Published on December 30, 2007
Slide1: An Economic View of Global Warming Bob Doppelt, Director, Climate Leadership Initiative, University of Oregon [email protected] 541-436-1609 Climate Change Integration Group July 27, 2006 Slide2: UO CLIMATE LEADERSHIP INITIATIVE The Climate Leadership Initiative (CLI) seeks to increase public understanding of the risks and opportunities posed by global climate change and to enhance climate policy and program development. Programs include: Climate Literacy, Education and Communication Climate Economics Greenhouse Gas Quantification and Volunteer Regional GHG Index Low-Carbon Sustainable Economic Development Climate Governance, Policy and Program Development Website: http://climlead.uoregon.edu Slide3: “I’m sure glad the hole is not on my end.” A KEY HUMAN LEARNING DISABILITY Our Inability to See Connections Across Boundaries in Time & Space Slide4: A SECOND KEY HUMAN LEARNING DISABILITY Our Inability to See the Full Impacts of Our Actions Due To Delays In the System Slide5: From An Economic Perspective Climate Change is a Unique “Externality” The emission of greenhouse gasses imposes costs on others that are not borne by the emitter. The costs will be felt over a long time period and over the entire world. But, the exact nature of costs is uncertain: they will be shaped by policies, market mechanisms, & other events. Those most affected—future generations– cannot speak up for their interests Slide6: THE UNIQUE AND COMPLEX NATURE OF THIS EXTERNALITY SUGGESTS ECONOMICS MUST COVER A BROAD RANGE OF ISSUES Including The Economics Of: Growth and development Innovation and technological change Institutions and governance National and international economies Demography and migration Public finance Information and uncertainty Environmental and public economics generally Slide7: Because Of The Complex Interaction Among These Issues, Climate Change Is Not Amenable To Simple Fixes Our response will depend on the choices we make about: Growth Development The kind of society we want to live in Type of environment we want to live in Opportunities for future generations Slide8: APPROACHES TO ECONOMIC ASSESSMENT Integrated Assessment Models: Tries to capture the links between GHG emissions, climate change, and impacts on the economy and society. Based on key assumptions. Models have generated important insights of year to year impacts of warming on key sectors such as agriculture. However, due to complex nature of issue, often has important omissions, such as impacts outside the market sectors of the economy and cumulative effects; expensive; time consuming. Sectoral Analysis: Application of basic economic analysis to key market sectors using temperature, water use & other scenarios. Can produce important insights of 1-20--50 year impacts of warming on key sectors (agriculture, electricity, snow sports); rapid, less expensive. However, has similar limitations to Integrated Assessment Models Slide9: PATHWAYS DETERMINE OVERALL IMPACTS Slow Moderate Warming: Most economic models are based on assumption of slow moderate warming and related changes. We probably have time and resources to adapt. Economic impacts can be assessed. Significant business opportunities and capital to invest. Flickering: New data suggests that as warming increases the climate may rapidly and unpredictably move between various states as the Earth seeks to settle into a new energy balance, bring more extreme events (e.g. heat, drought, rain). Unpredictability makes adaptation very difficult. Large scale economic impacts can be predicted, but not easy to model or quantify. Major economic opportunities but likely scarce capital. Abrupt Change: Increasing concern that tipping points may trigger abrupt changes: Ocean acidification, collapse of Greenland or WAIS, shutdown of ocean circulation systems, methane release from tundra. Impacts likely catastrophic, with fewer resources available to mitigate impacts. No models exist to estimate impacts. Slide10: SCENARIOS AND 2 DEGREE THRESHOLD James Hansen, Director of the NASA Goddard Institute for Space Studies 1. Business as Usual: Annual emissions continue to increase at current rates for next 50 years, as do other GHGs. “The business as-usual scenario yields an increase of about 5 degree F of global warming this century.” “The last time the Earth was five degrees warmer was three million years ago when the sea level was 80 ft higher.” [rising 20 ft or more per century] 2. Alternative Scenario: CO2 emissions level off this decade, slowly decline for a few decades, and by mid-century decrease rapidly. “…with global warming under two degrees F, still produces significant rise in the sea level, but its slower rate, probably less than a few feet per century...” “The warmest interglacial periods were about 2 degrees F warmer than today and the sea level was as much as 16 Ft. higher.” Slide11: SAMPLE IMPACTS ON HUMAN SYSTEMS International Symposium on Stabilization of GHG concentrations, Hadley Centre UK May 2005 