Conference PaperPDF Available

Climate Change Impacts, Energy, and Development

Authors:
1
Climate change impacts, energy, and development
Professor Michael Grubb1
Paper to World Bank
Annual Bank Conference on Development Economics
Tokyo, 30 May 2006
ABSTRACT
Climate change – both through its direct impacts, and the implications of measures to tackle
the problem through reducing greenhouse gas emissions – is likely to be a major influence
upon global socio-economic development during the 21st Century. This paper addresses three
dimensions of the challenge:
the risks associated with changing climatic patterns, particularly in relation to key
vulnerabilities and scope for adaptation, and economic approaches to evaluating the
scale of those risks;
the relationship between emissions and development, including potential
opportunities between climate change policies and development at the project and
sector levels
innovation and macroeconomic dimensions of emissions mitigation in the national
and global context, including the role of economic instruments
The broad conclusion is that climate changes holds opportunities as well as threats to
development, and that the balance between them will to a large degree be a function of how
public policy responds – the most dangerous and damaging approach being to ignore the
problem and hope that it goes away.
1 Chief Economist, The Carbon Trust, 3 Clements Inn, London WC2A 2AZ
michael.grubb@carbontrust.co.uk; Senior Research Associate, Faculty of Economics at Cambridge
University; Visiting Professor, Centre for Environmental Policy at Imperial College, London.
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Introduction
The general acceptance that climate is a real and pressing problem is beginning to move the
issue from one of scientific debate and observation towards questions about the impact of
climate change on economic development, and the implications of measures to tackle it. This
paper briefly summarises the scientific evidence and nature of the problem, and moves on to
discuss the implications and relationship to economic and development policy.
The paper comes at an interesting time in relation to international assessment processes. The
Fourth Assessment report of the Intergovernmental Panel on Climate Change is in its final
analytic stages, with drafts either already circulating or soon to be issued for global
governmental and expert review. In addition, the Stern review of the Economics of Climate
Change, commissioned by the UK Treasury as an assessment of the global economic issues,
is due to report this autumn. Thus a much richer base of material will shortly become
publicly available. Obviously, this paper reflects my view of the debate.
The paper is divided into three main parts:
Part I summarises the scientific evidence, projections, and discusses key points
around evaluation of impacts particularly in relation to developing countries;
Part II discusses the relationship between emissions and economic development,
presenting ‘four facts’ and ‘four opportunities’ around the CO2-development
relationship
Part III analyses the macroeconomics of mitigation policy, including the role of
innovation and economic instruments
This paper as submitted for the ABCDE conference contains only Parts I and II. Part III will
be included for the final publication.
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PART 1: SCIENCE AND THE NATURE OF THE
CHALLENGE2
Is Climate Change Real?
Emissions of various gases from industrial and other human activities are changing our
atmosphere. ‘Climate change’ encapsulates the wide variety of accompanying impacts on
temperature, weather patterns and other natural systems. Despite decades of research,
important things remain uncertain, but much is also now established beyond reasonable
doubt.
The fundamental science of climate change.
The fundamentals of climate change have long been well understood because they involve
the same basic physics that keeps the earth habitable. Heat-trapping ‘greenhouse gases’ in
the atmosphere (of which the two most important are water vapour and carbon dioxide, CO2)
let through short-wave radiation from the sun but absorb the long-wave heat radiation coming
back from the earth’s surface and re-radiate it. These gases act like a blanket – and keep the
surface and the lower atmosphere about 33 deg. C warmer than it would be without them.
The Earth’s greenhouse blanket is a good balance between the extremes of our neighbours:
Mars, exposed without any greenhouse gases, is a frozen wasteland; whilst Venus remains
trapped in a dense blanket of hot CO2.
Primarily through the burning of fossil fuels and deforestation, humans have been increasing
the concentration of CO2 and other greenhouse gases in the atmosphere since the industrial
revolution began, thickening the greenhouse blanket.
The world has been warming.
Surface warming in recent decades is established beyond doubt. So too is cooling of the
stratosphere (the layer above the main ‘blanket’), as would be expected from greenhouse
warming that traps more heat near the surface. Direct temperature records back to the middle
of the last century are considered to be reliable enough to establish that recent temperatures
are warmer than any since direct measurements began. Since the 1980s, due in part to the
clean-up of other industrial pollutants (some of which had “masked” underlying warming),
the underlying, long-term greenhouse warming has emerged more clearly - all of the 10
warmest years have occurred since 1990, including each year since 1995. Better accounting
for these and other factors can now generate a good fit between the observed temperature
trend and the results of computer simulations that incorporate these multiple factors (Figure
1).
2 The first half of this section draws heavily upon a report prepared by the author for the Carbon Trust,
published as Grubb (2004). The source data draws heavily upon the Third Assessment Report of the
Intergovernmental Panel on Climate Change (IPCC, 2001). The IPCC is currently engaged in its Fourth
Assessment, which will update such analyses.
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Figure 1. Global average temperatures since 1860.
Source: IPCC, Third Assessment Report. The charts compare observed temperature trends
(red) with model predictions without (left hand side) and with (right hand side) greenhouse
gas emissions
Although debate continues about the exact temperatures during mediaeval times, a wide
variety of ‘proxy indicators’ (such as tree rings, coral layering, glacier records, etc) give a
high confidence that the warming observed is unprecedented; indeed it appears that global
average temperatures have varied by less than a degree C for thousands of years, and
probably during the entire post Ice-Age period during which human civilisation has
developed, so that recent years are probably the warmest seen for more than 100,000 years.
Scientists have been unable to identify natural factors that could explain either the degree or
the pattern of the surface warming and stratosphere cooling observed over recent decades.
Understanding is still incomplete, but the fundamentals are clear and supported by a long list
of other accumulating impacts.
Other observed indicators and impacts of our changing climate
The list of observed changes other than temperature and sea-level is growing rapidly. These
include ‘the thawing of permafrost, later freezing and earlier break-up of ice on rivers and
lakes, lengthening of mid to high-latitude growing seasons, poleward and altitudinal shifts of
plant and animal ranges, declines of some plant and animal populations, and earlier flowering
of trees, emergence of insects, and egg-laying in birds’.3
Perhaps the most clear, prominent and consistent indicator of warming is the retreat of
mountain glaciers (e.g. Chart 2) which has been a worldwide phenomenon. Impacts on ice
are also clear around the poles. The Arctic ice cap is shrinking and the Larsen Ice Shelf
3 Cited from IPCC Third Assessment, Climate Change 2001, Report on Impacts, Adaptation and Vulnerability
(Policymakers Summary).
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around the Antarctic peninsula has undergone unprecedented calving. Another widely-
observed impact is the ‘bleaching’ of coral reefs caused at least in part by rising sea-surface
temperatures.
