Select Committee on Economic Affairs Minutes of Evidence


Memorandum by Defra/HM Treasury

SECTION 1

Introduction

  1.  Following the recent ratification of the Kyoto Protocol, the Committee has decided to inquire on the following topics:

    —  ways in which the problem of climate change has been assessed;

    —  the key role of the Intergovernmental Panel on Climate Change in compiling and assessing technical information on climate change;

    —  the question of who bears the brunt of climate change and of the costs of controlling it.

  2.  The Committee has raised a series of specific questions that are addressed in the following sections of this submission.

SECTION 2

How are the current estimates of the scale of climate change damage derived?

  3.  Estimates of the scale of climate change are derived from projections of future climate and sea-level combined with demographic and other socio-economic data on populations and ecosystems at risk.

  4.  Damages may be expressed in physical units or monetised. The latter is in principle more convenient for economic analysis, but does not capture the full range of damages. For example what are called socially contingent effects (such as increased risk of conflict) are generally not included, impacts on environmental goods and services are often neglected, and coverage of large scale shifts in the climate system is incomplete or absent. Consideration of the full range of damages for policy purposes must therefore take account of physical assessment of the risks.

  5.  Of the monetized estimates, the social cost of carbon (SCC, or the marginal damage[8] cost per additional tonne of carbon emitted) is most relevant to cost benefit analysis. Most available estimates of the SCC are based on integrated assessment models (IAMs) eg the FUND[9] model described further in section 3, which combine the scientific and economic aspects of climate change in a single analytical framework. Climate change damage functions relate damage costs to increases in temperature, and hence SCC. These models raise concerns about partial assessment, aggregation of costs and benefits, and over-simplification. Nevertheless they represent the most self consistent basis available for estimating the SCC. Defra is currently reviewing UK advice on the SCC (currently £70 per tonne of carbon emitted with a range £35 to £140) and aims to publish revised estimates later this year. Further details concerning Government-sponsored research into the social cost of carbon are provided in Annex 1.

  6.  The Intergovernmental Panel on Climate Change (IPCC) assesses the extensive scientific information available on physical damages, most recently summarised in the Third Assessment Report (TAR). IPCC's Fourth Assessment Report, to be published in 2007, will contain much more comprehensive assessment of impacts.

  7.  There are interim assessments, importantly that provided by the recent Symposium on Avoiding Dangerous Climate Change[10], organised by Defra in Exeter at the Hadley Centre from February 1 to 3 2005. The Exeter Symposium indicated that the sensitivity of the climate system to increased greenhouse gas concentrations is likely to be greater than quoted in the TAR, and that the risks of climate change are in many cases more serious than previously thought. There are likely to be tipping points that we should strive to avoid, such as those associated with melting of ice-sheets in the Antarctic and Greenland, stability of the North Atlantic thermohaline circulation and reversal of the terrestrial land sink. Ocean acidification is newly recognised as a disturbing impact, likely to result in extensive changes to marine ecosystems. The technological options for reducing emissions over the long term already exist and significant reductions can be obtained using a portfolio of options at a cost less than previously thought.

SECTION 3

How far do the estimates of damage depend on assumptions about future global economic growth, and how valid are those growth assumptions?

  8.  Growth itself is not the issue; damage estimates depend on the profile of emissions over time and hence on the combination of economic activity, energy intensity per unit of output and carbon per unit of energy.

  9.  We are aware that the economic growth assumptions underlying the IPCC Special Report on Emission Scenarios (SRES) (see Annex 2 for details) have been criticised by the Australian statistician Ian Castles and UK economist David Henderson. The IPCC has responded to Castles and Henderson in the literature, although the issue is not completely resolved. But the case for action is not hostage to the Castles and Henderson critique. It absolutely clear that carbon dioxide (CO2) emissions are rising and other bodies, such as the International Energy Agency expect that this will continue in the absence of effective action to reduce emissions.




  10.  Integrated assessment models that have been used by Defra consultants to produce estimates of the marginal damage costs of carbon emissions (ie, the social cost of carbon) are also calibrated on the basis of relatively low-growth scenarios. In particular, FUND's base scenarios of demographic and economic change are derived from the Energy Modelling Forum (EMF) standardised scenario, though as an alternative the SRES marker scenarios A1, A2, B1 and B2 are all available. The PAGE[11] model assumes an A2 baseline scenario.

