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FP6 project no. 018476-GOCE :
Adaptation and Mitigation Strategies:
Supporting European Climate Policy
The Economics of a Zero-Carbon Society:
transitional climate policies after the “big crunch”
Terry Barker, University of Cambridge
First International Summit on Policy, Technology and
Investment: Entrepreneurship for a Zero Carbon Society
22–24 September 2008, Sidgwick Site, University of
Cambridge, UK
1
The Economics
of a Zero-Carbon Society
• The economics is easy – set the carbon price
appropriately and those who would otherwise emit
CO2 into the atmosphere will find alternative ways of
meeting the underlying demand for energy services
(comfort, power, transport) or ways of capturing and
storing the waste CO2
• The real problem is the transition to such a society
using portfolios of policies and measures that are
effective, efficient, equitable and flexible (to learn
from experience and mistakes), requiring
– Assessment of the engineering feasibility of system
decarbonisation (e.g. Road transport, electricity networks,
dwellings) and the costs and benefits
– International co-ordination
2
Outline: transitional climate policies after the “big crunch”
• The “big crunch” – the implosion of global money
supplies September 15 2009, and its implications for
climate policy
• The science and the EU 2˚C target for climate
stabilization and implications for “dangerous” climate
change
• Costs and benefits of climate change, adaptation
and mitigation: the debate
– Transforming the global energy system through climate
policy
– Air-quality and climate change synergies
– The role of technology policies in modelling
• Costs of achieving the 2˚C target (and benefits) and
conclusions
3
Outline
• The “big crunch” – the implosion of global money
supplies September 15 2009, and its implications for
climate policy
• The science and the EU 2˚C target for climate
stabilization and implications for “dangerous” climate
change
• Costs and benefits of climate change, adaptation
and mitigation: the debate
– Transforming the global energy system through climate
policy
– Air-quality and climate change synergies
– The role of technology policies
• Costs of achieving the 2˚C target (and benefits) and
conclusions
4
The Big Crunch
September 15 -20, 2008
• With the bankruptcy of Lehman Brothers (15/09/08),
the global money stock was abruptly reduced by an
unknown amount
• Many if not all banks with substantial exposure to
“toxic” debt may now be insolvent, depending on stock
market valuations
• The crisis became apparent when banks ceased to
trust one another in summer of 2007, but has been
concealed by creative accounting and failure to value
assets at realizable values
• The crisis is one of international money: the banks
have been creating new forms of money that are now
seen to have a highly uncertain worth, i.e. “bad money”
• The Fed‟s proposal (19/09/08) is to exchange the bad
money for good government-backed money, then
gradually liquidate the underlying debt
5
The Big Crunch: the theory:
economic activity is based on trust
• Trust underlies our use of money
• Private banks have lost some of our
trust
• No trust=no banking
• No banking means no bank loans for
real investment (or consumption)
• The Big Crunch is a global financial
catastrophe
– Non-linear event with extreme outcomes
– Unprecedented in economic history in its scale
– Unlike the tulip mania or South Sea Bubble, it is not
primarily based on speculation, but on banks creating
money (similar to what would happen at the start of a
global hyperinflation)
6
The Big Crunch and Global Warming
• Similarities
– Both arise out of the pursuit of self-interest
– Both are market failures associated with systemic risk and,
arguably, both are the greatest market failures the world has
ever seen
– Both are highly nonlinear systems‟ failures leading to extreme
events (economic and climatic)
– Both threaten the economy with catastrophic collapses
– Both require strong regulation for efficient economic outcomes
• Differences
– Timing: big crunch happened in a day, arguable a week, year,
or even two decades; global warming is a four-century process
– Risks: big crunch risks are to trust in money and global
deflation; global warming risks are wild weather and
floods/droughts
– Solutions: big crunch requires and supports immediate solution
(banks reputations destroyed; global warming solutions can be
delayed and subverted more easily by special interests
7
The Big Crunch:
implications for the world economy
• Global depression seems likely: banks are forced
to restore their net credit or go bankrupt, so
lending is cut, and investment falls, with the fall re-
enforced by expected loss of sales
• US economy is in a very weak position to restore
global demand: US foreign and public sectors are
both in substantial deficit; personal savings are
around zero, and spending is likely to fall
• US $ faces a potential collapse, with inflationary
effects on the US economy (interest rates rise?)