Changes in extreme weather events potentially have considerable impact on humans, but
since by definition they occur infrequently, trends are hard to prove. Warming increases
evaporation and precipitation, and both aggregate rainfall and occurrences of ‘heavy
precipitation events’ in northern mid-latitudes (e.g. Europe and the US) – the principal cause
of flooding – has increased in recent decades. In tropical regions, the potential for more
intense hurricanes and typhoons increases in a warmer world, but the data are sufficiently
sparse and complex that the observational trend remains in dispute.
(a) c. 1900
(b) Recent
Figure 2. Alpine Glacier: comparison of present to 1900
Photo Source: Munich Society for Environmental Research
The impact on some other extremes is better established. Many areas have seen fewer long
cold spells and more long hot spells, in ways that are consistent with the predictions of
climate models. But unlike the general trends of temperature, ice and sea level, it may
always be questionable to attribute any one particular weather event to climate change,
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because all weather events have multiple causes. So the question ‘was X due to climate
change?’ cannot be answered simply – whether X was record temperatures, exceptional
storms, floods or droughts. Nevertheless science may increasingly be able to estimate ‘how
much have past emissions increased the risk of such events?’ – and the chances, at least of
extreme high temperatures, and in some areas droughts and flood events, are rising.4
Insurance data (Figure 3) show a dramatic rise in the economic costs due to extreme weather
events, though a major part of this is probably due to changes in demographics, property
valuation and insurance practices.
Figure 3. Global costs of extreme weather events (inflation-adjusted) since 1950.
Note. The economic losses from catastrophic weather events have risen globally 10-fold since the 1950s,
after accounting for inflation. Part of the trend is linked to growing wealth and population, which
increases economic vulnerability to extreme events, and part is linked to regional climatic factors (eg.
changes in precipitation and flooding).
Source: IPCC Third Assessment, Climate Change 2001: Synthesis report (Figure 2-7)
The distinction between climate and weather is itself a bit like that between sea-level and
waves. Sea-level sets average conditions which vary locally according to tides and coastline,
but even understanding all these does not mean one can easily pick out trends from individual
waves, or predict them in detail. But the complexities and uncertainties around climate
change should not obscure the basic facts. The fundamental mechanics of climate change are
well understood; the world is warming; and much of the warming is due to human emissions
of greenhouse gases. The next section explains why climate changes seem set to accelerate in
the future, and the varied impacts this may bring.
4 The IPCC Third Assessment (IPCC, 2001) detailed observations, trends and projections, and in particular the
Working Group II assessed observed and projected impacts. The Fourth Assessment will present considerably
enhanced data on impacts and projections including at the regional level.
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Projected impacts of climate change over the next few decades
Introduction and overview
Some of the big, persistent trends indicated for example in glaciers, which embody a lot of
inertia also due to past warming, can already be projected with confidence. The Snows of
Kilimanjaro, for example, already much shrunk, are expected to disappear entirely within the
next few decades – it is already too late to avert this (Alverson et al, 2001). Glaciers and sea
ice will continue to shrink, and there may be no Arctic sea ice in summer by the end of this
century. The Antarctic ice sheet, being in a much colder climate, is less likely to lose mass,
notwithstanding some shrinking ice shelves around it.
Existing zones of preferred vegetation and associated crops will migrate towards the poles,
requiring farming practices and ecosystems to adapt. However, many species and ecosystems
have limited scope to move, because of a wide variety of barriers. The most comprehensive
study to date estimates that about a quarter of the world’s known animals and plants – more
than a million species – will eventually die out because of the warming projected to take
place in the next fifty years.(Thomas et al. 2004)
In addition to the broad physical and biological trends of warming and glacier retreat, sea-
level rise, and the migration and loss of species and ecosystems, other predicted impacts of
climate change are many and varied, and as research continues and experience begins to
accumulate the list grows longer.
Scientists rate the following other changes to be very likely (with more than 90%
confidence):5
Higher maximum temperatures, with more hot days and heat waves over nearly all land
areas. This would increase heat-related deaths, as well as heat related stresses on crops,
livestock, etc;
Higher minimum temperatures, fewer cold days, frost days and cold waves over nearly all
land areas. This would reduce cold-related deaths and crop and livestock-related stresses
associated with frost and other cold conditions. The balance between this and the first set
of effects obviously depends on the starting conditions, but also on the rate and degree of
change. Tentative estimates predict net agricultural gains for the US and Europe for
equilibrium global changes up to 2.5 deg.C (this does not include transitional effects), the
balance becomes negative for greater changes;
More intense precipitation events, resulting in increased floods, landslide, avalanche, and
mudslide damage, with increased soil erosion and increased flood runoff.
The following changes are rated as likely (with confidence greater than two-thirds):
5 This list is drawn from the IPCC 3rd Assessment, Report on Impacts, Adaptation, and Vulnerability, Table
SPM-1.
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Summer drying over most mid-latitude continental interiors and associated risk of
drought;
More intense tropical cyclones (in terms of both wind and rainfall);
Intensified droughts and floods associated with the Pacific El Niño events, in many
different regions; and
More variable Asian summer monsoon, obviously of particular relevance to the half of
the world’s population that live in China, India and surrounding countries.
Human impacts: an overview of the debate
There are several broad approaches to thinking about the potential implications of such
impacts for human economies and societies. Research during the 1990s tended to divide
between scientific emphases on physical impacts, and economic studies some of which were
far more optimistic. The economic debate was largely stimulated by Nordhaus (1991), who
argued that quantifiable impacts of a warmer climate would be modest and justified only very
modest action to mitigate emissions, with a contrary view by Cline (1992) who adopted
broadly comparable methods but found quite different results depending upon parametisation.
Mendelsohn and others (1994) developed more detailed analyses of US agricultural impacts,
which based on comparative static analysis concluded that moderate levels of climate change
could boost US agricultural output. Over the 1990s he and colleagues extended the work to
other sectors and other countries. These studies are considered further below, but one feature
to which they draw attention is a prediction that impacts will be highly diverse, with the brunt
of damages falling upon low latitude developing countries, whilst high latitude countries may
gain and, according to his studies, mid-latitude countries may be little affected in aggregate
over the Century.
These ‘optimistic’ analyses were based primarily on projections of aggregate, average
warming patterns, and effective adaptation to these, and have come under extensive criticism
for these reasons. Certainly, any evaluation of human implications needs to start from a more
comprehensive understanding of the likely nature of impacts than displayed in these early
economic evaluations. Moreover, human impacts depend on specific changes in regions and
localities.
Localised changes are likely to be both more varied, and harder to predict, than the global
averages. All projections are thus still quite speculative. Nevertheless, two regional examples
help to illustrate possible consequences. Summer drying and heatwaves in and around the
Mediterranean could further stress water supplies in some regions that are already politically
sensitive and heavily dependent upon irrigation for agriculture. The suffering could also drive
expanded migration into northern Europe that which might itself come under growing
pressure from increased floods and heatwaves.
