Memorandum by Professor Robert Mendelsohn,
1. It is a great honor to submit evidence
to the House of Lords concerning the economics of climate change.
I have been studying climate change impacts intensively for the
last 12 years. I believe our understanding of climate change is
now mature enough to make initial policy judgments about controlling
greenhouse gases. The problem is a long range one and the future
is always uncertain, but it is clearly time to act. The question
is how to start.
2. Current estimates of climate change impacts
are built using integrated assessment models (Nordhaus 1991).
These models begin with forecasts of future emissions and then
predict the cascading chain of events. From emissions, the models
predict how the stock of greenhouse gases in the atmosphere change.
This leads to a change in radiative forcing (heating) which in
turn gradually warms the oceans. After a long lag (30 years),
the oceans in turn lead to warming of the atmosphere. This change
also affects precipitation patterns. All of these changes will
affect a number of physical phenomena such as runoff, sea level,
ecosystems, and crop yields. Finally, the models predict how these
physical changes will affect society; the damages and benefits
to expect over time. The models are now reasonably thorough about
measuring economic impacts to agriculture, forestry, energy, water,
and coasts (Pearce 1996; McCarthy 2001). But the models do not
yet do a good job of capturing nonmarket impacts to biodiversity,
ecosystems, and health.
3. One early assumption in the literature
about impacts is that any change in the environment would be bad
for everyone. Climate change would lead to immediate harmful effects
for most every country in the world (Nordhaus 1991; Cline 1992).
Subsequent research has shown this assumption to be incorrect.
In most sectors that are sensitive to climate, climate response
functions are actually hill-shaped (Mendelsohn and Schlesinger
1999). That is, each sector has an "optimal climate".
This implies that warming would actually be good for regions that
are "too cold" and harmful only for regions that are
"too warm". For example, agriculture in the UK and especially
northern and Eastern Europe would benefit from initial warming
but agriculture in Africa is likely to be harmed (Mendelsohn and
4. Initial climate research also underestimated
adaptation and assumed victims would make few changes as climate
changed (Smith and Terpak 1989; Rosenzweig and Parry 1994). More
recent research has revealed that adaptation is very important
in every sector. For example, farmers will alter the timing of
planting and harvests, switch crops, change production methods,
and introduce irrigation all as adaptations to warming. A study
just completed in California reveals that a dry scenario which
would leave the state with 25 per cent less irrigation water.
However, this would reduce net farming income by only 6 per cent,
if water is reallocated to high valued farming (Howitt 2005).
Adaptation will reduce the damages from warming and increase the
benefits. Taking adaptation into account has reduced the overall
impacts from climate change substantially.
5. Future economic growth has two large
roles to play in climate change. First, economic growth will determine
the magnitude of future emissions. It is not the current or past
emissions that make climate change dangerous; it is future emissions.
The faster the economy grows, the larger future emissions will
become. However, it is not just the size of the economy, but also
its nature. Energy is the primary source of future emissions as
we burn inexpensive fossil fuels. If future growth entails less
energy, emissions will be less.
6. Economic growth also affects the damages
from climate change. As climate sensitive sectors grow, the climate
damages to these sectors also increase (Mendelsohn and Williams
2004a). For example, as agriculture and forestry grow, the absolute
magnitude of the impacts in these sectors is expected to increase.
In practice, though, the fraction of GDP in climate sensitive
sectors is likely to fall in the future. For example, agriculture
is projected to grow but less quickly than the rest of the economy.
As a result, the magnitude of impacts from climate change as a
fraction of GDP may not increase over time even though the absolute
damages will grow.
7. The IPCC has done an excellent job of
reflecting the science of climate change (Houghton et al
1996; 2001). It is truly the authoritative voice for where the
science stands. However, it has not done as good a job capturing
the economics of climate change. For example, there are serious
deficiencies in the economic components of the Third Assessment
Report of the IPCC (Houghton et al. 2001; McCarthy et
al. 2001; Metz et al. 2001). The 2001 Report failed
to provide good baselines of future economic growth in its SRES
scenarios. The SRES scenarios are fictional stories rather than
empirically based projections of likely outcomes. This failure
undercuts the value of the climate projections that were based
on the scenarios. The Third Assessment Report also moved away
from trying to quantitatively assess the value of the impacts
of climate change so that they can be compared with abatement
costs. The Second Assessment Report actually did a better job
of assessing damages even though it had to rely on older literature
(Pearce et al 1996).
