The problem of climate change

The flows of greenhouse gases (GHGs) that human activity causes are larger than the planet can absorb. Thus, concentrations of GHGs in the atmosphere rise. These extra concentrations trap more heat, causing global warming. The global warming causes climate change. And climate change disrupts human activity. In the language of economics, this damage to others from emissions is an externality.

Climate change is the greatest market failure the world has ever seen. GHGs represent an externality that is different from most examples in economics in four fundamental ways. First, this externality is global; 1 tonne of CO2 emitted in the US has a similar social impact as 1 tonne of CO2 emitted in the UK. Second, emissions and the accumulation of stocks in the atmosphere have long-lasting impacts of up to a century or more. Third, the science points to inherent risks and uncertainties regarding the extent and impacts of climate change. Last, the effects of this externality are potentially very large and may not be reversible. Therefore, these features profoundly influence the relevant economic policy.

Economic policy analysis must be based on risk and uncertainty, it must consider ethics, including intergenerational concerns, and it must be global in its policy prescriptions. Failure to analyse the problem in terms of the scale of the global risks, the long term and through an international policy perspective will, and has, led to economic analysis and policy that is misleading and dangerous.

While some of the much loved traditional economic tools of marginal analysis remain useful in is context, it is clear that this approach is inadequate to guide an effective policy response on its own. The economic analysis must consider non-marginal changes in economic structures and examine radically different growth paths in the presence of significant uncertainty and risk.

People around the world are suffering from past emissions. The affects of an approximate 0.7°C increase in global average temperatures relative to pre-industrial times (mid 19th century) are already evident: floods in Mozambique in 2000 that decreased gross domestic product (GDP) by at least 10 per cent; movement of pastoral populations in Darfur as a result of extended drought, causing conflict with those in settled agriculture; retreat of glaciers in the Himalayas affecting water supplies throughout South and East Asia; heat waves of 2003 in Europe; hurricanes in the US and the Caribbean of increased frequency and intensity. Looking to the future, even if the world acts responsibly, the planet is likely to see a further 1°C to 2°C increase in average global temperatures. If, however, the world continues with business as usual (BAU), the world has around a 50-50 probability of a temperature increase exceeding 5°C above the mid 19th century (Table 9.1).

A temperature change of this magnitude would transform the planet. Only 10,000 to 12,000 years ago, when temperatures were 5°C lower than today, most of Northern Europe and North America were under hundreds of metres of ice and the distribution of human populations was restricted to areas closer to the equator. A continued failure to take responsibility for our future will result in tremendous movements of population and hundreds of millions, possibly billions, will have to move, with the likelihood of severe and protracted conflicts. While the costs of disruption on this scale are very hard to quantify, a rough calculation, presented in the Stern Review, suggests that the world may experience a cost, averaged over space, time and possible outcomes, equivalent to 20 per cent of annual consumption every year. If, however, the world takes responsibility now, the risk from climate change can probably be significantly reduced at a cost of roughly 1 to 2 per cent of GDP (between -1 and 3 per cent). Thus, the cost of strong and timely action is much less than inaction or delayed action. A decisive and committed response makes economic sense. Furthermore, as we shall argue, climate responsibility can be combined with economic growth and development. This is not a horse race between economic growth and development, on the one hand, and climate responsibility, on the other. Climate responsibility and low-carbon growth together constitute the only development and growth story of the 21st century. High-carbon growth will kill itself: first from high hydrocarbon prices and

Table 9.1 Probabilities of exceeding a temperature increase at equilibrium

(percentage)

Table 9.1 Probabilities of exceeding a temperature increase at equilibrium

(percentage)

Stabilization level (in ppm CO2e)

2°C

3°C

4°C

5°C

6°C

7°C

450

78

18

3

1

0

0

500

96

44

11

3

1

0

550

99

69

24

7

2

1

650

100

94

58

24

9

4

750

100

99

82

47

22

9

Source: adapted from Stern (2007, Box 8.1, p220)

Source: adapted from Stern (2007, Box 8.1, p220)

second, and more fundamentally, from the hostile physical environment that it would generate.

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