On the Indian subcontinent, Bangladesh and north-east India could face a number of diverse
pressures: rising seas and storms inundating the Ganges delta region; a more variable
monsoon undermining the agricultural foundations that feed a quarter of a billion people; and
changing patterns of river flow as climate change impacts the Himalayan glaciers that feed
the rivers, with corresponding international tensions across already volatile borders.
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These are just tentative examples; the possible human consequences of climate change are
only just beginning to be seriously considered. A particularly complex consideration is that
whilst most scientific studies have focused upon the possible impacts of a warmer world,
most human impacts may flow from the nature of a warming world, in which change – often
hard to predict at the local level – may be the most difficult characteristic for societies to
handle. Farming practices, water industries, and innumerable other social and infrastructural
systems designed for the last Century’s climate will not necessarily adapt easily to the
accelerating change now in prospect, particularly as some of the underlying natural systems
are also pressured by global economic and population growth.
Such considerations inform the ‘risk assessment’-led approach to considering impacts. One
form of this is illustrated in Figure 4, in which the impacts of projected climate changes have
been summarised in terms of five risk categories. This suggests that even at the most
optimistic end of projections, some unique and threatened ecosystems will disappear and
some regions will be exposed to adverse impacts. In the mid range, many unique systems
may be at risk and the impact of extreme events would rise, with the developing countries
hurt the most although impact on the aggregate global economy could still be modest.
Change towards the upper end pose significant risks to all and the risk of planetary-scale
abrupt disruptions becomes significant.
To date, this debate on impacts between economists quantifying specific, potentially
measurable and monetiseable impacts, and scientists focused on risk indices and scenarios,
has been largely a dialogue of the deaf. The next section sets out more formally a structure
for thinking about these different dimensions.
Figure 4 Five risk indicators associated with projected global temperatures changes
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The chart shows how the projected range of temperature changes for this century (left hand panel) would
affect the risks posed in terms of five generic ‘reasons for concerns’ (right hand panel). In the columns,
white indicates neutral or small impacts, yellow indicates negative impacts for some systems or low risk,
and red means negative impacts or risks that are more widespread and/or greater. The five columns
concern (i) risks to unique and threatened ecosystems, (ii) the risks from extreme climate events; (iii) the
risks posed to specific regions, with only the most vulnerable being affected in the white/yellow zone but
most in the red zone; (iv) the aggregated impact on the global economy, and (v) the risk from large-scale
climatic discontinuities (such as collapse of ocean circulation patterns). The assessment took account only
of the magnitude, not the rate, of change.
Source: IPCC, IPCC Third Assessment, Report on Impacts, Adaptation, and Vulnerability,
Figure SPM-2.
Economic evaluation of climate change impacts
How costly may climate change really be? This is a natural question for economists in
particular to ask, but an extraordinarily difficult one to answer. Continuing scientific
uncertainties about the detailed nature, timing and severity of natural impacts are multiplied
by many layers of uncertainty about how society will cope with growing impacts and how to
quantify these. The impacts literature is dominated by natural scientists. But it is natural for
economists to ask, for any given emissions pathway, how costly may climate impacts be
taking account of human capacity to adapt – and hence how much might the reduced impacts
in lower emission pathways compare against the presumed costs of lowering emissions?
Rather than answering this question quantitatively, this section attempts to introduce a
comprehensive structure into the debate on impacts quantification, and to draw some basic
conclusions.
Attempts by economists to quantify impacts in monetary terms have tended to concentrate on
a few measurable dimensions, using one of two approaches: either model simulations, or
comparative-static (cross-sectional) studies that attempt to compare indices such as land
value and other indicators as a function of temperature. Some of the most widely-cited
studies have been those of Mendelsohn (1994), who referred to the latter as the “Ricardian”
method. These methods are applied to specific sectors such as timber, energy, water supply
etc. Mendelsohn and Williams (2004) present a recent collection of such studies.
The essential foundation of such studies is that the explicitly ‘climate-vulnerable’ sectors of
the economy account for a relatively limited share of GDP, and in particular Ricardian
approaches suggest that there are optimum temperatures for most of the sectors, which lie
somewhat above the average temperatures typical in mid-latitude regions. This drives the
principal findings that climate damages are found to be modest in mid-latitude regions, averse
in low latitude regions, but with net gains in high latitude regions. Since mid-latitude
countries which dominate world GDP, the net impact of climate change is modest across the
Century. The Mendelsohn and Williams (2004) results suggest that globally aggregated
damages and benefits are comparable for the next several decades; damages start to dominate
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after about 2050 and get worse thereafter, but in an aggregated ‘present value’ analysis these
have little impact due to discounting.
Table 1, drawn from a major review study on the "social cost of carbon" (Downing et al.,
2005) helps to set such studies in perspective in terms of a 3x3 risk matrix covering the
dimensions of uncertainty in both climate change impacts (rows) and the scope of evaluation
(columns). As the authors note, over 95% of the studies that seek to put a monetized value on
climate impacts have focused mostly on only two out of the nine elements of the matrix,
namely the market and non-market costs associated with smooth projected change. This is
true for example of most of the studies cited above, whilst Nordhaus’ estimates try to
quantify the most measurable impacts, and then assumes by extrapolation that other impacts
are correspondingly small. Even more limited are the comparative static (Ricardian) analyses
which compare the costs of two assumed climates, since these neglect transitional costs of
shifting systems from one climate to another (which is itself changing).
However since the bulk of existing work lies in this domain, I start by discussing the metrics
of evaluation within the boundaries of existing comparative-static and projection-based
quantification studies. I then try to lay out considerations around the “missing elements”,
respectively:
the dynamic and ‘socially contingent’ issues, focused upon the actual capacity of societies
to prepare for, and to tackle, climate-related changes; and how as a result societal
constraints might affect the welfare consequences of impacts (or limit adaptation) in ways
beyond the evaluation of direct market and non-market measures currently employed;
the risks that may arise from regionally variable (non-trend) changes within the broad
envelope of projected climate variation including extreme events (“bounded risks”), and
larger scale system surprises
The essential conclusion of these sections is that there is no a priori ground for believing
these elements to be insignificant compared to those that economists have sought to quantify.
Uncertainty in valuation
A. Market B. Non-market C. Socially
contingent
1. Projection Over 95% of the studies are in this category; with a
bias toward market costs.
2. Bounded risks Some models have explicit scenarios but most are tied
to benchmark 2xCO2 scenarios and do not cover local
changes in weather.
Plausible effects have
been posed but not
adequately valued nor
included in the
marginal SCC
Uncertainty in
Climate Change
3. System change and
surprise A few exploratory studies, but not sufficient to
provide robust estimates of the marginal SCC No credible studies
Table 1. Locating the 'social cost of carbon' literature in a risk assessment framework
Source: Downing et al. (2005).