Temp rise above pre- industrial levels Year when occurred Impact on human systems Region affected .06 .06 .06 .06 1.0 Changes in streamflows, flood and draught (e.g. earlier peak runoff Heatwave associated with unusual 2004 summer caused 14,802 deaths in France & approx 25,000 in Europe Increased cloud mount, annual precipitation and heavy precipitation events Rainfall decline in W. hemisphere, subtropics, E equatorial region, consistent with more frequent El Nino like conditions $1000 billion damage due to sea level rise 2004 2004 2000-04 Europe, Russia, N. America, Peru, Brazil, Columbia Europe Mid and high latitudes N. Hemisphere S. hemisphere, especially 5 Andean countries Globe Observed Impacts Slide12: Predicted Impacts SAMPLE IMPACTS ON HUMAN SYSTEMS International Symposium on Stabilization of GHG concentrations, Hadley Centre UK May 2005 www.stabilisation2005.com 0.8 –2.6 1.3 Temp rise above pre- industrial levels Year when predicted Impact on human systems Region affected 2010-2050 Any Increased insurance prices Food prices rise $5.3-5.4 billion losses in dryland agriculture Threshold above which ag yields fall 1620-1973 or 1092-2761 million additional people suffer water stress $2000 billion damage due to sea level rise Food production threatened, fisheries impacted Globe Globe USA EU, Canada, USA, Australia Globe Globe Africa, Asia, parts of Russia 2 2 1.9 2.0 2-2.5 Slide13: SMALL CHANGES CAN LEAD TO BIG IMPACTS A 1 degree change in temperature can mean millions of dollars in damage if the variance is from 32 degrees F The impact of the 1 degree F variance from 32 degrees F gets even larger if it is accompanied by precipitation When ocean waters rise above 82.4 degrees F, evaporation increased dramatically, providing huge reservoir of potential energy for storms Economic Impacts Therefore are Difficult to Determine Slide14: “The Economic Impacts of Climate Change in Oregon: A Preliminary Assessment” (UO Resource Innovations 2005) “Oregon is particularly vulnerable to global warming because much the economy is dependent on freshwater and much of that freshwater comes from mountain snowpack.” Water Supply Is (Initially) The Most Critical Issue Estimates suggest that as mountain snowpack disappears, by 2050 Oregon farmers could lose 2.9 million acre feet of water for irrigation-- roughly half of what they use today--valued at between $265 and $995 million. Obtained at: http://climlead.uoregon.edu/publicationspress/publicationspress.html Slide15: Most Vulnerable Sectors (Initially) Agriculture and ag dependent communities Forestry and forest dependent communities Municipal drinking water Power production and costs Public health Winter recreation and tourism Coastal infrastructure, tourism and recreation Agriculture, Forestry, Tourism, and Hydropower Industries Alone Represent 25% Of Oregon’s Economy. As warming increases other sectors are likely to be impacted. Slide16: Municipal Drinking Water City of Portland Bull Run assessment (Palmer and Hahn, 2002) found warmer climate will reduce water availability by 1.5 billion gallons and increase demand by 2.8 billion gallons. Taking pop. growth into account led to projected need for 9.6 billion gallons of additional water storage. Global warming could increase this need by 50%. Forecasts for years when average precipitation is lower led to expected shortfall of 3 billion gallons. Planners must develop water resources to meet dry year demands. Agriculture Farmers likely to maintain crop production and quality under modest warming, particularly if water availability is not an issue. But crops have temperature thresholds at which yield and quality decline and little is known about the effects of warming trend on current crops grown in Oregon. Some possibilities: Water availability: Water availability may be stressed even with current storage capacity. Study in Yakima basin projected capital costs of $3.5 to $4 billion to build sufficient extra storage capacity, which was deemed not cost effective unless warming reached 4 degrees F. (Michael Scott, Battelle PNW Lab) Wine industry: The 2.7 degree F temperature increase now projected by 2020s likely to displace “Brand Oregon” Pinot Noir grapes from Willamette Valley. Slide17: All told, major portions of Oregon’s $128.1 billion economy may be at risk Goodstein and Matson estimate impacts of between .2% to 2.2% of Oregon GDP by 2050 just for irrigation and salmon alone. Significant economic impacts can be anticipated even at the lower end of warming regardless of whether Oregon becomes somewhat wetter or somewhat drier With few exceptions, long-term planning in Oregon does not yet take rising temperatures and sea levels, reduced snowpack, or increased human health risks into account. Slide18: CLI Washington Economic Impact Assessment For Department of Community, Trade and Economic Development and Department of Ecology Assessing: Water resources Agriculture and ag dependent communities Forestry and forest dependent communities Municipal drinking water