SECTION 4

How does uncertainty about the scale of the problem and its impact affect the economics of climate change?

  11.  UK policy is based on the assessment that the worst impacts of climate change can be avoided if the temperature increase can be kept below 2ºC. Recent evidence suggests that the sensitivity of the climate to increased greenhouse concentrations may be significantly, perhaps much, greater than we thought. This affects the balance of abatement costs and avoided damages. This implies the economic analysis associated with targets needs to be kept under review as the science develops.

  12.  The literature on costs of mitigation tends to show that the economy-wide costs of mitigation need not be prohibitive, provided the economy is allowed sufficient time to adjust. Assessment by the IPCC and analysis by the UK Government for the Energy White Paper both suggest that the costs of putting us on a path to stabilisation compatible with limiting eventual temperature rise to 2ºC and CO2 concentrations around 500 parts per million (ppm) need not be large—of the order 0.5 to 2 per cent GDP over 50 years—a delay of a few months in reaching a particular level of GDP (or a reduction of 0.01 to 0.02 percentage points in the growth rate compared with the long run rate of 2.25 per cent).

  13.  Annex 3 provides further details about the costs of mitigation action on climate change, modelling approaches and hedging strategies in dealing with climate change. Annex 4 provides background information about deterministic models of climate change, impact assessments and costs, and the uncertainties linked to calculating estimates of climate change damage.

  14.  The Government believes that appropriate action should be taken to avoid the worst effects of climate change by aiming at stabilising the atmospheric concentrations of CO2. The Energy White Paper (EWP), published in February 2003, accepted the recommendation of the Royal Commission on Environmental Pollution that the UK should put itself on a path to a 60 per cent reduction in greenhouse gas emissions from current levels by 2050, with real progress by 2020. This is consistent with stabilisation of CO2-equivalent atmospheric concentrations at 550 ppm, or an increase in global mean temperature of 2 to 3ºC, provided assumptions about developing country emissions and carbon cycle feedback are met. The EWP also stressed that unless early action is taken, more dramatic and more disruptive change will be needed later on. Together, the long-term stabilisation target and the pre existing Kyoto commitment and domestic target (a 20 per cent reduction of CO2 emissions by 2010) define a policy trajectory for UK climate policy.

SECTION 5

What has been the approach within the IPCC to the economic aspects of climate change, and how satisfactory has it been?

  15.  The IPCC assesses the science of climate change, climate change impacts, ways to estimate and mitigate emissions, associated costs and benefits. The IPCC also produces emissions scenarios, which project greenhouse gas emissions from world regions over the next century and are used to help estimate future climate change. Economic analysis is therefore key to several of IPCC's activities.

  16.  Economists who contributed to the IPCC Second Assessment Report (SAR) and Third Assessment Report (TAR) include Nobel Prize winners Prof J Stiglitz and Prof K J Arrow. Other authoritative economists included Dr W R Cline, Prof David W Pearce (UCL), Dr S Fankhauser, Prof J C Hourcade, Prof John Weyant (Standford), Dr Terry Barker (Cambridge), Dr Alan Krupnick (Resources for the Future), Prof Carlo Carraro (University of Venice), Prof Richard Tol (Hamburg University) and many others.

  17.  It is fair to say that economist involvement in IPCC work has occasionally given rise to some controversy. For instance, at the time of the SAR the authors of the chapter on social costs in the IPCC Working Group III (WGIII) report were at the centre of a debate on the role of global aggregate estimates of the costs of climate change. In particular, the controversy focused on the procedures that should be adopted when comparing and aggregating monetized estimates of damages across different regions of the world, and on the opportunity of adopting "equity weighting" procedures to account for differing income levels across these regions (see section 8 below for our views on this issue). The SAR experience shows the importance and the sensitivity of economic valuation when it involves attempts to produce aggregate estimates of damage costs, which involve trading off welfare effects among winners and losers.

  18.  More recently, there has been a debate on the SRES emission scenarios initiated by Ian Castles and David Henderson. The Castles and Henderson argument has three main elements: that the use of market exchange rates (MEX) instead of purchasing power parity (PPP) overestimates the gap in income between the developed and developing world; that to subsequently model convergence in incomes per capita based on such a gap is to assume unrealistically high rates of economic growth; and that to base estimates of future emissions on such rates of GDP growth would inevitably lead to pessimistic scenarios in terms of emissions of greenhouse gases (GHGs).