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a) Issues in aggregating quantified impacts: discounting and contingent methodologies.
Because of the long timescales of climate change, discounting over time is a critical
determinant of the ‘present cost’ from impact assessments. The discounting literature is
enormous, and has yielded consensus that market-based discount rates are not appropriate for
evaluation of very long-term issues like climate change. Indeed it is now general practice to
use discount rates for public policy evaluation that are well below market interest rates,
particularly for longer-term endeavours; uncertainty around future economic growth rates
lowers applicable rates further (eg. Weitzman 1998). Indeed, the literature increasingly
questions the form as well as the number used for discounting: whilst the argument of Heal
(1998) for a logarithmic form has not been generally accepted, Groom et al (2003) do
conclude that the classical single exponential form is not tenable, and the UK government
itself has adopted a rate that declines over time (UK Treasury ‘Green Book’ (2004)). All
these revisions tend to amplify the “present value” of climate change impacts, which
predominate in the longer term.
This in itself has important implications, as sketched in the Downing et al report, establishing
that the long-term cumulative impacts of climate change cannot be wholly "discounted away"
in evaluation of climate damages. I return to some implications at the end of this section.
In the pursuit of treatments that are ethically consistent across space as well as time, similar
scrutiny needs to be applied to the evaluation of transboundary impacts. Contingent valuation
methodologies based upon 'willingness to pay' lead for example to valuation of mortality
based upon national Value Of Statistical Life (VOSL), which is heavily constrained by
national income and can differ by a factor of well over ten between countries (IPCC, 1996) –
a fact which has already led to political dispute due to the apparent unequal valuation of life
contingent upon the wealth of the country impacted. In aggregate there is a huge 'North-
South' asymmetry between the principal emitters and biggest potential victims: it is the rich
countries whose mitigation expenditures would be most influenced according to the estimated
global damages, not the poor.
Hence the case for using national VOSL (and other willingness-to-pay based measures) is
unclear. A logical link can only be maintained by appeal to the argument that abatement
expenditure in rich countries would displace foreign assistance for adaptation or other aid (an
‘indirect opportunity cost’ argument). But there is no evidence that mitigation expenditure
does or would displace foreign aid. Moreover foreign adaptation assistance (partly due to
institutional constraints and the dynamic uncertainties documented below) is likely to be an
imperfect substitute for reduced climate variability.
Equity weightings introduce a multiplier for VOSL or other willingness-to-pay based impact
measures in poorer countries to increase their weighting in global economic aggregation
indices (Groom et al, 2003), and thus attempt to correct for the apparent inequities arising
from such approaches. However the basis and derivation for such weights is unclear. In my
view this reveals some genuinely complex ethical issues underpinning global aggregation of
damages that have yet to be resolved. Simply taking a purely egalitarian approach (for
example, assuming a constant VOSL across humanity at the level of rich countries) does
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vastly amplify quantified estimates of climate change impacts, but is similarly riddled with
inconsistencies.
Economics is thus struggling to provide an objective approach to quantifying global impacts,
let alone one that is accepted as such across the most relevant parties. In the absence of this,
the only ethically defensible approach to developing responses has to include negotiations
based upon fair representation of both victims and emitters.
b) Dynamic and socially contingent impacts6
Unlike issues of discounting and even international comparison, the literature exploring the
‘socially continent’ aspect of impacts is extremely limited. Concerning this, three particular
dimensions need consideration:
(i) Transitional impacts. Spatial and time aggregation over the long run may mask the bulk of
social costs, which are far more likely to be those associated with transitions and extremes:
adaptation to a changed climate, predicted ex-ante, may be very different from adaptation to a
changing climate, with attendant changes in the distribution and scale of extremes. Both
theory and recent experiences (such as Asia and New Orleans) suggest that what matters is
the joint effect of climate impacts and constraints upon preparation, reconstruction and
adaptation capabilities.
Consequently the scale of losses may be sensitive to the pre-existing conditions of the
economy on which climate change impacts may fall. Hourcade (2005) argues that impacts
may be aggravated by constraints on: (i) reconstruction capabilities; (ii) failure of cost-
sharing mechanisms including insurance and international assistance; (iii) local obstacles
including rigid agricultural practices; (iv) knock-on economic impacts arising from
depreciation of this share of capital stocks (through real estate and property ownership); and
(v) ecological constraints. Drawing in part on wider development literature on the economics
of natural disasters (Benson and Clay, 2004), Hallegate and Hourcade (2005) present a model
in which poor societies are unable to recover from one extreme climate event before the next
disaster strikes, leaving such countries trapped a cycle of under-development.
Finally, mechanisms for adaptation, compensation and cost-sharing are inevitably
weaker at international levels. This may increase the probability of adverse effects
propagating across regions (including through migration), blurring any distinction between
‘winners’ and ‘losers’.
(ii) Uncertainty. The most obvious conclusion is that adaptive capacity needs greatly to be
strengthened. This is unquestionably true but incomplete, not least because of the uncertain
nature of impacts (particularly extremes) combined with the demonstrated incapacity of
societies to prepare adequately on the basis of risk warnings (such as with the Asian Tsunami,
and Hurricane Katrina). The main impact of climate change may arise from the interplay
between climate uncertainty and the constraints and sources of inertia in social and economic
systems. The dilemma is neatly illustrated by the juxtaposition of two papers in Climate
Policy (Olsen (2006) and Butt et al. (2006)): one an agricultural modelling study of the
6 This section draws heavily on a Powerpoint presentation by Dr Jean-Charles Hourcade, posted on the World
Bank website.
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capacity of optimal adaptation to yield net benefits in Mali, the other a political economy
study of the fact that a decade of international assistance efforts have made little headway in
influencing practical policy in Uganda.
Three big factors constrain the capacity for preparatory adaptation: (i) uncertainty in
regional climate predictions, probably an order of magnitude greater than that in global
average predictions; (ii) the masking effect of natural climate variability, which means that
climate change signals may be undetected, ignored or misinterpreted; and (iii) the capital-
intensive nature and inertia of adaptation strategies (eg. dams, building norms, etc). In
combination these factors combined create a significant risk of “maladaptation”. The first
lesson from comparing optimal control models is that costs and responses can be very
different between perfect foresight and decision-making under high uncertainty.