• The resolution
– Countries with surpluses (China, EU, oil countries) buy
up US assets
– Interest rates fall (but fear of $ or £ collapse and inflation)
– New investment by governments in social capital
– Tax cuts (but higher public deficits and fear of inflation)
8
The Big Crunch:
implications for climate policy
• The period of the creation of the bad money has
seen a massive mis-allocation of investment funds
towards the financial services
• The real investments supported by these services
and the incomes from them (buildings, luxury
goods etc) will stop and engender a global
recession
• The gap in global effective demand could be
closed by a massive effort to invest in
decarbonising the real economy, but requires
– Recognition of the opportunity
– Rapid development and deployment of mitigation policies
aimed at raising investment especially where real
resources are becoming unemployed (construction,
vehicle manufacture)
9
Outline
• The “big crunch” – the implosion of global money
supplies September 15 2009, and its implications for
climate policy
• The science and the EU 2˚C target for climate
stabilization and implications for “dangerous” climate
change
• Costs and benefits of climate change, adaptation
and mitigation: the debate
– Transforming the global energy system through climate
policy
– Air-quality and climate change synergies
– The role of technology policies
• Costs of achieving the 2˚C target (and benefits) and
conclusions
10
Targets to avoid
“dangerous” climate change
UNFCCC “dangerous” is an ethical and political
issue
• IPCC leaves the definition to governments
• Stern, p. 284: “The current evidence suggests aiming for
stabilisation somewhere within the range 450 - 550ppm
CO2eq. Anything higher would substantially increase
risks of very harmful impacts..”
• EU‟s 2ºC target of a rise in equilibrium temperatures above
pre-industrial: even at this limit, there is a risk of the
Greenland ice sheet melting (eventually)
UNFCCC: stated objective is "to achieve stabilization of greenhouse gas
concentrations in the atmosphere at a low enough level to prevent dangerous
anthropogenic interference with the climate system."
11
The key question: can “dangerous
anthropogenic climate change” be
avoided?
Post-SRES (max)
35
Stabilization targets:
E: 850-1130 ppm CO2-eq
30 D: 710-850 ppm CO2-eq
Equilibrium global mean temperature
C: 590-710 ppm CO2-eq
increase over preindustrial (°C)
25 B: 535-590 ppm CO2-eq
Wold CO2 Emissions (GtC)
A2: 490-535 ppm CO2-eq
A1: 445-490 ppm CO2-eq
20
EU interpretation: 15
global mean 10
temperature increase 5
Post-SRES (min)
at less than 2ºC 0
-5
above pre-industrial 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
GHG concentration stabilization level (ppmv CO2-eq)
level
Source: IPCC WG3 SPM 2007
12
The key question: can “dangerous
anthropogenic climate change” be avoided?
Post-SRES (max)
35
Stabilization targets:
E: 850-1130 ppm CO2-eq
30 D: 710-850 ppm CO2-eq
Equilibrium global mean temperature
C: 590-710 ppm CO2-eq
increase over preindustrial (°C)
25 B: 535-590 ppm CO2-eq
Wold CO2 Emissions (GtC)
A2: 490-535 ppm CO2-eq
A1: 445-490 ppm CO2-eq
20
EU interpretation: 15
global mean 10
temperature increase 5
Post-SRES (min)
at less than 2ºC 0
-5
above pre-industrial 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
GHG concentration stabilization level (ppmv CO2-eq)
level
Stern 450-550
Source: IPCC WG3 SPM 2007
13
The key question: can “dangerous
anthropogenic climate change” be avoided?
where we are now!
Post-SRES (max)
35
Stabilization targets:
E: 850-1130 ppm CO2-eq
30 D: 710-850 ppm CO2-eq
Equilibrium global mean temperature
C: 590-710 ppm CO2-eq
increase over preindustrial (°C)
25 B: 535-590 ppm CO2-eq
Wold CO2 Emissions (GtC)
A2: 490-535 ppm CO2-eq
A1: 445-490 ppm CO2-eq
20
EU interpretation: 15
global mean 10
temperature increase 5
Post-SRES (min)
at less than 2ºC 0
-5
above pre-industrial 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
GHG concentration stabilization level (ppmv CO2-eq)
level
Stern 450-550
Source: IPCC WG3 SPM 2007
14
The key question: can “dangerous
anthropogenic climate change” be avoided?
where we are now!
Post-SRES (max)
35
Stabilization targets:
E: 850-1130 ppm CO2-eq
30 D: 710-850 ppm CO2-eq
Equilibrium global mean temperature
C: 590-710 ppm CO2-eq
increase over preindustrial (°C)
25 B: 535-590 ppm CO2-eq
Wold CO2 Emissions (GtC)
A2: 490-535 ppm CO2-eq
A1: 445-490 ppm CO2-eq
20
EU interpretation: 15
global mean 10
temperature increase 5
Post-SRES (min)
at less than 2ºC 0
-5
above pre-industrial 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
GHG concentration stabilization level (ppmv CO2-eq)
level
Stern 450-550
Source: IPCC WG3 SPM 2007
15
“feasible”
The key question: can “dangerous
anthropogenic climate change” be avoided?
where we are now!