8. There are many attempts to integrate
the science and economics of climate change in the literature.
This line of inquiry began several decades ago with the building
of the first integrated assessment model of climate change (Nordhaus
1991). Since then, many groups around the world have built similar
models. In addition to the integrated assessment modelers, many
others economists around the world have been active contributors
to the climate change literature. For example, CSERGE, led by
David Pearce, has made many contributions in the UK, Richard Tol
from the Netherlands has done considerable research on climate
impacts, IIASA in Austria has been working on this problem for
years, and there is an important group in Potsdam Germany.
9. Of course, with a problem as complex
and long lasting as climate change, there is need for additional
research. The UK, with its strong commitment to economics and
its solid foundation in science, is in an excellent position to
help. Better projections describing how the world will change
in the long run are needed. We need to know more about what our
mitigation options might be in the future, not just at the moment.
We need to know more about the climate sensitivity of economic
and especially nonmarket sectors (health and ecosystems). We need
to know what adaptation options are realistic in the future and
what plans need to be laid to make them happen. We need to know
how climate change will affect people across the globe, especially
in the low latitudes. We need to explore what institutions have
to be created to encourage efficient regulation of greenhouse
gases globally. The IPCC member governments and especially the
UK have the skills and resources to help considerably in this
10. The literature is becoming clearer and
clearer that the distribution of impacts from climate change will
be striking (Mendelsohn, Dinar, and WiIliams 2005). The medium
to high income countries in the mid to high latitude countries
will see benefits in some sectors (agriculture and forestry) that
are at least as large as the damages in other sectors (coastal
and energy). In other words, the net damages to mid to high latitude
countries will be very small if not beneficial this coming century.
The impacts to poor low latitude countries will be harmful across
the board. It does not matter whether one measures impacts in
dollars, effects per person, or Purchasing Power Parity (PPP),
there will be distributional impacts from climate change. Climate
change will hurt the poorest people in the world the most. The
bulk of the damages from climate change this century will be borne
largely by the poorest quartile of the world's population who
live in rural impoverished communities in the low latitudes (Mendelsohn,
Dinar, and WiIliams 2005).
11. Current estimates suggest that there
will be benefits to warming for mid to high latitude countries
over the first half of this century, which may turn to small damages
by the end of the century. There will also be net damages to low
latitude countries that will start immediately and will get only
worse over time as warming progresses. Adding these effects together,
the global impacts from greenhouse gases will be small for the
first half of the century and only gradually become larger by
the end of the century.
12. These results suggest that another ton
of carbon will cause between 0-$5 of damage this decade. This
marginal damage will rise over time as the stock of greenhouse
gases accumulate. Projected estimates of the future marginal damage
of carbon emissions lie between $50-$100 per ton by 2100. These
marginal damage estimates provide important guidance for how much
to spend on mitigation costs. At the moment, one might only want
to spend up to $5 per ton. In the future, one would be willing
to spend far more. Of course, current policy does not lock future
governments into specific mitigation policies. As each generation
learns more about climate change from both research and living
with it, future societies can adjust their policies to take into
account new insights.
13. These results suggest an initial mitigation
strategy that is relatively modest. It is consistent, however,
with what Europe is actually planning to do under the Kyoto agreement.
Counting the shrinking economies of Eastern Europe and Russia,
Western Europe is planning only modest abatement expenditures
this decade. The recent abatement proposal for the United States
(McCain-Lieberman bill) would also commit the US to a modest program.
These proposals will not stop climate change, they will only slow
it down slightly. However, modest commitments give the world a
realistic opportunity to begin. A modest abatement program makes
it far more likely that every country in the world would be willing
to participate. The world can then focus on building global institutions
to control greenhouse gases. Given how long it has taken the world
to build institutions to support global trade, it is not too early
to start building global institutions to control climate change.
Starting modestly and increasing abatement over time makes both
economic and political sense.
26 February 2005
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