(iii) Aggregation and the value of climate stability. Estimates of GDP losses associated with
climate change in existing literature are thus questionable to the extent that they neglect
issues of transition, uncertainty, and human capacity. When extrapolated to global estimates
they also face questions about the ethical basis of aggregation indicated above, and moreover
implicitly assume perfect compensation between winners and losers, which human
institutions are unlikely to deliver.
c) Beyond smooth change: risks, surprises and the very long term
Particularly in the longer term, these difficulties are amplified by the remaining elements in
the risk matrix, namely larger-scale risks and surprises in the climatic system, particularly
when combined with inertia. The 'Burning Embers' diagram of the IPCC WGII Third
Assessment report (reproduced in Figure 4 above), attempted to depict how different levels of
atmospheric change may affect risk levels across five impact metrics (ecosystem impacts,
risks from extreme events, impacts focused upon vulnerable regions, globally significant
impacts, and risks of ‘surprises’).
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Figure 5: Potentially sensitive ‘switch point’ areas in which local effects might trigger larger-scale
changes
The chart shows regions in which specific local phenomena may result in points of sensitivity for larger-scale
and possibly rapid changes in regional or global climatic conditions.
Source: J. Schellnhuber and H. Held, adapted from ‘How Fragile is the Earth System?, in J.Briden, and
T.Downing, T.(Eds.), Managing the Earth: the Eleventh Linacre Lectures, Univ. Press., Oxford (2002).
Scientists studying the interaction between different components of the climate
system, and related natural systems, express concern about various possible instabilities. The
north Atlantic ocean circulation is the best known, but is by no means the only example.
Some studies question the stability of monsoon patterns particularly on the Indian
subcontinent. The UK Hadley Centre projects that climate changes over Amazonia will lead
to loss of the rainforest during this century. Other very long term possibilities include the
melting or collapse of the Greenland and West Antarctic Ice sheets. Figure 5 illustrates some
of these potential points of instability. The scale of threats posed by structural disruption; for
example, to Indian monsoon or African rainfall patterns are extremely hard to evaluate, but
clearly should not be ignored in any quantification that claims to be reasonably
comprehensive.
There are also feedbacks which concern scientists. Drying of the Amazonian
rainforest system would feed more carbon back into the atmosphere. Thawing permafrost in
the far north is likely to release pent-up methane (another and potent greenhouse gas). Far
larger amounts of methane are currently locked on the sea bed and could ultimately be
released, though only over very much longer time periods (Centuries or Millennia, if and as
warming penetrates to ocean floors).
There are inherent uncertainties about such systems; the dynamics that keep them
stable, and their limits, are not well understood. When it comes to such big questions about
complex systems, uncertainty is endemic. But especially given the inertia in all these systems
– including the inertia in economic systems discussed further in Part II - by the time limits are
fully understood they may already be unavoidable. Several of the examples noted above -
systemic changes in monsoon patterns; desertification of the Amazon; and perhaps collapse
of salinity shifts in the Thermohaline, may only be clearly identifiable through observational
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data (on rainfall change, soil moisture / forest cover, and saline water movement); but by the
time changes can be observed in the data with sufficient statistical certainty to understand and
project much further, the inertia in all the systems concerns may well mean that the transition
involved can no longer be avoided - potentially with dramatic consequences.
Long term trends and risks
This is because one fundamental characteristic of the climate problem is the inertia involved.
Atmospheric greenhouse gas concentrations will not stabilise until global greenhouse gas
emissions are reduced to a small fraction of today’s levels, which few expect before the end
of the century. Even after the atmosphere stabilises, other effects will continue to accumulate.
Global temperatures will continue to rise for decades as the oceans slowly adjust to the higher
heat input. Sea levels will rise due to both thermal expansion and ice melt – effects which
will cumulate over hundreds to thousands of years respectively (see Figure 6): over
centuries, sea levels would rise many metres if and as the Greenland and/or west Antarctic ice
sheets disintegrate. Although these seem far away, there are economic reasons discussed
further in Part II why choices over the next few decades will affect emissions and
concentrations for decades beyond that, and thus do much to determine the degree of
commitment to a range of temperature, sea-level and other kinds of risks and instabilities
noted below.
Figure 6 Accumulating impacts of climate change over the long term
The chart shows how key aspects of climate change will continue to accumulate long after global
emissions are reduced even to low levels. Temperatures would continue to rise slowly for a few centuries
as the oceans continued to warm; but sea level rise would continue for hundreds to thousands of years, due
to the continuing impact on ice sheets in addition to thermal expansion of the oceans. The impact on
species might also continue for centuries as the effects on ecosystem viability play out (not shown).
Source: IPCC Third Assessment Synthesis Report, SPM-5.
17
Conclusions
Against this background, it is not hard to understand the conclusion of Downing et al. (2005)
that the ‘social cost of carbon’ – the present value of damages associated with a tonne of
carbon emissions - is characterised by huge uncertainties. They suggest that values could
span a range potentially from 1 to 1000£/tC, though also argue that the very low values in this
range are unlikely.
Hourcade (2005) offers a complementary perspective that would have similar
practical implications. He argues that considerations such as those set out above could be
used to argue that from an economic standpoint, climate stability is a component in utility
functions that should be explicitly represented; and that given loss aversion (one of the most
stable findings in behavioural economics) there is an intrinsic value to avoiding an unstable
climate. Moreover, although it is poorer societies that may suffer most from an unstable
climate, the decreasing marginal utility of income means that high-income populations /
generations should be more willing to spend resources on protecting the climate (in addition
to the fact that they have been and remain the major emitters of greenhouse gases). Climate
stability is thus a ‘superior good’ and this may influence some of the policy insights,
including those relating to the cost-effective distribution of mitigation investments.
To conclude, these various factors suggest a strong evidence base that:
1. Climate change will result in significant social costs, adaptation is very important but cannot be
expected to negate such costs. All the discussion above underlines why trying to cost the
impacts of climate change is a daunting task. Early efforts to do so were criticised on the
grounds that they assumed little or no adaptation – a ‘dumb farmer’. Since a substantial
degree of climate change is already unavoidable, there is no question that far greater
efforts are needed to help societies adapt to its likely impacts, and that this has the
potential to lower the cost of such impacts. But assuming that adaptation can radically
reduce the costs of impacts is itself questionable, not least because of the fundamental
nature of the uncertainties at the micro-level, where adaptation is actually relevant but
where the uncertainties are greatest: in economic terms, it is not certain that replacing
assumptions of ‘dumb farmers’ (no adaptation) by assumptions about ‘clairvoyant
farmers’ (perfect adaptation) is necessarily more realistic.
2. Adaptation is only likely to contain adverse impacts if combined with serious moves
towards slowing atmospheric change and ultimately stabilising concentrations. The risks
associated with uncertainties and irreversibilities are considerable and also constrain the ability of
adaptive measure to avoid adverse impacts: a stable climate has characteristics of an intrinsic
good. Moreover the whole issue is set in the context that climate change is not a discrete
phenomenon with an identifiable end-point to which we need to adapt; to the contrary, the
projected growth of global emissions means simply that it will be an ongoing and
accelerating process of continual climatic change, without any identifiable prospect of
stability, and growing risk of planetary-scale disruption.