“safe”
Post-SRES (max)
35
Stabilization targets:
E: 850-1130 ppm CO2-eq
30 D: 710-850 ppm CO2-eq
Equilibrium global mean temperature
C: 590-710 ppm CO2-eq
increase over preindustrial (°C)
25 B: 535-590 ppm CO2-eq
Wold CO2 Emissions (GtC)
A2: 490-535 ppm CO2-eq
A1: 445-490 ppm CO2-eq
20
EU interpretation: 15
global mean 10
temperature increase 5
Post-SRES (min)
at less than 2ºC 0
-5
above pre-industrial 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
GHG concentration stabilization level (ppmv CO2-eq)
level
Stern 450-550
Source: IPCC WG3 SPM 2007
16
“feasible”
The lower the stabilisation level, the
earlier global emissions have to go down
Range comes from
Range comes from alternative estimates of
diferent models climate sensitivity
Post-SRES (max)
35 Post-SRES (max)
35
Stabilization targets:
Stabilization targets:
CO2-eq
E: 850-1130 ppm CO2-eq
E: 850-1130 ppm CO2-eq
30 D: 710-850 ppm 710-850 ppm CO2-eq
30 CO2-eq
D: CO2-eq
Equilibrium global mean temperature
Equilibrium global mean temperature
C: CO2-eq
CO2-eq
C: 590-710 ppm 590-710 ppm CO2-eq
increase over preindustrial (°C)
increase over preindustrial (°C)
25 B: CO2-eq
B: 535-590 ppm 535-590 ppm CO2-eq
25 CO2-eq
Wold CO2 Emissions (GtC)
Wold CO2 Emissions (GtC)
A2: CO2-eq
A2: 490-535 ppm490-535 ppm CO2-eq
CO2-eq
A1: 445-490 ppm CO2-eq
CO2-eq
A1: 445-490 ppm CO2-eq
20
20
15
15
10
10
5
5 Post-SRES (min)
0
Post-SRES (min)
0
-5
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
-5
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 GHG concentration stabilization level (ppmv CO2-eq)
Multigas and CO2 only studies of studies below 450ppmv-
Note lackGHG concentration stabilization level (
combined CO2-eq
Source: IPCC WG3 SPM 2007
17
Outline
• The “big crunch” – the implosion of global money
supplies September 15 2009, and its implications for
climate policy
• The science and the EU 2˚C target for climate
stabilization and implications for “dangerous” climate
change
• Costs and benefits of climate change, adaptation
and mitigation: the debate
– Transforming the global energy system through climate
policy
– Air-quality and climate change synergies
– The role of technology policies
• Costs of achieving the 2˚C target (and benefits) and
conclusions
18
“The economics of climate change is shaped by the
science.” Stern, 2007, p.1
• The science and the politics (“dangerous”) both
emphasise that the problem is one of risk and uncertainty
– the economics is increasingly following the science
• The Stern Review changed the terms of the economics
debate by not using traditional cost-benefit analysis for
climate change assessment, but developing an
uncertainty analysis
• It gives a separate assessment of costs of climate change
(5 to 20% global GDP) and costs of mitigation (-1 to
+3.5% GDP)
• Message: the costs of doing nothing far outweigh costs of
mitigation - therefore act urgently
• Compare this with the message from cost-benefit
analysis:
– Nordhaus “optimal” temperature increase above pre-industrial is
at least about 3.7ºC, requiring a very low carbon tax (c
$20/tCO2 or less by 2050 (2002, p.197)
– but such “optimal” temperature rises ignore the unquantifiable
risks of catastrophe
19
Why a risk analysis?
• Risks are different for climate change, adaptation and
mitigation
– for countries and time periods
– outcomes are not smooth, but can be abrupt and irreversible
– risks can be asymmetrical: (unbounded?) risks of higher rather than
lower temperatures and sea level rise
• There are possibilities of catastrophe (IPCC WG1 Box
10.2: approx. 3% probability of climate sensitivity
leading to > 8ºC).
