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CLIMATE CHANGE 1995: IPCC SECOND ASSESSMENT REPORT

7. THE SOCIAL COSTS OF ANTHROPOGENIC obtain total social welfare impacts implies difficult decisions about CLIMATE CHANGE: DAMAGES OF

equity amongst countries. Global estimates are based upon an INCREASED GREENHOUSE GAS EMISSIONS

aggregation of monetary damages across countries (damages

which are themselves implicit aggregations across individuals) that The literature on the subject in this section is controversial and reflects intercountry differences in wealth and income - this mainly based on research done on developed countries, often fundamentally influences the monetary valuation of damages. extrapolated to developing countries. There is no consensus about Taking income differences as given implies that an equivalent how to value statistical lives or how to aggregate statistical lives impact in two countries (such as an equal increase in human across countries.? Monetary valuation should not obscure the mortality) would receive very different weights in the calculations human consequences of anthropogenic climate change damages, of global damages. because the value of life has meaning beyond monetary valuation. It should be noted that the Rio Declaration and Agenda 21 call for To enable choices between different ways of promoting human human beings to remain at the centre of sustainable development. welfare to be made on a consistent basis, economists have for many The approach taken to this valuation might affect the scale of years sought to express a wide range of human and environmental damage reduction strategies. It may be noted that, in virtually all of impacts in terms of monetary equivalents, using various techniques. the literature discussed in this section, the developing country The most commonly used of those techniques is an approach based statistical lives have not been equally valued at the developed on the observed willingness to pay for various nonmarket benefits. 8 country value, nor are other damages in developing countries This is the approach that has been taken in most of the assessed equally valued at the developed country value. Because national literature. circumstances, including opportunity costs, differ, economists sometimes evaluate certain kinds of impacts differently amongst Human life is an element outside the market and societies may want countries.

to preserve it in an equal way. An approach that includes equal

valuation of impacts on human life wherever they occur may yield The benefits of limiting greenhouse gas emissions and enhancing different global aggregate estimates than those reported below. For sinks are: (a) the climate change damages avoided; and (b) the example, equalizing the value of a statistical life at a global average secondary benefits associated with the relevant policies. Secondary could leave total global damage unchanged but would increase benefits include reductions in other pollutants jointly produced markedly the share of these damages borne by the developing with greenhouse gases and the conservation of biological diversity. world. Equalizing the value at the level typical in developed coun. Net climate change damages include both market and nonmarket tries would increase monetized damages several times, and would impacts as far as they can be quantified at present and, in some further increase the share of the developing countries in the total cases, adaptation costs. Damages are expressed in net terms to damage estimate. account for the fact that there are some beneficial impacts of global warming as well, which are, however, dominated by the damage Other aggregation methods can be used to adjust for differences in costs. Nonmarket impacts, such as human health, risk of human the wealth or incomes of countries in calculations of monetary mortality and damage to ecosystems, form an important damages. Because estimates of monetary damage tend to be a higher component of available estimates of the social costs of climate percentage of national GDP for low-income countries than for highchange. The literature on monetary valuation of such nonmarket income countries, aggregation schemes that adjust for wealth or effects reflects a number of divergent views and approaches. The income effects are expected to yield higher estimates of global estimates of nonmarket damages, however, are highly speculative damages than those presented in this report. and not comprehensive.

The assessed literature quantifying total damages from 2-3°C warming Nonmarket damage estimates are a source of major uncertainty in provides a wide range of point estimates for damages, given the assessing the implications of global climate change for human presumed change in atmospheric greenhouse gas concentrations. The welfare. While some regard monetary valuation of such impacts as aggregate estimates tend to be a few per cent of world GDP, with, in essential to sound decision-making, others reject monetary valua- general, considerably higher estimates of damage to developing countion of some impacts, such as risk of human mortality, on ethical tries as a share of their GDP. The aggregate estimates are subject to grounds. Additionally, there is a danger that entire unique cultures considerable uncertainty, but the range of uncertainty cannot be may be obliterated. This is not something that can be considered in monetary terms, but becomes a question of loss of human diversity, ? The value of a statistical life is defined as the value people assign to a for which we have no indicators to measure economic value. change in the risk of death among the population.

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The concept of willingness to pay is indicative, based on expressed desires, monetized damages associated with doubled CO2 equivalent

The assessed literature contains only a few estimates of the

available resources and information of a human being's preferences at a

certain moment in time. The values may change over time. Also, other concentration scenarios. These estimates are aggregated to a global concepts (such as willingness to accept compensation for damage) have been scale and illustrate the potential impacts of climate change under

advanced, but not yet widely applied, in the literature, and the interpretation

and application of willingness to pay and other concepts to the climate selected scenarios. Aggregating individual monetized damages to problem may evolve.

