Consumption tradeoff vs. catastrophes avoidance: implications of some recent results in happiness studies on the economics of climate change

Recent discussion of climate change focuses on the trade-off between present and future consumption and hence correctly emphasizes the discount rate. Stern (2007) favours immediate and strong actions of environmental protection, but this has been questioned as the discount rate used is much lower than the market or commonly used rates. Focussed only on consumption trade-off, the use of these higher discount rates completely reverses the need for strong actions. However, an even more important problem has been largely neglected. This is the avoidance of catastrophes that may threaten the extinction of the human species. But ??we lack a usable economic framework for dealing with these kinds of ... extreme disasters?? (Weitzman, J Econ Lit 45(3):703?C724, 2007, p. 723). To analyse this, the comparison of marginal utility with total utility is needed. As happiness studies suggest a low ratio of marginal to total utility and as scientific and technological advances (especially in brain stimulation and genetic engineering) may dramatically increase future welfare, immediate and actions stronger than proposed by Stern may be justified despite high discount rates on future consumption, as discount rates on future utility/welfare should be much lower.     

Risk mitigation and the social cost of carbon

The social cost of carbon – i.e., the marginal present-value cost imposed by greenhouse gas emissions – is determined by a complex interaction between factual assumptions, modeling methods, and value judgments. Among the most crucial factors is society's willingness to tolerate potentially catastrophic environmental risks. To explore this issue, the present analysis employs a stochastic climate–economy model that accounts for uncertainties in baseline economic growth, baseline emissions, greenhouse gas mitigation costs, carbon cycling, climate sensitivity, and climate change damages. In this model, preferences are specified to reflect the high degree of risk aversion revealed by private investment decisions, signaled by the large observed gap between the average rates of return paid by safe and risky financial instruments. In contrast, most climate–economy models assume much lower risk aversion. Given high risk aversion, the analysis finds that investment in climate stabilization yields especially large net benefits by forestalling low-probability threats to long-run human well-being. Accordingly, the social cost of carbon attains the markedly high value of $25,700 per metric ton of carbon dioxide in a baseline scenario in which emissions are unregulated. This value falls to just $4 per ton as the stringency of control measures is successively increased. These results cast doubt on the idea that the social cost of carbon takes on a uniquely defined, objective value that is independent of policy decisions. This does not, however, rule out the use of carbon prices to achieve the benefits of climate stabilization using least-cost mitigation measures.     

Accounting for uncertainties and time preference in economic analysis of tackling climate change through forestry and selected policy implications for Scotland and Ukraine

The paper discusses the development of economic techniques for dealing with uncertainties in economic analysis of planting trees to mitigate climatic change. In consideration of uncertainty, time preference and intergenerational equity, the traditional cost-benefit analysis framework is challenged with regard to the discounting/non-discounting of carbon uptake benefits, and because it usually uses a constant and positive discount rate. We investigate the influence of various discounting protocols on the outputs of economic analysis. The idea of using the declining discount rate is also considered. Several numerical examples dealing with the analysis of afforestation for carbon sequestration in Scotland and Ukraine are provided. We show that the choice of discounting protocols have a considerable influence on the results of economic analysis, and therefore, on the decision-making processes related to climate change mitigation strategies. The paper concludes with some innovative insights on accounting for uncertainties and time preference in tackling climate change through forestry, several climate policy implications of dealing with uncertainties, and a brief discussion of what the use of different discounting protocols might imply for decision making.     

Agrarian stress and climate change in the Eastern Gangetic Plains: Gendered vulnerability in a stratified social formation

This paper reviews the complex impact of climate change on gender relations and associated vulnerability on the Eastern Gangetic Plains of Nepal and India. Field research has identified that gendered vulnerability to climate change is intricately connected to local and macro level political economic processes. Rather than being a single driver of change, climate is one among several stresses on agriculture, alongside a broader set of non-climatic processes. While these pressures are linked to large scale political–economic processes, the response on the ground is mediated by the local level relations of class and caste, creating stratified patterns of vulnerability. The primary form of gendered vulnerability in the context of agrarian stress emerges from male out-migration, which has affected the distribution of labour and resources. While migration occurs amongst all socio-economic groups, women from marginal farmer and tenant households are most vulnerable. While the causes of migration are only indirectly associated with climate change, migration itself is rendering women who are left behind from marginal households, more vulnerable to ecological shocks such as droughts due to the sporadic flow of income and their reduced capacity for investment in off-farm activities. It is clear that policies and initiatives to address climate change in stratified social formations such as the Eastern Gangetic Plains, will be ineffective without addressing the deeper structural intersections between class, caste and gender.     

