and environmental reasons, because not all forms of disposal ensure prevention of carbon re-entering the atmosphere.

GENERIC ASSESSMENT OF RESPONSE STRATEGIES

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Most nitrous oxide emissions come from diffuse sources related to agriculture and forestry. These emissions are difficult to reduce rapidly. Industrial emissions of nitrous oxide and halogenated compounds tend to be concentrated in a few key sectors and tend to be easier to control. Measures to limit such emissions may be attractive for many countries.

The slow implementation of many of the technologically attractive and cost-effective options listed above has many possible explanations, with both actual and perceived costs being a major factor. Among other factors, capital availability, information gaps, institutional obstacles and market imperfections affect the rate of diffusion for these technologies. Identifying the reasons specific to a particular country is a precondition to devising sound and efficient policies to encourage their broader adoption.

Education and training as well as information and advisory measures are important aspects of various response options.

Many of the emission-reducing technologies and practices described above also provide other benefits to society. These additional benefits include improved air quality, better protection of surface and underground waters, enhanced animal productivity, reduced risk of explosions and fire, and improved use of energy resources.

Many options are also available for adapting to the impacts of climate change and thus reducing the damages to national economies and natural ecosystems. Adaptive options are available in many sectors, ranging from agriculture and energy to health, coastal zone management, offshore fisheries and recreation. Some of these provide enhanced ability to cope with the current impacts of climate variability. However, possible trade-offs between implementation of mitigation and adaptation measures are important to consider in future research. A summary of sectoral options for adaptation is presented in the volume on the scientific-technical analyses of impacts, adaptations and mitigation of climate change of the IPCC Second Assessment Report (SAR).

The optimal response strategy for each country will depend on the special circumstances and conditions which that country must face. Nonetheless, many recent studies and empirical observations suggest that some of the most cost-effective options can be most successfully implemented on a joint or cooperative basis among nations.

9.

COSTS OF RESPONSE OPTIONS

It must be emphasized that the text in this section is an assessment of the technical literature and does not make recommendations on policy matters. The available literature is primarily from developed

countries.

Cost concepts

From the perspective of this section on assessing mitigation or adaptation costs, what matters is the net cost (total cost less secondary benefits and costs). These net costs exclude the social costs of climate change, which are discussed in Section 7 above. The assessed literature yields a very wide range of estimates of the costs of response options. The wide range largely reflects significant differences in assumptions about the efficiency of energy and other markets, and about the ability of government institutions to address perceived market failures or imperfections.

Measures to reduce greenhouse gas emissions may yield additional economic impacts (for example, through technological externalities associated with fostering research and development programmes) and/or environmental impacts (such as reduced emissions of acid rain and urban smog precursors). Studies suggest that the secondary environmental benefits may be substantial but are likely to differ from country to country.

Specific results

Estimates of the cost of greenhouse gas emission reduction depend critically upon assumptions about the levels of energy efficiency improvements in the baseline scenario (that is, in the absence of climate policy) and upon a wide range of factors such as consumption patterns, resource and technology availability, the desired level and timing of abatement, and the choice of policy instruments. Policymakers should not place too much confidence in the specific numerical results from any one analysis. For example, mitigation cost analyses reveal the costs of mitigation relative to a given baseline, but neither the baseline nor the intervention scenarios should be interpreted as representing likely future conditions. The focus should be on the general insights regarding the underlying determinants of costs.

12 These are addressed in Section 4 above and in the volume on economic and social dimensions of climate change of the IPCC Second Assessment Report (SAR).

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

The costs of stabilizing atmospheric concentrations of greenhouse gases at levels and within a time-frame that will prevent dangerous anthropogenic interference with the climate system (the ultimate objective of the UNFCCC) will be critically dependent on the choice of emission timepath. The cost of the abatement programme will be influenced by the rate of capital replacement, the discount rate, and the effect of research and development.

Failure to adopt policies as early as possible to encourage efficient replacement investments at the end of the economic life of a plant and equipment (i.e., at the point of capital stock turnover) imposes an economic cost to society. Implementing emission reductions at rates that can be absorbed in the course of normal stock turnover is likely to be cheaper than enforcing premature retirement now.

The choice of abatement paths thus 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, necessitating premature retirement of future capital stock).

Appropriate long-run signals are required to allow producers and consumers to adapt cost-effectively to constraints on greenhouse gas emissions and to encourage research and development. Benefits associated with the implementation of any "no-regret" policies will offset, at least in part, the costs of a full portfolio of mitigation measures. This will also increase the time available to learn about climate risks and to bring new technologies into the marketplace.

Despite significant differences in views, there is agreement that energy efficiency gains of perhaps 10-30% above baseline trends over the next two to three decades can be realized at negative to zero net cost. (Negative net cost means an economic benefit.) With longer time horizons, which allow a more complete turnover of capital stocks, and which give research and development and market transformation policies a chance to impact multiple replacement cycles, this potential is much higher. The magnitude of such "no-regret" potentials depends upon the existence of substantial market or institutional imperfections that prevent cost-effective emission reduction measures from occurring. The key question is then the extent to which such imperfections and barriers can be removed cost-effectively by policy initiatives such as efficiency standards, incentives, removal of subsidies, information programmes and funding of technology transfer.

Progress has been made in a number of countries in cost-effectively reducing imperfections and institutional barriers in markets through policy instruments based on voluntary agreements, energy efficiency incentives, product efficiency standards and energy efficiency procurement programmes involving manufacturers, as well as utility regulatory reforms. Where empirical evaluations have been made, many have found the benefit-cost ratio of increasing energy efficiency to be favourable, suggesting the practical feasibility of realizing "no-regret" potentials at negative net cost. More information is needed on similar and improved programmes in a wider range of countries.

