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
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•
• •
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 reenforced 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)
•
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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."
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The key question: can “dangerous anthropogenic climate change” be avoided?
35
Post-SRES (max) Stabilization targets:
E: 850-1130 ppm CO2-eq C: 590-710 ppm CO2-eq
Wold CO2 Emissions (GtC)
25
B: 535-590 ppm CO2-eq A2: 490-535 ppm CO2-eq A1: 445-490 ppm CO2-eq
20
EU interpretation: global mean temperature increase at less than 2ºC above pre-industrial level
15 10 5
Post-SRES (min)
0
-5
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Equilibrium global mean temperature increase over preindustrial (°C)
GHG concentration stabilization level (ppmv CO2-eq)
30
D: 710-850 ppm CO2-eq
Source: IPCC WG3 SPM 2007 12
The key question: can “dangerous anthropogenic climate change” be avoided?
35
Post-SRES (max) Stabilization targets:
E: 850-1130 ppm CO2-eq C: 590-710 ppm CO2-eq
Wold CO2 Emissions (GtC)
25
B: 535-590 ppm CO2-eq A2: 490-535 ppm CO2-eq A1: 445-490 ppm CO2-eq
20
EU interpretation: global mean temperature increase at less than 2ºC above pre-industrial level
15 10 5
Post-SRES (min)
0
-5
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Equilibrium global mean temperature increase over preindustrial (°C)
GHG concentration stabilization level (ppmv CO2-eq)
30
D: 710-850 ppm CO2-eq
Stern 450-550
Source: IPCC WG3 SPM 2007 13
The key question: can “dangerous anthropogenic climate change” be avoided?
where we are now!
35
Post-SRES (max) Stabilization targets:
E: 850-1130 ppm CO2-eq C: 590-710 ppm CO2-eq
Wold CO2 Emissions (GtC)
25
B: 535-590 ppm CO2-eq A2: 490-535 ppm CO2-eq A1: 445-490 ppm CO2-eq
20
EU interpretation: global mean temperature increase at less than 2ºC above pre-industrial level
15 10 5
Post-SRES (min)
0
-5
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Equilibrium global mean temperature increase over preindustrial (°C)
GHG concentration stabilization level (ppmv CO2-eq)
30
D: 710-850 ppm CO2-eq
Stern 450-550
Source: IPCC WG3 SPM 2007 14
The key question: can “dangerous anthropogenic climate change” be avoided?
where we are now!
35
Post-SRES (max) Stabilization targets:
E: 850-1130 ppm CO2-eq C: 590-710 ppm CO2-eq
Wold CO2 Emissions (GtC)
25
B: 535-590 ppm CO2-eq A2: 490-535 ppm CO2-eq A1: 445-490 ppm CO2-eq
20
EU interpretation: global mean temperature increase at less than 2ºC above pre-industrial level
15 10 5
Post-SRES (min)
0
-5
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Equilibrium global mean temperature increase over preindustrial (°C)
GHG concentration stabilization level (ppmv CO2-eq)
30
D: 710-850 ppm CO2-eq
Source: IPCC WG3 SPM 2007 15
Stern 450-550 “feasible”
The key question: can “dangerous anthropogenic climate change” be avoided?