A missed opportunity: The Stern Review on climate change fails to tackle the issue of non-substitutable loss of natural capital

The Stern Review on The Economics of Climate Change is one of the few cost-benefit analyses of climate change to come out in favour of immediate and decisive action to reduce greenhouse gas emissions. The choice of a low discount rate is the main reason for the Review's divergence in conclusions compared to other economic studies. I argue that the Review's ethical reasons for a low discount rate are defendable, but unlikely to find wider public support. In order to justify spending a large amount of scarce resources for the purpose of limiting climate change, it is necessary to move beyond the discounting debate. Unfortunately, the Review did not develop a persuasive argument for why climate change threatens to inflict upon future generations irreversible and non-substitutable damage to and loss of natural capital. This represents a missed opportunity as it would have provided a much more compelling case for drastic action than the Review's arguments for a low discount rate.     

Discounting and relative prices

Environmentalists are often upset at the effect of discounting costs of future environmental damage, e.g., due to climate change. An often-overlooked message is that we should discount costs but also take into account the increase in the relative price of the ecosystem service endangered. The effect of discounting would thus be counteracted, and if the rate of price rise of the item was fast enough, it might even be reversed. The scarcity that leads to rising relative prices for the environmental good will also have direct effects on the discount rate itself. The magnitude of these effects depends on properties of the economy’s technology and on social preferences. We develop a simple model of the economy that illustrates how changes in crucial technology and preference parameters may affect both the discount rate and the rate of change of values of environmental goods. The combined effect of discounting and the change of values of environmental goods is more likely to be low – or even negative – the lower the growth rate of environmental quality (or the larger its decline rate), and the lower the elasticity of substitution between environmental quality and produced goods.     

Uncertainty and risk in climate projections for the 21st century: comparing mitigation to non-intervention scenarios

Probabilistic climate projections based on two SRES scenarios, an IMAGE reference scenario and five IMAGE mitigation scenarios (all of them multi-gas scenarios) using the Bern2.5D climate model are calculated. Probability distributions of climate model parameters that are constrained by observations are employed as input for the climate model. The sensitivity of the resulting distributions with respect to prior assumptions on climate sensitivity is then assessed. Due to system inertia, prior assumptions on climate sensitivity play a minor role in the case of temperature projections for the first half of the 21st century, but these assumptions have a considerable influence on the distributions of the projected temperature increase in the year 2100. Upper and lower probabilities for exceeding 2°C by the year 2100 are calculated for the different scenarios. Only the most stringent mitigation measures lead to low probabilities for exceeding the 2°C threshold. This finding is robust with respect to our prior assumptions on climate sensitivity. Further, probability distributions of total present-value damages over the period 2000–2100 for the different scenarios are calculated assuming a wide range of damage cost functions, and the sensitivity of these distributions with respect to the assumed discount rate is investigated. Absolute values of damage costs depend heavily on the chosen damage cost function and discount rate. Nevertheless, some robust conclusions are possible.     