Industrial water supplies Power production and costs Public health Impacts of sea level rise in Puget Sound Slide19: Ski Industry Ski areas in Washington are likely to be negatively affected by double whammy of less snow and more precipitation. A 1 degree F temp increase yields a 23% decline in “skiable days” and a 2 degree F temp increase yields an average of 46% decline. Water Availability Using Yakima basin as case study, found a 14% probability of water rationing of at least 50% with a 1 degree F increase and up to 54% probability of rationing of at least 50% when temperatures approach 2 degree F increase. Forestry Over 50% of Washington is forest land. Pests and fire are the biggest threat. The “average” fire year is expected to see a tripling of acres burned with 2 degree F increase. On DNR lands this would increase burned acreage from 12,000 to 36,000. In 2003 UW Rural Technology Initiative calculated all forest and indirect costs of forest fires and estimated they cost $1,300 to $2,100 per acre. Current estimates of 12,000 acres burned per year produces $16-25 million costs. Tripling of acres burned would yield costs of $48-75 million annually. Slide20: WEATHER AND INSURANCE STUDIES Tyndall Center in UK: If climate warms gradually, the chances of catastrophic weather-related losses rise from about 1 in 100 to 9 in 100 over next 50 years, which is manageable impact for the insurance industry. Abrupt climate change brings the odds to 9 chances in 100 as early as 2010, which would raise insurance costs as high as 12% of value. Most businesses start to self-insure when premiums reach 3% of value John Dutton, dean emeritus Penn State College of Earth and Mineral sciences estimates $2.7 trillion of the $10 trillion U.S. economy is susceptible to weather-related loss of revenue. Slide21: Bottom Line: Global Warming May Fundamentally Change the Way the Economy Operates (Stern Review, What is the Economics of Climate Change, UK) 1. Direct Effects on Output—for example, reduce water availability; higher water, energy, materials and transportation costs; restrictions on GHG generation in processes and products; increased insurance costs, or none. 2. Increased Depreciation of Capital—for example, equipment and technologies will need to be replaced at accelerated rates (faster than normal depreciation) to suite a changing climate. 3. Adverse Effects on Human Skills and Health—for example, increased heat, psychological stress, and pathogens will increase employee illness & absenteeism & reduce productivity. Slide22: 4. Cumulative Effects Impacting Economy-wide Productivity Decreased output in a few sectors reduces incomes which reduce purchasing power and effects other sectors. Corporations may face more environmentally related litigation and insurance related payouts, both as emitters of GHG and from non-compliance with new regulations if political climate changes due to public alarm* Insurance costs may rise substantially—or not be available at all--constraining business activity. Restrictions on trade, transportation and travel and market instability may grow. (Sources: What is the Economics of Climate Change, Stern Review, UK; Climate Change Futures, Harvard Medical School, Swiss Re, UNDP 2005) Slide23: IN SHORT, WE ARE IN A WHOLE NEW ERA-- A “CARBON CONSTRAINED” ECONOMY Many scientists are discussing that stabilizing the climate will require 60-80% reductions in GHG emissions based on 1990 levels. This requires transition to “low-carbon economy”: Goal must be to decouple economic and population growth from energy use & emissions Must do so in context of likely rapid and unpredictable variation. Traditional planning methods may not work. Slide24: LEFT ON ITS OWN, THE MARKET WILL NOT SOLVE WARMING PROBLEMS Climate change is an externality— the emitter does not bear the direct costs of their action. As with any externality without policy interventions, the emitter has little motivation to consider the costs in their decision-making. Slide25: MITIGATION & ADAPTATION POLICIES ARE NOT ALTERNATIVES Both will have costs but both can produce economic benefits Possible Criteria for Evaluating Climate Policy: Environmentally Effective Economically Effective Administratively Effective Equitable Politically Feasible Slide26: Theory Of Externalities Suggests Some Basic Policy Approaches For Reducing GHG Tax the emitter equivalent to the marginal external social costs Ultimately borne by households, raises revenues that can be used to achieve other goals, provides incentives to economize on the damaging activity The allocation of property rights linked with emissions trading Provides large emitters the flexibility to trade emission rights across sectors. Direct regulation Tends to place burden on industry (which generally passes on the costs to consumers—if they can/will pay) Provide financial incentives Usually popular, sends clear signals, but often suffers from free rider problem. Each option has different distributional & public finance implications. Slide27: Voluntary and Information Prescriptive Regulation Financial Disincentives Financial Incentives Emission Cap and Trade Permits Niche Market Regulation Economic Efficiency Medium to Poor Good to Poor Good Poor Good Medium Environmental Effectiveness Administrative Feasibility Political Feasibility Poor Good Medium Medium Good Good Good Good Good Medium Medium Medium Good Medium to Poor Poor Good Medium Good (Adapted from What is the Economics of Climate Change?, Stern Review, London, 2006; & Sustainable Fossil Fuels, M. Jaccard, 2005, and U.S. Technologies and Innovation Policies, Pew Center, 2003) CLIMATE POLICY EVALUATION CHART Equity Good Good Poor Poor Good Good Slide28: ADAPTATION MUST FOCUS ON Built Systems—Greater exposure to extreme events: resulting in increased demands on maintenance and upgrades; damage to energy, water, sewage, communication, transport systems. Human Systems--Increased stress & shocks effecting: skills and productivity, social welfare, public health, emergency response, natural hazard management, insurance, organizations, & systems of governance Natural Systems--Increased temperatures effecting: ecosystems and species; increased pests, diseases, forest fires; more heat waves; diminished air quality. Slide29: TYPES OF ADAPTATION MEASURES CATEGORY Status Quo Prevent the Loss Spread or Share the Loss Change the Activity Change the Location Enhance Adaptive Capacity MEANING Do nothing to reduce vulnerability & absorb losses Adopt measures to reduce vulnerability Spread the burden of losses across different sectors Stop activities that are not sustainable under new climate regime and substitute others Displace the infrastructure or system Enhance the resiliency of the system to improve its ability to deal with stress EXAMPLE Rebuild, or abandon affected structures Engineer structures for big winds, floods, drought Purchase flood insurance Prevent development in low lying coastal areas, rebuild wetlands Relocate infrastructure out of risk zones Preserve or rehabilitate natural systems, increase emergency response capacity From Adapting to Climate Change, Canadian Climate Impacts and Adaptation Research Network Slide30: MITIGATION & ADAPTATION MEASURES HAVE COSTS AND BENEFITS All economic wealth results from increased productivity. Increased productivity results from continual innovation. Policy Goal Should Be: Make short term economic impacts negligible while stimulating innovation, breaking path dependency, and producing net future economic benefits Is this possible? Slide31: EXAMPLE “Economic Assessment of Some California Greenhouse Gas Control Policies” (California Climate Change Center, UC Berkeley, 2006) Assessed 9 climate policy scenarios: Baseline, vehicle emission, building efficiency, HFC reduction, manure management, semiconductors, landfill management, afforestation, cement management. Conclusion CA can save money and increase overall employment by implementing a suite of climate change policies due to the direct effects & cumulative effects of indirect effects Slide32: IF WE CHANGE OUR THINKING AND PRACTICES, WE MAY END UP BETTER OFF Global warming requires a change in energy regimes. Despite the pain, each previous major change in energy produced increased prosperity and well being. The first major energy shift came about 230,000 years ago when humans discovered how to control fire. The ability to use fire to kill germs by cooking food and to provide warmth in cold and damp weather dramatically reduced illness and death. The change from wood and organic material, for most of human history the dominant source of energy, to coal over 200 years ago launched the industrial revolution. The transition from coal to oil and from the direct use of fuels to electricity in the early part of the twentieth century triggered wealth creation over the past one hundred years or so on a scale never before seen in human history (at least in the West). Slide33: Likely Big Impacts & Possible Irreversibility's Suggest An “Insurance Approach” Basic Economic Principle: When the risk of economic harm is not zero, it is prudent to take steps to project yourself against those potential risks. For example, although the chances of our house burning down are low, it's not zero. Therefore, we buy homeowners insurance that we may never use, but which we nevertheless view as a good investment because it will pay off big time if ever needed. Climate Insurance Policy Framework Act Prepare Invest Slide34: SUMMARY Current trends show the economic impacts of climate change will be significant & increase the warmer it gets. Warming poses risks and opportunities. If done right, solutions are likely to increase efficiency and productivity of U.S. and world economy Doing so will require broad mix of policies tailored to specific sectors and regions aimed at stimulating innovation throughout the economy. Innovation must also focus on the institutional structures and systems that support the policies Must avoid ideology and think in new ways.