  19.  Fifteen IPCC scenarios authors have replied arguing that Castles and Henderson's reconstruction of their methodology is factually incorrect. In particular they say that:

    —  A number of models on which the SRES scenarios are based did make use of both MEX and PPP GDP growth rates. However, the authors decided not to include both measures throughout the course of the report so as not to generate confusion about growth rates and other scenario indicators that include GDP.

    —  PPP is a better measure for purposes of static comparisons of economic welfare (income and consumption) across different world regions and countries, but it is not a better measure for developing long-term GDP growth scenarios, as this would be inconsistent with the majority of the current literature and modelling techniques.

    —  Economic growth rate assumptions were carefully chosen in line with historic data. So that no mechanistic "gap closure" approach was followed, though in some scenarios a high degree of convergence in incomes was modelled as part of the possible futures.

    —  PPP was indeed taken into account in the various models that were used, and one of the participating models used both.

  20.  Castles and Henderson have replied that in their view:

    —  The distinction the IPCC make between GDP growth and static welfare in relation to the use of PPP is not warranted. Cross country comparisons of economic variables should always separate out "price" effects from "quantity/output" or "real" effects. Measurements of growth are interested in measures of quantity and this is not captured by valuation based on MEX.

    —  Developments in the literature over the last decade are said to make use of PPP as opposed to MEX.

    —  While some models that were used as basis for IPCC scenarios did make use of both MEX and PPP-based growth rates, the concept of PPP which the modellers adopted is, they think, not economically valid—given the resulting GDP growth rates for the four world regions presented in SRES are not credible.

    —  The convergence scenarios modelled by the IPCC reflect normative judgement about "what is equitable and fair" (ie, a rapid closing of the gap in income per capita between industrialised countries and developing countries) rather than an objective projection.

  21.  Taking PPP-based estimates of income per head in developed and developing countries from Maddison (2001) [12]and assuming convergence between income levels per head over the time frame 2000-2100, Castles and Henderson suggest that the ". . . prima facie effect of taking a PPP based gap as a point of departure at the beginning of this century is to reduce prospective world GDP in 2100 in this scenario by over one quarter". (MEX estimates predict world GDP in 2100 to be 12.3 times that in 2000, whilst the equivalent PPP figure is 9-fold). For more background information about the debate between Castles and Henderson and the IPCC authors see the 4 papers referenced in the single footnote below[13].

  22.  The OECD has also recently looked at the issue of whether PPP or MEX represents a better basis for long-term projections at a recent workshop on the definition of baselines for long-term modelling, and concluded that PPP-based measures of growth should be preferred. But the issue is still debated among modellers. One of the reasons is that while PPP-based measures have to be estimated on the basis of some bundle of goods, MEX provides much more historical data for comparison and for estimation of structural economic relationships. Hence organisations such as the World Bank and the US Energy Information Administration use MEX-calibrated models for their projections.

  23.  While it is clearly important that the issues raised by Castles and Henderson in their critique of the SRES scenarios are fully addressed by the modelers community, from a policy perspective (and in relation to the use of SRES scenarios as a basis for impact assessment in the IPCC Fourth Assessment Report—AR4) the key question is whether ultimately there is potential bias introduced by using MEX as a measure of the initial income gap in convergence scenarios which makes a material difference to our understanding of the climate change problem. A first issue is the extent to which the use of MEX as opposed to PPP affects emissions. A second issue is the relevance on any potential bias on emissions in the wider context of uncertainty in deriving climate change scenarios, bearing in mind that in the SRES scenarios the high-growth scenarios (including those that postulate convergence) do not automatically tend to lead either to the highest emissions projections or to the most severe climate changes. Annex 5 provides further details about empirical studies in the literature that have looked at the implications of the Henderson and Castle critique.

  24.  Overall our view is that Castles and Henderson have not provided a conclusive criticism of the IPCC's projections. We anticipate that the IPCC's Fourth Assessment Report will take account of the methodological arguments of Castles and Henderson and others. IPCC Working Group III (Mitigation of Climate Change) is fully engaged with the debate on exchange rates and projections of economic growth. One example is the recent expert workshop (Washington, 12-14 January 2005) which examined the role of SRES scenarios in the AR4. The issues raised by Castles and Henderson were explicitly addressed by several speakers. We understand that IPCC authors will continue paying due attention to these issues during the AR4 writing and review, and that the bases for long-term growth projections will be further explored.