SO

SUMMARY FOR POLICYMAKERS: THE ECONOMIC AND SOCIAL DIMENSIONS OF CLIMATE CHANGE CLIMATE CHANGE 1995: IPCC SECOND ASSESSMENT REPORT

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 agree. ment 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.

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• A large potential for cost-effective energy conservation and effi.

ciency improvements in energy supply and energy use exists in many sectors. These options offer economic and environmental bene fits 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. 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 insti

tutional reforms. • Estimates of the technical potential for switching to less carbon

intensive 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 esti.

mates vary widely. • 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.

9 Due to time lags between findings in the natural sciences, their use in determination of potential physical and biological impacts, and subsequent incorporation into economic analyses of climate change, the estimates of climate change damage are based mainly on the scientific results from the 1990 and 1992 IPCC reports. 10 See the volume on the science of climate change and the volume on the scientific-technical analyses of impacts, adaptations and mitigation of climate change of the IPCC Second Assessment Report (SAR).

11 For more information on the technical aspects of nuclear power, see the volume on the scientific-technical analyses of impacts, adaptations and mitigation of climate change of the IPCC Second Assessment Report (SAR).

A review of CO2 mitigation options suggests that:

• Forestry options, in some circumstances, offer large potential, The optimal response strategy for each country will depend on the

modest costs, low risk and other benefits. Further, the potential special circumstances and conditions which that country must face. modern use of biomass as a source of fuels and electricity could Nonetheless, many recent studies and empirical observations become attractive. Halting or slowing deforestation and increasing suggest that some of the most cost-effective options can be most reforestation through increased silvicultural productivity and successfully implemented on a joint or cooperative basis among sustainable management programmes that increase agricultural nations. productivity, the expansion of forest reserves and promotion of ecotourism are among the cost-effective options for slowing the atmospheric build-up of CO2. Forestry programmes raise impor. 9. COSTS OF RESPONSE OPTIONS tant equity considerations. 12

It must be emphasized that the text in this section is an assessment There is also a wide range of available technologies and practices for of the technical literature and does not make recommendations on reducing emissions of methane from such sources as natural gas policy matters. The available literature is primarily from developed systems, coal mines, waste dumps and farms. However, the issue of countries. reduction of emissions related to food supply may imply trade-offs with rates of food production. These trade-offs must be carefully assessed, as they may affect the provision of basic needs in some

Cost concepts countries, particularly in developing countries.

From the perspective of this section on assessing mitigation or adapMost nitrous oxide emissions come from diffuse sources related to tation costs, what matters is the net cost (total cost less secondary agriculture and forestry. These emissions are difficult to reduce benefits and costs). These net costs exclude the social costs of climate rapidly. Industrial emissions of nitrous oxide and halogenated change, which are discussed in Section 7 above. The assessed literacompounds tend to be concentrated in a few key sectors and tend ture yields a very wide range of estimates of the costs of response to be easier to control. Measures to limit such emissions may be options. The wide range largely reflects significant differences in attractive for many countries.

assumptions about the efficiency of energy and other markets, and

about the ability of government institutions to address perceived The slow implementation of many of the technologically attractive market failures or imperfections. and cost-effective options listed above has many possible explana. tions, with both actual and perceived costs being a major factor, Measures to reduce greenhouse gas emissions may yield additional Among other factors, capital availability, information gaps, institu- economic impacts (for example, through technological externalities tional obstacles and market imperfections affect the rate of diffusion associated with fostering research and development programmes) for these technologies. Identifying the reasons specific to a particular and/or environmental impacts (such as reduced emissions of acid country is a precondition to devising sound and efficient policies to rain and urban smog precursors). Studies suggest that the secondary encourage their broader adoption.

environmental benefits may be substantial but are likely to differ

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

Specific results Many of the emission-reducing technologies and practices described above also provide other benefits to society. These additional bene. Estimates of the cost of greenhouse gas emission reduction depend fits include improved air quality, better protection of surface and critically upon assumptions about the levels of energy efficiency underground waters, enhanced animal productivity, reduced risk of improvements in the baseline scenario (that is, in the absence of explosions and fire, and improved use of energy resources. climate policy) and upon a wide range of factors such as consump

tion patterns, resource and technology availability, the desired level Many options are also available for adapting to the impacts of climate and timing of abatement, and the choice of policy instruments. change and thus reducing the damages to national economies and Policymakers should not place too much confidence in the specific natural ecosystems. Adaptive options are available in many sectors, numerical results from any one analysis. For example, mitigation ranging from agriculture and energy to health, coastal zone manage- cost analyses reveal the costs of mitigation relative to a given basement, offshore fisheries and recreation. Some of these provide line, but neither the baseline nor the intervention scenarios should enhanced ability to cope with the current impacts of climate variabil. be interpreted as representing likely future conditions. The focus ity. However, possible trade-offs between implementation of should be on the general insights regarding the underlying determitigation and adaptation measures are important to consider in minants of costs. future research. A summary of sectoral options for adaptation is presented in the volume on the scientific-technical analyses of

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These are addressed in Section 4 above and in the volume on economic impacts, adaptations and mitigation of climate change of the IPCC

and social dimensions of climate change of the IPCC Second Assessment Second Assessment Report (SAR).