Policy uncertainty and diffusion of carbon capture and storage in an optimal region

Abstract

The social cost of carbon (SCC) is the value of the climate change impacts from 1 tonne of carbon emitted today as CO₂, aggregated over time and discounted back to the present day. We used PAGE2002, the same probabilistic integrated assessment model as used by the Stern Review (Stern et al., 2006), to calculate the SCC and to examine how it varies with discount rate; and find that it is not sensitive to the path of emissions on which the tonne of carbon is superimposed. The mean value of the SCC is $43 per tonne under both a business-as-usual scenario, and under a scenario aimed at stabilizing CO₂ concentrations at 550 ppm. This counter-intuitive result is caused by the interplay between the logarithmic relationship between forcing and concentration, the nonlinear relationship of damage to temperature, and discounting. However, the SCC is sensitive to a number of scientific and economic inputs to the model. Two recent distributions for the sensitivity of climate to a doubling of atmospheric CO₂ (Murphy et al., 2004; Stainforth et al., 2005) increase the mean value of the SCC from $43 to $68 and $90 per tonne. Using a pure rate of time preference of 0.1% per year, as in the Stern Review, gives a mean SCC of $365 per tonne.     

The Climate Change Benefits of Reducing Methane Emissions

The PAGE95 integrated assessment model is used to calculate the marginal benefit of immediate cutbacks in methane emissions, and compare them with the benefits of carbon dioxide reductions and the costs of methane reduction measures. The main result is that immediate cutbacks of methane bring a marginal benefit of between $30 and $260 per tonne, with a mean value of $110 per tonne. This compares to a benefit of between $10 and $50 per tonne of carbon, with a mean value of $20, for immediate cutbacks of carbon dioxide (all values in 1990 dollars). A sectoral and regional breakdown finds that two-thirds of the benefit is non-economic and only about 5% of the benefit occurs in the European Union (EU) and 8% in the USA; the vast majority of the benefit is felt in other regions, particularly in the developing world. Analysis up to 2200 shows the benefit continuing throughout the next century, peaking after 2050, even though methane stays in the atmosphere for only about a decade. This is because the surface-troposphere system typically takes decades to regain equilibrium, owing principally to the thermal inertia of the oceans. Exploring a range of alternative assumptions shows that the benefit from methane reduction is most sensitive to the discount rate. Using a pure time preference rate of 2% per yr instead of 3% per yr, almost doubles the mean benefit to $190 per tonne; a rate of 1% per yr doubles the mean benefit again to $380 per tonne.     

Activating the legacy motive mitigates intergenerational discounting in the climate game

Climate change will have dangerous impacts on future generations. Accordingly, people in the present have an obligation to make sacrifices for the benefit of future others. However, research on temporal and social discounting shows that people are short-sighted and selfish—they prefer immediate over delayed benefits, and they prefer benefits for themselves over others. Discounting over long-term time horizons is known as intergenerational discounting, and is a major obstacle to climate action. Here, we examine whether persuasive messages that activate the legacy motive—the desire to build a positive legacy—can increase the willingness of current actors to make sacrifices for future generations. Using a climate change public goods game, we find that when the benefits of cooperation accrue to decision makers in the present, high levels of cooperation are sustained, whereas when the benefits accrue to future generations, intergenerational discounting makes cooperation elusive. Crucially, when the legacy motive is activated—by promoting death awareness, feelings of power asymmetry, and intergenerational reciprocity—intergenerational discounting is attenuated, and cooperation is restored. Our results suggest climate action can be fostered by framing climate change as an intergenerational dilemma, and by crafting persuasive messages that activate people’s drive to leave a positive legacy.     

The economics of inaction on climate change: a sensitivity analysis

Abstract

Economic models of climate change often take the problem seriously, but paradoxically conclude that the optimal policy is to do almost nothing about it. We explore this paradox as seen in the widely used DICE model. Three aspects of that model, involving the discount rate, the assumed benefits of moderate warming, and the treatment of the latest climate science, are sufficient to explain the timidity of the model's optimal policy recommendation. With modifications to those three points, DICE shows that the optimal policy is a much higher and rapidly rising marginal carbon price; and that higher carbon price has a greater effect on physical measures of climate impacts. Our modifications exhibit nonlinear interactions; at least at low discount rates, there is synergy between individual changes to the model. At low discount rates, the inherent uncertainty about future damages looms larger in the analysis, rendering long-run economic modelling less useful. Our analysis highlights the sensitivity of the model to three debatable assumptions; it does not, and could not, lead to a more reliably ‘optimal’ cost of carbon. Cost-effectiveness analysis, focusing on the generally shorter-term cost side of the problem, reduces the economic paradoxes of the long run, and may make a greater contribution than economic optimization modelling.     