SECTION 6

Is there sufficient collaboration between scientific and economic research?

  25.  There is a very high degree of co-operation and collaboration between the scientific and economic communities both within Defra, across UK government as a whole and within the IPCC.

  26.  As previously mentioned, Defra economists are currently co-ordinating work to produce revised estimates of the social cost of carbon. This work involves climate scientists, experts and economists from Defra, DTI, DfT, HMT, DfID, OfGEM and the devolved administrations.

  27.  As part of the UK Climate Impacts Programme, a new method[14] to help organisations work out the cost of climate change impacts and adaptation has been developed, in collaboration between climate scientists and economists. This project also involved training workshops run jointly by economists and climate experts. Defra is also funding an ongoing project to quantify the cost of climate impacts and adaptation over a number of time scales in the UK—this will work from quantification of costs in key sectors up to an aggregated estimate at regional and national level, and it involves economists working closely with scientific and sectoral experts.

  28.  Two areas where more collaborative work is needed are in accounting for the costs and benefits of different adaptation options, and in reconciling the discrepancies between "top-down" and "bottom-up" approaches to estimating economic impacts of climate change.

  29.  The IPCC has three Working Groups. Working Group I assesses the science of climate change, Working Group II the vulnerability of socio-economic and natural systems to climate change and options for adaptation to it. Working Group III deals with options for mitigating emissions and with emissions scenarios. There is also a Task Force dealing with methodologies to prepare greenhouse gas emission inventories.

  30.  Linked economic, statistical and technical expertise is found very widely in Working Groups II and III which account for 325 out of the 450 or so lead authors. About 18 UK lead authors contributed to Working Groups II and III.

SECTION 7

Could IPCC member governments, and the UK in particular, do more in future to contribute to the robustness of the economic analysis?

  31.  The Government strongly supports the work of the IPCC in all areas (including economic analysis) and looks forward to doing so in future. We believe that it is in everybody is interest that the IPCC work is informed by high quality economic expertise, so that despite the uncertainties inevitable in economic and statistical work it can keep representing the better basis for international negotiations and policy development.

  32.  The Government has commissioned or supported important research projects on the economics of climate change relevant to the IPCC Fourth Assessment Report. This has involved work on the costs of transition to a low carbon economy and support to the Cambridge-led Innovation Modelling Comparison Project, which is looking at the impacts of induced technological progress on the costs of climate stabilisation. It has also involved work on the costs of inaction, including the current review of the social cost of carbon but also in-kind support to the OECD research project on the benefits of climate policy.

  33.  In relation to the debate on the SRES emission scenarios, we also believe that informed debate is essential and that it was useful for Ian Castles and David Henderson to raise these issues. When the debate first emerged we provided the IPCC with funds so that David Henderson could attend a meeting to discuss the issues with IPCC modellers. We are pleased to see that the IPCC is devoting considerable effort to address the criticism to its long-term growth forecasts and more generally to keep abreast of the evolving literature on emissions scenarios. A workshop open to experts as well as Government representatives is planned for June 2005 to discuss the approach to the next round of IPCC scenarios. Defra economists as well as scientists may attend.

  34.  The UK is also keen to support an Australian proposal for an OECD workshop on long-term growth projections. This event, which is being discussed by the OECD Economic Policy Committee, may represent a further opportunity to promote the debate on the complex, technical issues involved by building economic and emission scenarios over a time horizon of one century or more.

SECTION 8

In monetary terms, the impact of change and the costs of control may be greater in rich countries than poor ones. But is this an adequate measure?


Ian Castles and David Henderson "Economics, Emissions Scenarios, and the Work of the IPCC," Energy and Environment, vol 14, no 4, 2003, pp 415-435.

Arnulf Grobler, et al. "Emissions Scenarios: A Final Response," Energy and Environment, vol 15, No 1, 2004, pp 11-24.

Nebojsa Nakicenovic et al. "IPCC SRES Revisited: a Response," Energy and Environment, vol 14, No 2 & 3, 2003, pp 187-214.