where we are now! “safe”
35
Post-SRES (max) Stabilization targets:
E: 850-1130 ppm CO2-eq C: 590-710 ppm CO2-eq
Wold CO2 Emissions (GtC)
25
B: 535-590 ppm CO2-eq A2: 490-535 ppm CO2-eq A1: 445-490 ppm CO2-eq
20
EU interpretation: global mean temperature increase at less than 2ºC above pre-industrial level
15 10 5
Post-SRES (min)
0
-5
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Equilibrium global mean temperature increase over preindustrial (°C)
GHG concentration stabilization level (ppmv CO2-eq)
30
D: 710-850 ppm CO2-eq
Source: IPCC WG3 SPM 2007 16
Stern 450-550 “feasible”
The lower the stabilisation level, the earlier global emissions have to go down
Range comes from diferent models
35
35 Stabilization targets:
Range comes from alternative estimates of climate sensitivity
Post-SRES (max)
E: 850-1130 ppm CO2-eq CO2-eq
Post-SRES (max)
Stabilization targets:
E: 850-1130 ppm CO2-eq
Wold CO2 Emissions (GtC)
A2: CO2-eq A2: 490-535 ppm490-535 ppm CO2-eq CO2-eq
Wold CO2 Emissions (GtC)
25
B: CO2-eq B: 535-590 ppm 535-590 ppm CO2-eq CO2-eq 25 A1: 445-490 ppm CO2-eq
20
A1: 445-490 ppm CO2-eq CO2-eq 20
15
15
10
10
5
5
0
Post-SRES (min)
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
Multigas and CO2 only studies combined
Source: IPCC WG3 SPM 2007 17
Note lackGHG concentration stabilization level ( of studies below 450ppmvCO2-eq
Equilibrium global mean temperature increase over preindustrial (°C)
GHG concentration stabilization level (ppmv CO2-eq)
Equilibrium global mean temperature increase over preindustrial (°C)
30
D: 710-850 ppm 710-850 ppm CO2-eq CO2-eq 30 D: CO2-eq C: 590-710 ppm 590-710 ppm CO2-eq CO2-eq C: CO2-eq
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
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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
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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
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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
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Electricity investment in context: global investment, 2000 $bn
56 84 180 1400 168 56 68 98 233 220 69 214 246 177 154 169 219 296 300 284 61 80 93 107 Global investment, 2000 $bn 113 288 277 83 263 305 216 196 205 274 355 375 347 75 128 342 341 98 316 364 256 244 241 333 414 448 416 90 143 397 406 114 372 426 297 296 277 396 475 522 490 107 121 159 457 475 133 435 493 343 353 319 466 543 602 572 127 138 178 523 547 154 507 566 391 415 364 546 616 685 663 149
1200 1000 189
168 141 135 169 231 49
$bn
800 117 600
400 241 200 226 0
74 506 111 92 485 2404
42 Dwellings
38 Public Admin.
93 636 143 117 627 3155
26 Distribution
36 Prof. Services
32 29 Land
37 Other Bus.
33 Banking &
40 Health &
27 Retailing
41 Misc.
1 Agriculture etc
22 Electricity
25 Construction
5 Food, Drink & 39 Education
28 Hotels &
3 Oil & Gas etc
19 Motor
2 Coal
112 775 178 140 787
133 913 216 162 958
155 1077 256 184 1136 5634
178 1230 299 208 1334 6527
206 1400 346 225 1539 7479
3973
4803
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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.”
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US study of accelerated reductions in CO2 emissions
US Administration EIA study (1999) for effects on US GDP
2010
number of years to adjust 3 to 4
2020
13
trade in emission permits
CO2 change (%)
none Annex I
-30.6 -18.4
none Annex I
-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
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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.
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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
number of years to adjust trade in emission permits CO2 change (%) 3 to 4 none Annex I -30.6 -18.4 -2.0
0.3 0.7 0.3 -0.7
2020
13 none Annex I -35.1 -23.9 -0.8
0.1 0.4 0.4 0.1
high Base GDP effect (%) - 4.2 cost Additional effects of: non-CO2+sinks 0.7 revenue recycling 1.9 ancillary benefits* 0.4 Total GDP effects (%) * -1.2
-0.6
0.1 0.2 0.3 0.0
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. 31
low cost
What are the macro-economic costs in 2030 for different stabilization levels?
Stabilization levels (ppm CO2-eq) Median GDP reduction[1] (%) Range of GDP reduction [2] (%) Reduction of average annual GDP growth rates [3] (percentage points) < 0.06 <0.1 < 0.12
590-710 535-590 445-535[4]
0.2 0.6 Not available
-0.6 – 1.2 0.2 – 2.5 <3
[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.
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Illustration of the 3% cost number
GDP
GDP without mitigation
80%
77%
GDP with stringent mitigation e.g. 2ºC target
current 2007
33
~1 year 2030
Time
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)
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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
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