Is the Uncertainty about Climate Change too Large for Expected Cost-Benefit Analysis?

Cost-benefit analysis is only applicable if the variances of both costs and benefits are finite. In the case of climate change, the variances of the net present marginal costs and benefits of greenhouse gas emission reduction need to be finite. Finiteness is hard, if not impossible to prove. The opposite is easier to establish as one only needs to show that there is one, not impossible representation of the climate change with infinite variance. The paper shows that all relevant current variables of theFUND model have finite variances. However, there is a small chance that climate change reverses economic growth in some regions. In that case, the discount rate becomes negative and the net present marginal benefits of greenhouse gas emission reduction becomes very large. So large, that its variance is unbounded. One could interpret this as an indication that cost-benefit analysis is invalid. Alternatively, one could argue that the infinity is present in both the base case and the policy scenario, and therefore irrelevant; in that interpretation, cost-benefit analysis is a valid tool.     

The political economy of natural disaster damage

Economic damage from natural hazards can sometimes be prevented and always mitigated. However, private individuals tend to underinvest in such measures due to problems of collective action, information asymmetry and myopic behavior. Governments, which can in principle correct these market failures, themselves face incentives to underinvest in costly disaster prevention policies and damage mitigation regulations. Yet, disaster damage varies greatly across countries. We argue that rational actors will invest more in trying to prevent and mitigate damage the larger a country's propensity to experience frequent and strong natural hazards. Accordingly, economic loss from an actually occurring disaster will be smaller the larger a country's disaster propensity – holding everything else equal, such as hazard magnitude, the country's total wealth and per capita income. At the same time, damage is not entirely preventable and smaller losses tend to be random. Disaster propensity will therefore have a larger marginal effect on larger predicted damages than on smaller ones. We employ quantile regression analysis in a global sample to test these predictions, focusing on the three disaster types causing the vast majority of damage worldwide: earthquakes, floods and tropical cyclones.     

An Issue of Permanence: Assessing the Effectiveness of Temporary Carbon Storage

In this paper, we present a method to quantify the effectiveness of carbon mitigation options taking into account the `permanence' of the emissions reduction. While the issue of permanence is most commonly associated with a `leaky' carbon sequestration reservoir, we argue that this is an issue that applies to just about all carbon mitigation options. The appropriate formulation of this problem is to ask `what is the value of temporary storage?' Valuing temporary storage can be represented as a familiar economic problem, with explicitly stated assumptions about carbon prices and the discount rate. To illustrate the methodology, we calculate the sequestration effectiveness for injecting CO₂ at various depths in the ocean. Analysis is performed for three limiting carbon price assumptions: constant carbon prices (assumes constant marginal damages), carbon prices rise at the discount rate (assumes efficient allocation of a cumulative emissions cap without a backstop technology), and carbon prices first rise at the discount rate but become constant after a given time (assumes introduction of a backstop technology). Our results show that the value of relatively deep ocean carbon sequestration can be nearly equivalent to permanent sequestration if marginal damages (i.e., carbon prices) remain constant or if there is a backstop technology that caps the abatement cost in the not too distant future. On the other hand, if climate damages are such as to require a fixed cumulative emissions limit and there is no backstop, then a storage option with even very slow leakage has limited value relative to a permanent storage option.     