  35.  Monetary estimates reflect the underlying uncertainties on climate change impacts but are also sensitive to assumptions about discount rates and weighting and aggregation of costs and benefits accruing to different regions of the world. Calculations of this type are complex and politically sensitive. In particular, in aggregating monetary estimates of climate change damages across countries and regions with very different levels of income per capita there is an issue of how to properly reflect welfare effects in the poorest countries.

  36.  Within a utilitarian framework this problem can be addressed by explicitly "equity weighting" monetary impacts in different countries according to the ratio between local incomes per capita and a reference level of income per capita (eg average global income). Intuitively, equity weighting reflects the fact that the one pound to the poor is worth more in welfare terms than one pound to the rich. Several economists would agree that there is a conceptual link between consumption discounting (ie, adjusting for the fact that monetary costs count less in utility terms for the richer individuals of tomorrow) and equity weighting (ie, adjusting for the fact that monetary costs count more in utility terms for the poor of the current generation). Applying both adjustments is therefore conceptually consistent.

  37.  Equity weighting using incomes cannot capture all elements of inequality and there are non-monetary indicators each with their own advantages and disadvantages. However, income variables in equity weights are theoretically objective, an aggregation of many useful indicators and expressed in a useful unit (£). Whilst not perfect, monetary measures can be improved by equity weighting to make an adequate measure of the value of costs and benefits in different countries.

  38.  Interestingly the latest version of the UK Treasury guidance to economic appraisal and evaluation, also known as the Green Book (HM Treasury, 2003) [15]introduced distributional weights as a tool for assessing the distributional implications of Government projects and policies. The application of equity weighting to derive social cost of carbon estimates is an international application of the distributional weights approach.

  39.  As far as the costs of control are concerned, these are currently being predominantly met by developed countries that have signed up to binding targets under Kyoto. Developing countries, under the Convention principle of "common but differentiated responsibilities", do not have binding targets under Kyoto. The UK agrees with the principle that developed countries must take the lead in reducing emissions, given that historically they are the highest emitters. It is important for the UK to demonstrate through meeting its Kyoto targets that action to reduce emissions is possible, without great economic cost. Ultimately since the UK only contributes about 2 per cent to global emissions we need to encourage more countries to take proportionate action and this is focus of negotiations now that the Kyoto Protocol is about to enter into force.

SECTION 9

What would be the relative costs and benefits of using resources, otherwise expected to be allocated to climate change control, instead to expand international development assistance?

  40.  Undertaking a full cost benefit analysis is problematic. Any evaluation of costs and benefits would be very dependent on the underlying assumptions and prone to large uncertainties (given the long time period over which the two issues need to be compared). Another problem is the uncertainty in determining the exact impact (and for some policies cost) of current international development and climate change policies. The international development policies have been introduced over a longer time period so evaluating performance is easier. However, climate change policies have evolved rapidly making it difficult at this stage to robustly estimate all the costs and benefits.

  41.  The Copenhagen Consensus has suggested that there could be a greater welfare gain from spending on development issues (such as HIV/AIDS). However it failed to reflect some of the most serious risks of climate change, including disruption in the climate system and potential regional conflict (eg arising from water shortages). Furthermore the international carbon tax scenarios that were assessed by the Copenhagen Consensus panel are somewhat extreme and the perception that the other scenario, the Kyoto Protocol, will cause a significant economic cost is misplaced. The Intergovernmental Panel on Climate Change concluded that the cost of implementing Kyoto in 2010 for Annex I countries was in the range 0.2 to 2 per cent of GDP without the use of emissions trading and 0.1 to 1.1 per cent of GDP with trading between developed countries.

  42.  What is clear is that the cost of switching resources away from climate change mitigation is potentially very high. Whilst there is insufficient evidence for full cost benefit analysis of different resource allocations, there is a growing body of evidence on the links between the climate change and development agendas. One impact of climate change is the exacerbation of existing climate variability, such as those associated with droughts, floods and extreme events, and some new threats such as sea level rise. There is evidence that the developing world may bear the brunt of climate change. The size of Africa's land mass means that, in the middle of the continent, overall rises in temperature will be up to twice the global rise. Africa may lose more than 4 per cent of GDP with just a 1 degree Celsius temperature rise (IPCC 3rd Assessment). The largest increases in precipitation are expected in South East Asia and equatorial regions.