– conventional cost-benefit analysis is “especially and unusually
misleading” (Wietzman, 2007)
– and a sea level rise of several meters over this century
cannot be ruled out (Hansen et al, 2008)
• Assets such as the Amazon rainforest or coral reefs
cannot be substituted by money, partly because their
loss is effectively irreversible
• Economic assessment should cover both costs &
benefits and such risks
20
Implications for avoiding dangerous
climate change
• To have a >50% probability of achieving <2ºC rise
– CO2-eq concentrations have to be <450ppm CO2 eq (c/f c430 now)
– global GHG emissions fall >70% below business as usual by 2050
– technologies have to be developed to capture CO2
• Global warming is a stock problem and industrialized
countries are responsible for most of current stocks
– hence reduction in EU & USA of c90% below BAU/1990 by 2050
• Risks are asymmetric
– so precaution suggests zero-carbon economies as soon as possible
(without excessive costs)
• Eventually all countries & sectors have to decarbonize
– Turns “How much?” into “When?” for each person, household, business,
government
21
Outline
• The “big crunch” – the implosion of global money
supplies September 15 2009, and its implications for
climate policy
• The science and the EU 2˚C target for climate
stabilization and implications for “dangerous” climate
change
• Costs and benefits of climate change, adaptation
and mitigation: the debate
– Transforming the global energy system through climate
policy
– Air-quality and climate change synergies
– The role of technology policies
• Costs of achieving the 2˚C target (and benefits) and
conclusions
22
Examples of accelerated
decarbonisation
• France‟s move to nuclear power in
the 1980s
• Copenhagen‟s 25% reduction in
CO2 emissions below 1990 levels
• Studies of 30% reduction in US
CO2 emissions required for Kyoto
ratification
23
France: decarbonising electricity production
from 50% thermal in 1980 to 10%in 1987
Source: http://www.eia.doe.gov/emeu/international/electricitygeneration.html
24
Electricity investment in context:
global investment, 2000 $bn
56 68 80 93 107
Global investment, 2000 $bn 121 138
84 98 113 128 143 159 178
180 233 288 342 397 457 523
1400
168 220 277 341 406 475 547
56 69 83 98 114 133 154
1200
168 214 263 316 372 435 507
1000
189 246 305 364 426 493 566
141 177 216 256 297 343 391
800
117 154 196 244 296 353 415
$bn
135 169 205 241 277 319 364
600
169 219 274 333 396 466 546
400
241 296 355 414 475 543 616
231 300 375 448 522 602 685
200
226 284 347 416 490 572 663
49 61 75 90 107 127 149
0
42 Dwellings
38 Public Admin.
26 Distribution
36 Prof. Services
29 Land
32
37 Other Bus.
33 Banking &
40 Health &
27 Retailing
41 Misc.
1 Agriculture etc
22 Electricity
25 Construction
39 Education
5 Food, Drink &
28 Hotels &
3 Oil & Gas etc
19 Motor
2 Coal
74 93 112 133 155 178 206
506 636 775 913 1077 1230 1400
111 143 178 216 256 299 346
92 117 140 162 184 208 225
485 627 787 958 1136 1334 1539
2404 3155 3973 4803 5634 6527 7479
25
Copenhagen‟s 25% cut in per capita
CO2 emissions below 1990 levels
• “Every citizen has reduced his input to global
warming from 7 tons to 4.9 tons, by 2.1 tons in fact
compared to the 1990 figures.” … despite remarkable
growth in the city … due to connecting the district
heating system and generating stations to cleaner
fuels, especially …natural gas.”
• “So, we dare to set an ambitious new goal of
reducing CO2 emissions by a further 20% by 2015
compared to today (2005 figures). This means that by
2015 we will have reduced emissions by 40%
compared to 1990.”
26
US study of accelerated
reductions in CO2 emissions
US Administration EIA study (1999) for effects on US GDP
2010 2020
number of years to adjust 3 to 4 13
trade in emission permits none Annex I none Annex I
CO2 change (%) -30.6 -18.4 -35.1 -23.9
note: * ancillary benefits are estimated and are not in original study.
Source: US Energy Information Administration (EIA) (1998). Impacts of the Kyoto Protocol on U.S.
Energy Markets and Economic Activity. Washington DC.
Barker, T., Ekins, P. (2004) „The costs of Kyoto for the US economy‟, The Energy Journal, Vol. 25 No. 3,
2004, pp.53-71. 27
Air quality and climate change
synergies:IPCC conclusions, 2007
• Near–term health benefits from reduced air
pollution may offset a substantial fraction of
mitigation costs
– Mitigation can also be positive for: energy security,
balance of trade improvement, provision of modern
energy services to rural areas and employment
– Mitigation in one country or group of countries could
lead to higher emissions elsewhere (“carbon leakage”)
or effects on the economy (“spill-over effects”)
• These co-benefits for human health and crop
productivity are especially high in developing
countries
28
The role of technology policies in
economic modelling
• Third to Fourth Assessment report
– “remarkable progress has been achieved in applying approaches
based on induced technological change to stabilisation studies;
however, conceptual issues remain” (SPM, p. 28) (EMF19,
IMCP)
– technology is now responsive to carbon prices in many models
• In the models that adopt these approaches, projected
costs for a given stabilization level are reduced
– the reductions are greater at lower stabilisation levels.