Report (SAR).

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

The costs of stabilizing atmospheric concentrations of greenhouse Infrastructure decisions are critical in determining long-term emis gases at levels and within a time-frame that will prevent dangerous sions and abatement costs because they can enhance or restrict the anthropogenic interference with the climate system (the ultimate number and type of future options. Infrastructure decisions deterobjective of the UNFCCC) will be critically dependent on the choice mine development patterns in transportation, urban settlement and of emission timepath. The cost of the abatement programme will be land-use, and influence energy system development and deforesta influenced by the rate of capital replacement, the discount rate, and tion patterns. This issue is of particular importance to developing the effect of research and development.

countries and many economies in transition where major intra

structure decisions will be made in the near term. Failure to adopt policies as early as possible to encourage efficient replacement investments at the end of the economic life of a plant If a carbon or carbon-energy tax is used as a policy instrument for and equipment (1.e., at the point of capital stock turnover) imposes reducing emissions, the taxes could raise substantial revenues, and an economic cost to society. Implementing emission reductions at how the revenues are distributed could dramatically affect the cost rates that can be absorbed in the course of normal stock turnover is of mitigation. If the revenues are distributed by reducing likely to be cheaper than enforcing premature retirement now. distortionary taxes in the existing system, they will help reduce the

excess burden of the existing tax system, potentially yielding an The choice of abatement paths thus involves balancing the economic additional economic benefit (double dividend). For example, those risks of rapid abatement now (that premature capital stock retirement European studies which are more optimistic regarding the potential will later be proved unnecessary) against the corresponding risk of for tax recycling show lower and, in some instances, slightly delay (that more rapid reduction will then be required, necessitating negative costs. Conversely, inefficient recycling of the tax revenues premature retirement of future capital stock).

could increase costs. For example, if the tax revenues are used to

finance government programmes that yield a lower return than the Appropriate long-run signals are required to allow producers and private sector investments foregone because of the tax, then overall consumers to adapt cost-effectively to constraints on greenhouse costs will increase. gas emissions and to encourage research and development. Benefits associated with the implementation of any “no-regret" policies will There are large differences in the costs of reducing greenhouse gas offset, at least in part, the costs of a full portfolio of mitigation emissions among countries because of their state of economic develmeasures. This will also increase the time available to learn about opment, infrastructure choices and natural resource base. This climate risks and to bring new technologies into the marketplace. indicates that international cooperation could significantly reduce

the global cost of reducing emissions. Research suggests that, in Despite significant differences in views, there is agreement that principle, substantial savings would be possible if emissions are energy efficiency gains of perhaps 10-30% above baseline trends reduced where it is cheapest to do so. In practice, this requires interover the next two to three decades can be realized at negative to national mechanisms ensuring appropriate capital flows and zero net cost. (Negative net cost means an economic benefit.) With technology transfers between countries. Conversely, a failure to longer time horizons, which allow a more complete turnover of achieve international cooperation could compromise unilateral capital stocks, and which give research and development and attempts by a country or a group of countries to limit greenhouse market transformation policies a chance to impact multiple replace- gas emissions. However, estimates of so called leakage effects vary so ment cycles, this potential is much higher. The magnitude of such widely that they provide little guidance to policymakers. “no-regreto potentials depends upon the existence of substantial market or institutional imperfections that prevent cost-effective There has been more analysis to date of emission reduction potentials emission reduction measures from occurring. The key question is and costs for developed countries than for other parts of the world. then the extent to which such imperfections and barriers can be Moreover, many existing models are not well-suited to study removed cost-effectively by policy initiatives such as efficiency economies in transition or economies of developing countries. Much standards, incentives, removal of subsidies, information work is needed to develop and apply models for use outside develprogrammes and funding of technology transfer.

oped countries (for example, to represent more explicitly market

imperfections, institutional barriers, and traditional and informal Progress has been made in a number of countries in cost-effectively economic sectors). In addition, the discussion below and the bulk of reducing imperfections and institutional barriers in markets the underlying report deal with costs of response options at the through policy instruments based on voluntary agreements, energy national or regional level in terms of effect on GDP. Further analysis efficiency incentives, product efficiency standards and energy is required concerning effects of response options on employment, efficiency procurement programmes involving manufacturers, as inflation, trade competitiveness and other public issues. well as utility regulatory reforms. Where empirical evaluations have been made, many have found the benefit-cost ratio of increasing A large number of studies using both top-down and bottom-up energy efficiency to be favourable, suggesting the practical approaches (see Box 1 for definitions) were reviewed. Estimates of feasibility of realizing 'no-regret" potentials at negative net cost. the costs of limiting fossil fuel carbon dioxide emissions (expressed More information is needed on similar and improved programmes as carbon) vary widely and depend upon choice of methodologies, in a wider range of countries.