  43.  Already 73 per cent of the world's disasters are related to drought/famine, floods and windstorms. In 2004 the World Bank estimated annual costs of the world's natural disasters as $55 billion, with a high percentage of these losses in infrastructure. Unsurprisingly property losses are highest in richer countries because of the higher monetary value of physical assets lost. But, at current levels of climate variability, poorer countries suffer far higher losses as a proportion of GDP, with a corresponding greater drain on their potential for development. The lower capacity of poorer countries to reduce the risk of disaster impacts further exaggerates their climate change impact.

  44.  Bangladesh experienced eight major floods between 1974 and 2004. Many of these floods are considered by hydrologists to be one in 20 year events. The 1998 flood affected more than 30 million people and caused economic losses of more than US $3 billion, equivalent to 8 per cent of the country's GDP.

  45.  Humanitarian responses to disaster impacts now cost donors an annual US $6 billion or 7 per cent of official development assistance. In many cases this funding is reallocated from on-going development activities, for example in human development. According to UNEP, climate change is expected to be a major contributing factor to a projected doubling of water scarcity in Africa by 2025. The UN High Level Panel on Global Security recognises that "poverty, infectious disease, environmental degradation and war feed one another in a deadly cycle", and that climate change could exacerbate the occurrence of vector borne diseases such as malaria and lead to higher levels of food and water insecurity. Where the costs of adapting to the impact of climate change are high it could exacerbate global problems such as regional insecurity and population displacements.

  46.  It is also important to consider that climate change resource cost and international development assistance are not mutually exclusive. Some climate change policies can also facilitate cleaner development such as the flexibility mechanisms in the Kyoto protocol (the clean development mechanism) and other policies to encourage sustainable development (eg by encouraging technology transfer). Similarly considering environmental issues when allocating resources to international development assistance can make significant environmental gains at minimal cost.

  47.  The close linkages, highlighted above, mean that it would be wrong to focus on development in isolation and that expanded international development assistance could be significantly undermined by failing to act on climate change. International development assistance and climate change will be key issues in the forthcoming UK G8 presidency. One of our key aims on climate change for the presidency is to develop a better international understanding of the developmental and economic consequences of climate change. To this end, Hilary Benn and Margaret Beckett will co-host a meeting of Environment and Development Ministers. The meeting will focus on measures to help developing countries combat the growing problem of illegal logging and will consider the impact of climate change on Africa. The two issues illustrate the close links between the development and environment agendas.

SECTION 10

When are damages likely to occur and how satisfactory is the economic approach to dealing with costs and benefits that are distant in time?

  48.  We may already be witnessing the effects of climate change. For instance recent research[16] from the Hadley Centre indicated that heatwaves comparable to the one that hit Europe in summer 2003 are now four times more likely as a result of human influence on climate. This heatwave caused more than 30,000 early deaths and had an estimated direct cost of $13.5 billion. However the pattern of damage costs from climate change is likely to change over time. In the short term some sectors and countries can experience beneficial as well as detrimental impacts from climate change. For instance, agriculture can benefit from higher carbon dioxide concentrations and longer growing seasons and reduced costs of heating are likely to be widespread. However, there is no research that for any sector, suggests positive impacts from climate change as temperatures increase beyond certain levels, [17]and unless effective action is taken the worst impacts from climate change will dominate increasingly. These impacts are further outlined in Annex 4.

  49.  Discounting is the standard technique which is used by economists to compare costs and benefits that occur in different time periods. It is based on the principle that, generally, people prefer to receive goods and services now rather than later. As far as public choices are concerned, the approach to discounting which is recommended by the HM Treasury Green Book is based on the "social time preference rate" (STPR). This is the rate at which society values the present compared to the future. It incorporates an element of pure time preference as well as a component related to the fact that consumption per capita is likely to increase over time with economic growth, and if one assumes decreasing marginal utility of consumption the same change in consumption is valued differently at different points in time. The UK Treasury Green Book discounting scheme[18] starts with a discount rate of 3.5 per cent for the first 30 years, then 3 per cent for 45 years, and then a declining rate to 1 per cent. This is in line with some recent and increasingly accepted empirical literature which has shown how for a series of factors (including uncertainty on long-term economic growth) decreasing discount rate schedules may be more appropriate for policy analysis.