• Although most models show GDP losses, some show
GDP gains
– because they assume that baselines are non-optimal and
mitigation policies improve market efficiencies
– or they assume that more technological change may be induced
by mitigation policies.
29
Outline
• The “big crunch” – the implosion of global money
supplies September 15 2009, and its implications for
climate policy
• The science and the EU 2˚C target for climate
stabilization and implications for “dangerous” climate
change
• Costs and benefits of climate change, adaptation
and mitigation: the debate
– Transforming the global energy system through climate
policy
– Air-quality and climate change synergies
– The role of technology policies
• Costs of achieving the 2˚C target (and benefits) and
conclusions
30
US GDP costs for accelerated
reductions in CO2 emissions
US Administration EIA study (1999) for effects on US GDP
2010 2020
number of years to adjust 3 to 4 13
trade in emission permits none Annex I none Annex I
CO2 change (%) -30.6 -18.4 -35.1 -23.9
high
Base GDP effect (%) - 4.2 -2.0 -0.8 -0.6
cost
Additional effects of:
non-CO2+sinks 0.7 0.3 0.1 0.1
revenue recycling 1.9 0.7 0.4 0.2
ancillary benefits* 0.4 0.3 0.4 0.3
low
Total GDP effects (%) * -1.2 -0.7 0.1 0.0
note: * ancillary benefits are estimated and are not in original study.
cost
Source: US Energy Information Administration (EIA) (1998). Impacts of the Kyoto Protocol on U.S.
Energy Markets and Economic Activity. Washington DC.
Barker, T., Ekins, P. (2004) „The costs of Kyoto for the US economy‟, The Energy Journal, Vol. 25 No. 3,
2004, pp.53-71. 31
What are the macro-economic costs in
2030 for different stabilization levels?
Stabilization Median Range of GDP Reduction of
levels GDP reduction [2] average annual
(ppm CO2-eq) reduction[1] (%) GDP growth rates
(%) [3]
(percentage points)
590-710 0.2 -0.6 – 1.2 < 0.06
535-590 0.6 0.2 – 2.5 <0.1
445-535[4] Not available <3 < 0.12
[1] This is global GDP based market exchange rates.
[2] The median and the 10th and 90th percentile range of the analyzed data are given.
[3] The calculation of the reduction of the annual growth rate is based on the average reduction during the period till
that would result in the indicated GDP decrease in 2030.
[4] The number of studies that report GDP results is relatively small and they generally use low baselines.
32
Illustration of the 3% cost number
GDP
GDP without
mitigation 80%
77%
GDP with
stringent
mitigation e.g.
2ºC target
current ~1 year Time
2007 2030
33
3% maximum global cost by
2030 in context
Most studies for stringent
stabilization (categories A1 and
A2) show costs less than 3%
3%
cost
Source: IPCC AR4, WG III Report 2007, Chapter 3, Figure 3.25 (a)
34
Summary: the costs of
achieving the 2º C target
Key conclusion from IPCC AR4: not enough
studies on stringent mitigation have been done!
Extrapolating from current studies:
The macro-economic costs of the 2ºC target
appear to be negligible (even beneficial) for
global GDP and welfare, provided policies
are “well-designed”
• Equilibrium models (providing nearly all the cost estimates) assume that
mitigation will be costly, despite evidence from econometric models and
business
• Low-cost, low-GHG technologies are likely to be developed both directly
and through rising carbon prices
• But this requires international co-operation on allocation of burdens and
benefits 35
Conclusions for global policy
• G8 50% target or 450ppmv CO2-eq are probably not
stringent enough to avoid dangerous climate change
– a zero-carbon global target is required by at least 2050
• A real carbon price will support zero-carbon, rising to
about $100/tCO2 by 2020 (and rising thereafter) to be
on the safer side, e.g. by a trading scheme
– the price should be guaranteed by government to reduce risks
– a portfolio of supporting policies (regulation, ecotax reform,
information) will reduce costs and accelerate change
• An urgent and strong global fiscal reflation, based on
new investment justified by social values and discount
rates, will take up resources left unemployed by the
credit crunch, and kick-start the much delayed shift
towards decarbonising the global economy
– costs critically depend on international co-ordination
36
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