Infrastructure decisions are critical in determining long-term emissions and abatement costs because they can enhance or restrict the number and type of future options. Infrastructure decisions determine development patterns in transportation, urban settlement and land-use, and influence energy system development and deforestation patterns. This issue is of particular importance to developing countries and many economies in transition where major infrastructure decisions will be made in the near term.

If a carbon or carbon-energy tax is used as a policy instrument for reducing emissions, the taxes could raise substantial revenues, and how the revenues are distributed could dramatically affect the cost of mitigation. If the revenues are distributed by reducing distortionary taxes in the existing system, they will help reduce the excess burden of the existing tax system, potentially yielding an additional economic benefit (double dividend). For example, those European studies which are more optimistic regarding the potential for tax recycling show lower and, in some instances, slightly negative costs. Conversely, inefficient recycling of the tax revenues could increase costs. For example, if the tax revenues are used to finance government programmes that yield a lower return than the private sector investments foregone because of the tax, then overall costs will increase.

There are large differences in the costs of reducing greenhouse gas emissions among countries because of their state of economic development, infrastructure choices and natural resource base. This indicates that international cooperation could significantly reduce the global cost of reducing emissions. Research suggests that, in principle, substantial savings would be possible if emissions are reduced where it is cheapest to do so. In practice, this requires international mechanisms ensuring appropriate capital flows and technology transfers between countries. Conversely, a failure to achieve international cooperation could compromise unilateral attempts by a country or a group of countries to limit greenhouse gas emissions. However, estimates of so called leakage effects vary so widely that they provide little guidance to policymakers.

There has been more analysis to date of emission reduction potentials and costs for developed countries than for other parts of the world. Moreover, many existing models are not well-suited to study economies in transition or economies of developing countries. Much work is needed to develop and apply models for use outside developed countries (for example, to represent more explicitly market imperfections, institutional barriers, and traditional and informal economic sectors). In addition, the discussion below and the bulk of the underlying report deal with costs of response options at the national or regional level in terms of effect on GDP. Further analysis is required concerning effects of response options on employment, inflation, trade competitiveness and other public issues.

A large number of studies using both top-down and bottom-up approaches (see Box 1 for definitions) were reviewed. Estimates of the costs of limiting fossil fuel carbon dioxide emissions (expressed as carbon) vary widely and depend upon choice of methodologies, underlying assumptions, emission scenarios, policy instruments,

CLIMATE CHANGE 1995: IPCC SECOND ASSESSMENT REPORT

BOX 1. TOP-DOWN AND BOTTOM-UP MODELS

Top-down models are aggregate models of the entire macroeconomy that draw on analysis of historical trends and relationships to predict the large-scale interactions between the sectors of the economy, especially the interactions between the energy sector and the rest of the economy. Top-down models typically incorporate relatively little detail on energy consumption and technological change, compared with bottom-up models.

In contrast, bottom-up models incorporate detailed studies of the engineering costs of a wide range of available and forecast technologies, and describe energy consumption in great detail. However, compared with top-down models, they typically incorporate relatively little detail on nonenergy consumer behaviour and interactions with other sectors of the economy.

This simple characterization of top-down and bottom-up models is increasingly misleading as more recent versions of each approach have tended to provide greater detail in the aspects that were less developed in the past. As a result of this convergence in model structure, model results are tending to converge, and the remaining differences reflect differences in assumptions about how rapidly and effectively market institutions adopt costeffective new technologies or can be induced to adopt them by policy interventions.

Many existing models are not well suited to study economies in transition or those of developing countries. More work is needed to develop the appropriate methodologies, data and models and to build the local institutional capacity to undertake analyses.

reporting year and other criteria. For specific results of individual studies, see the volume on economic and social dimenstions of climate change of the IPCC Second Assessment Report (SAR).

OECD countries. Although it is difficult to generalize, top-down analyses suggest that the costs of substantial reductions below 1990 levels could be as high as several per cent of GDP. In the specific case of stabilizing emissions at 1990 levels, most studies estimate that annual costs in the range of -0.5% of GDP (equivalent to a gain of about $60 billion in total for OECD countries at today's GDP levels) to 2% of GDP (equivalent to a loss of about $240 billion) could be reached over the next several decades. However, studies also show that appropriate timing of abatement measures and the availability of low-cost alternatives may substantially reduce the size of the overall bill.

Bottom-up studies are more optimistic about the potential for iow or negative cost emission reductions, and the capacity to implement that potential. Such studies show that the costs of reducing emissions by 20% in developed countries within two to three decades are negligible to negative. Other bottom-up studies suggest that there exists a potential for absolute reductions in excess of 50% in the longer term, without increasing, and perhaps even reducing, total energy system costs.

The results of top-down and bottom-up analyses differ because of such factors as higher estimates of no-regrets potential and techno

logical progress, and earlier saturation in energy services per unit GDP. In the most favourable assessments, savings of 10-20% in the total cost of energy services can be achieved.

Economies in transition. The potential for cost-effective reductions in energy use is apt to be considerable, but the realizable potential will depend upon what economic and technological development path is chosen, as well as the availability of capital to pursue different paths. A critical issue is the future of structural changes in these countries that are apt to change dramatically the level of baseline emissions and the emission reduction costs.

Developing countries. Analyses suggest that there may be substantial low-cost fossil fuel carbon dioxide emission reduction opportunities for developing countries. Development pathways that increase energy efficiency, promote alternative energy technologies, reduce deforestation, and enhance agricultural productivity and biomass energy production can be economically beneficial. To embark upon this pathway may require significant international cooperation and financial and technology transfers. However, these are likely to be insufficient to offset rapidly increasing emissions baselines, associated with increased economic growth and overall welfare. Stabilization of carbon dioxide emissions is likely to be costly.

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