Very few studies have looked explicitly at the relationship between emission pathways and impacts, 7
but the two facts above make it plain that reducing global emissions – ultimately to low levels - has to
7 O’Neill and Oppenheimer (2004) offer one of the few studies of this nature. They examine the implications of
three types of pathways: ‘rapid change’ that follows ‘reference’ until at least 2030 before departing and
18
be part of a balanced response. Hence with this background, I turn to consider emission prospects and
the scope for emissions mitigation.
stabilising in 2100; ‘slow change’ pathways that depart from 2005 and remain on a lower trajectory that finally
reaches and stabilises at the target level in 2200; and ‘overshoot pathways’ that exceed the target level by
100ppm in 2100 and then decline to the target in 2100. For a range of different ultimate outcomes (target
concentrations 500, 600 and 700ppm) they find that ‘the range of temperature outcomes in 2100 across the three
types [of pathway] … is about 0.5-1.2 deg.C, as large as or larger than the difference in long-term outcomes for
different stabilisation levels.’ Moreover, the ‘slow change’ pathways lead to median rates of temperature change
that decline over time from an initial rate of 0.16deg.C/decade (for their central climate sensitivity), contrasting
with peak rates of around 0.2deg.C/decade for the ‘rapid change’ 500ppm case, and approaching
0.3deg.C/decade for the ‘rapid change’ (and overshoot) scenarios with higher stabilisation levels. The authors
conclude that the faster rates of change would both be harder to adapt to, and also would increase the risk of
abrupt climate changes such as impacts on the Thermohaline circulation and polar ice melting.
19
PART II. CLIMATE, EMISSIONS AND DEVELOPMENT
Despite the emerging efforts to tackle the problem, global CO2 emissions are widely
projected to grow. If industrialised countries fail to limit their emissions and energy-
intensive, fossil fuel-driven energy systems remain a foundation of economic growth, it is
hard to see rapid emissions growth in the rest of world being much curtailed as other
countries aspire to the same levels of economic development. Yet, the link between wealth
and emissions is far less strong than generally supposed. In this section I first present and
probe four facts around the relationship between global economic and emissions growth, and
then outline four opportunities that arise in the context of considering lower emitting
development paths.
A. Four Facts
1. Large disparities in present emissions combined with population and economic
growth create huge potential for global emissions growth if countries pursue
existing models of development.
Figure 7 plots per-capita emissions against population in different countries and regions (so
that annual emissions in each are represented by the area of the blocks). Per capita emissions
in the industrialised countries are typically as much as ten times the average in the more
populous developing countries, particularly Africa and the Indian subcontinent. The potential
for global emissions growth is thus huge, even if and as leading countries start to embark
upon more serious action:
20
Figure 7. CO2 emissions per capita and population by region in 2000
Note. The chart shows the global distribution of CO2 emissions in terms of three major indices: emissions per
capita (height of each block); population (width of each block); and total emissions (product of population and
emissions per capita = area of block). Per capita emissions in the Industrialised countries are currently as much
as ten times the average in developing countries, particularly Africa and the Indian subcontinent.
Source: Grubb (2004)
Population. Recent debates have tended to lower populations projections for this Century,
due to sharply declining birth rates, but most still involve projections that global
population (the horizontal axis in Figure 7) will expand by around 50%.8
Economic growth and per-capita emissions. Recent debates about CO2-GDP
relationships and projections focused on metrics of measurement,9 and about expectations
of economic convergence vs a continued bimodal distribution of world per-capita income
levels (eg. Jones 1997; Quah 1993, 1996; Barro and Sal-i-Martin, 1997; Riahi 2005), do
not change the ‘big picture’. Almost all scenarios involve considerable economic growth
in developing countries that, in the absence of counteracting policies, would tend to take
their per-capita emission levels closer to those of the present industrialized world.
Mainly as a result of these two forces, the vast majority of non-intervention scenarios in the
peer-reviewed literature (as reviewed for the IPCC Fourth Assessment) result in global CO2
emissions typically close to doubling around mid-Century, and reaching between two and
four times current levels by 2100 – taking the world far beyond the “doubled CO2
concentrations” scenarios that were the traditional focus of climate change modeling.
8 Out of 115 population scenarios collated recently by IIASA for the IPCC (Lutz et al, 2001; UN 2005; World
Bank 2005; US Census Bureau 2005), the majority project population in the second half of the Century to be
moderately stable at around 9-10 billion people, and only one scenario involves global population declining
below 5 billion by the end of the Century.
9 An extensive debate has focused upon use of Purchasing Power Parity (PPP) vs Market Exchange Rates
(MER)) and assumptions about economic convergence. Whilst the choice of GDP denominator would not be
expected to have a first order impact on projections of a physical quantity such as emissions (Holtsmark and
Alfsen, 2004a and b), it may have second-order impacts due to structural effects. Nordhaus (2005) concludes
that the ‘jury is still out’ and recommends a hybrid treatment using PPP base-year calibration with MER growth
rates; Dixon (2005) presents evidence that PPP treatments could lower emission projections due to differential
structural effects and associated sectoral emission intensities and elasticities.
21
0
1
2
3
4
5
6
7
8
9
0 10000 20000 30000 40000 50000 60000
Income Per Capita (1995 US$)
Emissions Per Capita (Metric Tonnes)
EIT
OECD
OPEC
NICs
Other
Figure 8. CO2 emissions per capita for different economic categories as a function of income
Source: Grubb, Butler and Feldman (2006)
2. Beyond the stage of basic industrialization, there are large differences in per-capita
emissions and huge variability in the CO2-GDP relationship.
Figure 8 plots per-capita emissions against per capita GDP. At present no country with
income beyond c.US$10,000 per capita emits less than about 1.5tC/cap. This reflects the
emissions inherent in building basic industrial and urban infrastructures – a fact which if
extrapolated forward, and comparing against Figure 7, implies considerable growth in
developing country emissions on almost any scenario for the world economy.
Nevertheless there are big variations across the richer countries. Per-capita CO2
emissions in the ‘new world’ developed economies, of 5-6tC/cap, tend to be around twice the
levels typical in ‘old world’ economies (Figure 7). Looked at more closely (Figure 8), the
differences are even more extensive. This diversity is a modest source of hope, even based on
current patterns; that itself implies a large degree of freedom over long run emissions even in
the absence of radical technological breakthroughs or major lifestyle changes.10 A world in
which most countries by the end of the Century emit 1.5-2.5 tC/cap clearly has far lower
climate risks than one in which they emit at up to 3 times those levels.
