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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