  50.  The STRP approach recommended by the Green Book commands broad support among UK economists, though some analysts hold different views. Some analysts argue that discount rate used for public policy assessment (including climate) should reflect observed real rates of return on long-term investments, with some adjustment for risk. According to this perspective, such returns represent the opportunity costs of investing resources to reduce damages from climate change, as well as the opportunity costs of compensating future generations for damages they may experience. By contrast, other analysts argue that when dealing with problems like climate change that have an essentially inter-generational nature the valuation of future costs and benefits should be viewed primarily as an ethical decision rather than as a traditional investment decision. In this perspective for instance the pure time preference element of discounting would not be a legitimate correction ("impatience" should not affect public decisions). On balance, it is probably safe to conclude that it is difficult to disentangle technical and ethical issues when considering the best way of aggregating costs and benefits across different generations.

SECTION 11

What other associated benefits might there be from reducing greenhouse gas emissions?

  51.  Emissions reduction can often be cost effective and ancillary benefits of mitigation policies (eg, improvement in local air quality) also offset the costs of action. Ancillary benefits are typically experienced now on a local or regional scale.

  52.  The IPCC Third Assessment Report (2001) estimates that globally ancillary benefits may be 30 per cent to over 100 per cent of abatement costs. Typically, improvement to public health and the knock-on effect to health services resulting from reductions in air pollutants account for approximately 80 per cent of the estimated total value of ancillary benefits of greenhouse gas mitigation in the USA and developed countries. In addition, there are likely to be ancillary benefits to ecological systems, agriculture and crops, building and materials, and visibility.

  53.  The co-benefits from policies to reduce greenhouse gas emissions will greatly depend on what policies are used. Opportunities for realising co-benefits, along with key areas of alignment and areas of interest for enhanced international co-operation, will be the focus of an Energy and Environment Ministerial Roundtable next month. Expert speakers will join ministers from 20 countries to discuss issues such as energy security, exploiting energy efficiency and the scope for coordinating investment in new energy technologies and systems to maximise potential synergies and benefits.

  54.  Examples from participating countries help to underline the range of co-benefits that can be derived from well designed policies which help to reduce greenhouse gas emissions. The Brazilian biofuels[19] programme and the Japanese Top Runner[20] programme provide examples of policies that have successfully yielded co-benefits.

February 2005








8   A measure of the flow of net costs of climate change impacts and autonomous adaptation. Back

9   The climate Framework for Uncertainty, Negotiation and Distribution (FUND). Back

10   Report of the Steering Committee, International Symposium of the Stabilisation of Greenhouse Gases, Hadley Centre, Met Office, Exeter, 1-3 Feb 2005 available at www.stabilisation2005.com Back

11   Probabilistic Assessment-General Equilibrium (PAGE). Back

12   Maddison, A (2001), "The World Economy: A Millennial Perspective", OECD Development Centre, Paris. Back

13   Castles, I and D. Henderson (2003a), "The IPCC Emission Scenarios: An Economic-Statistical Critique", Energy and Environment, 14 (2-3), 159-185. Back

14   "Costing the impacts of climate change in the UK", Metroeconomica, 2004, a suite of reports available from http://www.ukcip.org.uk Back

15   HMT Green Book Appraisal and Evaluation in Central Government available at: http://www.hm-treasury.gov.uk/economic_data_and_tools/greenbook/data_greenbook_index.cfm Back

16   Stott et al, "Human contribution to the European heatwave of 2003" Nature 432, 610-614, December 2004. Back

17   In a recent comprehensive review of climate change impacts, Smith and Hitz (Estimating global impacts from climate change in The Benefits of Climate Change Policies, Analytical and Framework Issues, OECD 2004) observed that a consistent pattern of marginal adverse impacts emerges across all sectors for which data were available beyond a 3-4C increase in global mean temperature. Back

18   Until relatively recently (prior to the publication of the Green Book 2003), the Government discount rate was 6 per cent per annum, but this reflected "bundling" of factors other than social time preference, such as risk and optimism bias. These now have to be addressed separately under the current guidance. Back

19   Details of this scheme can be found at: http://unfccc.int/files/meetings/cop_10/in_session_workshops/mitigation/application/pdf/041209szwarc-usebiofuels_in_brazil.pdf Back

20   Details of the scheme can be found at: http://www.eccj.or.jp/top_runner/index.html Back


 
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