Yet Fig.8 illustrates that the difference between these is not primarily to do with
wealth. It is to do largely with technology and infrastructure choices around the development,
10 Eg. ‘The econometric evidence is mixed. If cross-country data show the predicted relationship (aleit with
controversities, country-level analysis show relatively weak relationship between levels of GDP and emissionsn
.. econometric anlayiss does not support an optimistic interpretation of the hypothesis that “the problem will
take care of itself” with economic growth, bt the pessimistif interpretation, that gorwht and CO2 emissions
would be irrevocably related, is not supported by the data either. Case studies confirm that there are major
degrees of flexibility….’ (F. Lecocq, RFF/DEFRA workshop on the Economics of Climate Change:
Understanding Transatlantic Differences, Washington, March 2-3 2006).
22
scale and efficiency of buildings, industrial and transport systems, and the supply systems
(particularly electricity) with these are supplied. To these we now turn.
3. Emissions arise from a wide diversity of activities that embody huge inertia but
many of which offer a correspondingly wide array of higher or lower emitting
technology options
It is widely recognized that the climate problem overall requires us to tackle a number of
different gases and sources in addition to fossil fuels; in addition to the energy sector,
greenhouse gases also emanate from agriculture, land use and direct industrial process
emissions. For some developing countries, non-energy sources (particularly deforestation and
other land use activities) dominate, and the desirability of addressing these for a multitude of
reasons is widely recognized. But the relative role of energy-related emissions tends to grow
with development.
Yet even fossil-fuel related emissions result from several different systems each of
which involve fundamentally different processes. Specifically, they are driven by energy
demand in three main components (buildings, industry, and transport), supplied increasingly
through three main systems (electricity, refined fuels, plus direct fuel delivery (
Figure 9)).
Figure 9 Main components of global energy system and CO2 emissions
Transport
(29%)
Buildings,
Appliances
& other
(36%)
Industry
(Manufacturing
and
Construction)
(35%)
End Users Supply Systems Resources
Coal (37%)
Gas (21%)
Biomass
Solar & geothermal
Petroleum (42%)
Biofuels
Nuclear
Hydro
Wind, wave & tidal
Solar PV
Direct Fuels & Heat
(24%)
Refined Fuels System
(40%)
Electricity System
(36%)
Transport
(29%)
Buildings,
Appliances
& other
(36%)
Industry
(Manufacturing
and
Construction)
(35%)
End Users Supply Systems Resources
Coal (37%)
Gas (21%)
Biomass
Solar & geothermal
Petroleum (42%)
Biofuels
Nuclear
Hydro
Wind, wave & tidal
Solar PV
Direct Fuels & Heat
(24%)
Refined Fuels System
(40%)
Electricity System
(36%)
Flow of economic value
Notes: The data show the % of global energy-related CO2 emissions associated with the
different parts of the energy system (including emissions embodied in fuels and electricity). Some
small flows that comprise under 1% of global energy flows (eg. electricity and natural gas
contributions to transport) are not shown. Note that patterns vary between regions (eg. industry is
lower and transport higher in developed economies), and the sectors are growing at different
rates (over past 30 years, energy demand for buildings : industry : transport has grown at
23
2.6%:1.7%:2.5% annual average. Non-electric energy industries’ (emissions from refineries, gas
etc) cited as 7% of total, are allocated here in ratio 4:1:2 to transport : industry : buildings & other.
Refined fuels taken as petroleum less input to elec; direct fuels and heat is the residual.
Source data: Resources CO2 from EIA (2002); supply systems and end-use data from IEA (2002
The options for different technologies and systems are in most cases extensive. Buildings
differ radically in the efficiency with which they consume energy. Urban planners are
regularly faced with choices between road and rail investments. Electrical power is generated
from a wide array of technologies, from the highest to the lower carbon emitters. A recent
contribution (Pacala and Socolow, 2004) sought to frame the debate in terms of ‘technology
wedges’ that could each deliver savings of 1GtC/yr by mid century, and listed fifteen possible
such wedges.
Even in terms of energy resources, most options are not seriously limited in total; nor
are low-carbon options including renewable energy sources. Although constraints limit what
is feasible, the estimated global potential for tidal, wave and hydro are comparable to the
scale of global electricity consumption, whilst most estimates of practicable wind and solar
resources are substantially greater still (Figure 10 summarises various estimates). As with
natural gas, key issues for delivery include the systems, and the fact that (with the minor
exceptions of direct solar heating and lighting, and geothermal heating) all but one – biomass
- produce primary electricity. Rather, the constraints concern the economics of matching
sources and systems to demands. It is often said that countries will not leave their domestic
energy resources (such as coal) in the ground – “have coal, so will use it”. There is no
fundamental reason why the same logic should not apply to the renewable energy resources
which sweep most countries: the reality is that the options developed are a matter of cost,
technological capacity, and political choices.
Figure 10 Global renewable energy potential estimated by various studies compared to current
global energy and electricity demand.
24
Source: Neuhoff (2005). See source for references and explanation
-50000
-25000
0
25000
50000
75000
100000
125000
Wind Tidal Wave Hydro Geothermal Solar Biomass Fuel and
Electricity
Use
Electricity Generation (TWh/yr)
-180
-90
0
90
180
270
360
450
Therma l Equival ent ( EJ/yr)
Bonn TBP (2004) WEA (2000) RIGES (1993) Shell (1996)
Greenpeace (1993) Grubb & Meyer (1993) WBGU (2004) Fischer & Schrattenholzer (2001)
IEA (2002) WEC (1994) IPCC (1996) Hall & Rosillo-Calle (1998)
xy
Electricity Only Renewable Sources Electricity and
Thermal Renewable
Sources
Fuel
Renewable
Sources
Global Energy
Consumption
Fuel Use
(Other)
Fuel Use
(Transport)
Fuel Use
(Buildings)
Fuel Use
(Industrial)
Current
Electr icity
Output
Losses in
Electr icity
Generation
4. The biggest determinants of future emissions will be the combination of the
patterns set by industrialized countries and the capacity of developing countries to
‘leapfrog’ towards higher-income but lower-emitting patterns of development
I outline specific issues surrounding the economics of mitigation below. Here I note wider
issues around the relationship of emissions to development. Development economics has
increasingly emphasized the scope of development choices and their dependence upon
institutional capacity in developing countries (Meier, 2001). The same is likely to be true
with respect to emissions, and since one impact of weak institutions is that economies operate
further from the efficiency frontier it cannot a priori be concluded that stronger institutions
and resulting higher economic growth will result in higher emissions. Higher dependence
upon fossil fuels is not intrinsically good for development and carries numerous attendant
problems ranging from other environmental impacts to exposure to international fossil fuel
price variability. Institutional capacity to accelerate efficiency improvements and foster
lower fossil fuel paths could put countries on pathways that are both lower emitting and
better for development – the ideal being capacity to ‘leapfrog’ the inefficiencies displayed in
traditional models of development (the IPCC Fourth Assessment, WG3 report, contains a
chapter (12) covering these issues in depth).