underlying assumptions, emission scenarios, policy instruments,

CLIMATE CHANGE 1995: IPCC SECOND ASSESSMENT RESORT

logical progress, and earlier saturation in energy services per unit BOX 1. TOP-DOWN AND BOTTOM-UP MODELS

GDP. In the most favourable assessments, savings of 10-20% in the

total cost of energy services can be achieved. Top-down models are aggregate models of the entire macroeconomy that draw on analysis of historical trends and

Economies in transition. The potential for cost-effective reducrelationships to predict the large-scale interactions between the sectors of the economy, especially the interactions between the

tions in energy use is apt to be considerable, but the realizable energy sector and the rest of the economy. Top-down models

potential will depend upon what economic and technological typically incorporate relatively little detail on energy consumption

development path is chosen, as well as the availability of capital to and technological change, compared with bottom-up models. pursue different paths. A critical issue is the future of structural

In contrast, bottom-up models incorporate detailed studies of changes in these countries that are apt to change dramatically the the engineering costs of a wide range of available and forecast level of baseline emissions and the emission reduction costs. technologies, and describe energy consumption in great detail. However, compared with top-down models, they typically incor

Developing countries. Analyses suggest that there may be substanporate relatively little detail on nonenergy consumer behaviour

tial low-cost fossil fuel carbon dioxide emission reduction and interactions with other sectors of the economy.

opportunities for developing countries. Development pathways that This simple characterization of top-down and bottom-up

increase energy efficiency, promote alternative energy technologies, models is increasingly misleading as more recent versions of each

reduce deforestation, and enhance agricultural productivity and approach have tended to provide greater detail in the aspects that were less developed in the past. As a result of this conver

biomass energy production can be economically beneficial. To gence in model structure, model results are tending to converge,

embark upon this pathway may require significant international and the remaining differences reflect differences in assumptions cooperation and financial and technology transfers. However, these about how rapidly and effectively market institutions adopt cost- are likely to be insufficient to offset rapidly increasing emissions effective new technologies or can be induced to adopt them by baselines, associated with increased economic growth and overall policy interventions

welfare. Stabilization of carbon dioxide emissions is likely to be Many existing models are not well suited to study economies in

costly. transition or those of developing countries. More work is needed to develop the appropriate methodologies, data and models and

It should be noted that analyses of costs to economies in transition to build the local institutional capacity to undertake analyses.

and developing countries typically neglect the general equilibrium effects of unilateral actions taken by developed countries. These

effects may be either positive or negative and their magnitude is reporting year and other criteria. For specific results of individual difficult to quantify. studies, see the volume on economic and social dimenstions of climate change of the IPCC Second Assessment Report (SAR). It should also be noted that estimates of costs or benefits of the

order of a few per cent of GDP may represent small differences in OECD countries. Although it is difficult to generalize, top-down GDP growth rates, but are nevertheless substantial in absolute analyses suggest that the costs of she catial reductions below 1990 terms. levels could be as high as several per cent of GDP. In the specific case of stabilizing emissions at 1990 levels, most studies estimate Preservation and augmentation of carbon sinks offer a substantial that annual costs in the range of -0.5% of GDP (equivalent to a gain and often cost-effective component of a greenhouse gas mitigation of about $60 billion in total for OECD countries at today's GDP strategy. Studies suggest that as much as 15-30% of 1990 global levels) to 2% of GDP (equivalent to a loss of about $240 billion) energy-related emissions could be offset by carbon sequestration in could be reached over the next several decades. However, studies forests for a period of 50-100 years. The costs of carbon sequesalso show that appropriate timing of abatement measures and the tration, which are competitive with source control options, may availability of low-cost alternatives may substantially reduce the differ among regions of the world. size of the overall bill.

Control of emissions of other greenhouse gases, especially methane Bottom-up studies are more optimistic about the potential for low and nitrous oxide, can provide significant cost-effective oppor. or negative cost emission reductions, and the capacity to imple. tunities in some countries. About 10% of anthropogenic methane ment that potential. Such studies show that the costs of reducing emissions could be reduced at negative or low cost using available emissions by 20% in developed countries within two to three mitigation options for such methane sources as natural gas systems, decades are negligible to negative. Other bottom-up studies suggest waste management and agriculture. 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.

10. INTEGRATED ASSESSMENT

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

Integrated assessment models combine knowledge from a wide range of disciplines to provide insights that would not be

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