The concept of developing countries ‘leapfrogging’ to more advanced conditions is not
new, but it tends to have been confined to academic discussion far from the realities of the
ongoing struggle for economic development. It is a central conclusion of this paper that
‘leapfrogging’ can neither be confined to the margins of debate any longer, nor does it
represent one simplistic view of what could in theory be done. It is rather a necessity that
represents a set of specific opportunities, to which I now turn.
25
B. Four opportunities
1. Opportunities for enhancing energy and economic efficiency
There is a long-standing literature on the apparently favourable economics of improving
energy efficiency (eg. IPCC Third Assessment, WGIII). Global studies date back to
Goldemberg (1988). Even in developed countries that had made large strides during the
1980s and 1990s, considerable cost-effective potential remains.11 Numerous World Bank
studies have highlighted the potential in developing countries tends to be even greater
[WDR/which are best refs?]. Many factors explain the wastage – the literature on barriers to
energy efficiency is similarly enormous. One specific factor is the continuing degree of
energy sector subsidies, which are generally recognized to be macroeconomically
detrimental.12
Reforming subsidies, or introducing stronger regulatory measures around energy
efficiency, is not easy. There are strong obstacles of political economy. In such conditions it
is not uncommon that additional issues can offer leverage to achieve reforms that would
anyway be desirable. It is perfectly possible that climate change could help to play such a role
– blaming the medicine on the need to tackle emissions make be one factor in making it
easier to swallow.
2. ‘Co-benefits’
Whilst stronger measures around energy efficiency and removal of fossil fuel subsidies may
simply improve the internal efficiency of the energy sector, there are wider potential ‘co-
benefits’, in both forestry and energy / transport sectors. Energy is a source of multiple
emissions, for example sulphur dioxide. Higher energy consumption also means greater
exposure to the impacts of price volatility in international fuel markets. The list is
surprisingly extensive and studies indicate that such ‘co-benefits’ could themselves justify a
significant degree of measures that also reduce CO2 emissions (covered in depth in IPCC
Fourth Assessment, Chapters 11 and 12).
3. Leapfrogging in infrastructure
In the context of developing countries, the most important single consideration may be
harnessing the pace of construction of new capital stock. Most of the sectors indicated in
Figure 9 are also characterised by huge inertia. Industrial equipment that consumes,
generates or processes energy has a lifetime typically measured in decades. The buildings that
consume energy, the road and rail systems that determine transport demands, and even the
pipeline and port infrastructures required for direct fuel delivery, can set infrastructure
patterns for a Century or more.
We have learned a great deal since rich countries started locking themselves in to
higher emitting patterns of infrastructure. The wasteful nature of the UK building stock
remains one of greatest headaches for the government’s energy policy. North America’s/
exceptional energy intensity, and resulting dependence on oil imports, is to an important
degree driven by choices in the transport sector made in the first half of the 20th Century.
11 eg. the UK improved its national energy productivity (ratio of GDP to energy consumption) by over 20%
during the 1990s, but the government’s Performance Intelligence Unit still estimated the potential net value of
additional energy savings to the UK economy in 2000 at over £2bn/yr).
12 WDR refs? Cite data or is this all too well known anyway now?
26
Inefficient industrial equipment installed during those decades is frequently still operating,
with continual cycles of refurbishment that can rarely bring performance up to the standard of
new plant (Alic et al, 2003). ‘Leapfrogging’ in infrastructure, by trying to make choices at the
leading edge for the long term, is thus a huge opportunity in the course of development.
4. Leapfrogging in technology
Finally, in some of the major developing countries there is the possibility of moving to the
frontier of technological developments, in both domestic investment and capturing a growing
share of the global market for energy efficient and low CO2 technologies. India’s embrace of
IT is a classic example, but in the energy sector, Brazil’s dominance of biofuel technology –
now reaping large rewards - is perhaps more relevant. Technological development based on
the large investment needs in key areas is a real opportunity, with solar PV technology
perhaps being the biggest prize of all, because of the almost unlimited resource in which
developing countries excel.
Time is not on our side. In energy use and supply, emission patterns will be set by
how the world chooses to invest tens of US$trillions capital over the next few decades,
investments that will have irreversible impacts throughout the century. The uncertainties
around global emissions growth trends, and the extent to which it depends upon choices made
about the deployment of capital, are underlined by the IEA's World Energy Outlook (IEA,
2004), which estimates that about US$16tr will be invested in energy supplies up to 2030
(about US$10tr of this in the power sector), divided roughly equally between industrialised
and developing countries. In their “reference” scenario most of the generation investments
are in carbon-intensive stock; their “alternative” scenario involves more rapid growth in less
carbon intensive investments, and although this is more expensive per unit, the scenario
actually requires less capital investment overall because of the increased efficiency of end use
(even when the end-use investments are included). The choice of path out to 2030 will have
profound implications for the structure of capital stock, and its carbon intensity, well into the
second half of this Century and even beyond.13
None of this that should deflect attention from the need for industrialized countries to get
their emissions on a declining course. Indeed, as emphasized by a leading Chinese researcher
(Zhou, 2005), it will be much harder for developing countries to achieve progress unless the
world’s industrial powerhouses simultaneously develop the requisite lower-carbon
technologies, businesses, capacities and institutional models. But a debate which ignores the
crucial importance of emissions growth in developing countries is simply not a mature
debate. And, nor would ignoring the opportunities be in the interests of developing countries
themselves, for the reasons set out here, over and above their exposure to climate change.
13 Ulph (1997) noted that 'information acquisition and irreversibility could make a significant difference to
policy advice’, but models of irreversibility effects (Pindyck (2000), Kolstad (1996a and 1996b)) appear to
have treated carbon and non-carbon intensive investments asymmetrically, assuming only the latter to be
irreversible.13 In practice both embody considerable inertia: every major investment is a decision with
irreversible consequences. The dominant net irreversibility is then carbon in the atmosphere and associated
damages. Uncertainty about impacts (relative to best estimate) consequently increase the attractiveness of
low carbon paths, to a degree that depends on the potential damages, risks and degrees of irreversibility
(see also section 3).
27
The brake on embracing such opportunities appears to be partly political (the position in
the global negotiations that developing countries have no responsibility to act), partly
institutional (the sheer difficulty of thinking long-term in the crush of development
pressures), and partly motivated by fears of economic consequences. In the final part of this
paper, I turn more formally to the policy and macroeconomic issues.
Part III: Policy and macroeconomic dimensions
Family illness has prevented completion of the third part of this paper prior to the ABCDE
conference; it will be completed for the final published proceedings. It will draw i.a. upon studies of
the global economics of atmospheric stabilisation published in Vurren, Weyant and de la Chesnaye
(2006), Edenhofer et al, eds (2006), and studies of the economics of emissions trading and the
future of the European Trading System (Grubb and Neuhoff, eds, 2006)
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