Integrated assessment of abrupt climatic changes

One of the most controversial conclusions to emerge from many of the first generation of integrated assessment models (IAMs) of climate policy was the perceived economic optimality of negligible near-term abatement of greenhouse gases. Typically, such studies were conducted using smoothly varying climate change scenarios or impact responses. Abrupt changes observed in the climatic record and documented in current models could substantially alter the stringency of economically optimal IAM policies. Such abrupt climatic changes — or consequent impacts — would be less foreseeable and provide less time to adapt, and thus would have far greater economic or environmental impacts than gradual warming. We extend conventional, smooth IAM analysis by coupling a climate model capable of one type of abrupt change to a well-established energy–economy model (DICE). We compare the DICE optimal policy using the standard climate sub-model to our version that allows for abrupt change — and consequent enhanced climate damage — through changes in the strength (and possible collapse) of the North Atlantic thermohaline circulation (THC). We confirm the potential significance of abrupt climate change to economically optimal IAM policies, thus calling into question all previous work neglecting such possibilities — at the least for the wide ranges of relevant social and climate system parameters we consider. In addition, we obtain an emergent property of our coupled social–natural system model: “optimal policies” that do consider abrupt changes may, under relatively low discount rates, calculate emission control levels sufficient to avoid significant abrupt change, whereas “optimal policies” disregarding abrupt change would not prevent this non-linear event. However, there is a threshold in discount rate above which the present value of future damages is so low that even very large enhanced damages in the 22nd century, when a significant abrupt change such as a THC collapse would be most likely to occur, do not increase optimal control levels sufficiently to prevent such a collapse. Thus, any models not accounting for potential abrupt non-linear behavior and its interaction with the discounting formulation are likely to miss an important set of possibilities relevant to the climate policy debate.     

“A convenient truth”: air travel passengers’ willingness to pay to offset their CO<Subscript>2</Subscript> emissions

Several economic reviews demonstrate the substantial costs related to climate change and consequently call for early action. These reviews, however, have been limited to measuring ‘objective’ risks and expected material damage related to climate change. The ‘subjective’ perceived risk of climate change and society’s willingness to pay (WTP) to avoid these risks are expected to provide an important additional motivation for direct action. We investigate whether and why air travel passengers—an increasingly important source of greenhouse gas emissions—are supportive of measures that increase the cost of their travel based on the polluter pays principle and compensate the damage caused by their flight. Compared to the results of the few previous studies that have elicited WTP estimates for climate policy more generally, our results appear to be at the lower end of the scale, while a comparison to estimates of the social cost of carbon shows that the average WTP estimate in this study is close to the estimated marginal damage cost. Although significant differences are found between travellers from Europe, North America, Asia and the rest of the world, we show that there exists a substantial demand for climate change mitigation action. The positive risk premium over and above the expected property damage cost assessments should be accounted for more explicitly in economic reviews as it will add to the burden of proof of direct action. Measurements of passenger WTP will help policy makers to design effective financial instruments aimed at discouraging climate-unfriendly travel activities as well as to generate funds for the measures directed at climate change mitigation and adaptation. Based on stated WTP by travellers to offset their greenhouse gas emissions, funds in the order of magnitude of €23 billion could be generated annually to finance climate change mitigation activities.     

北京市1996-2007年住宅空调致冷耗能影响因素分析

 采用气象资料和经济统计资料,以北京市为例,分析了城镇住宅空调致冷耗能的影响因素。结果显示：在一定建筑设计标准下,直接影响城镇住宅空调致冷耗能的因子主要有降温强度、城镇人口数、人均住宅建筑面积和城镇家庭空调器拥有比例。总的来说,由于目前中国城市化进程的加速,城镇人口、人均住宅建筑面积、城镇空调器拥有比例在不断增加,因此,无论气候变暖或变冷,各地空调致冷耗能不可避免地在增加。在上述因子中,气候是目前为止唯一可能起到降低能耗作用的因子。对于城市化较快的北京市,由于城镇家庭空调器拥有比例的快速增长,城镇家庭空调器拥有比例这一因子对空调致冷耗能增量的贡献率普遍最大。     

Quantifying barriers to decarbonization of the Russian economy: real options analysis of investment risks in low-carbon technologies

Russia has significant potential for reducing its carbon emissions. However, investment in new low-carbon technologies has significant risks. Ambiguous energy and climate policy in Russia, along with deterioration of the country's investment climate, create investment barriers that are well described in qualitative terms in the literature. This paper attempts to provide a quantitative analysis of these barriers. For this numerical experiment, we apply the RU-TIMES model. Using a real options methodology, we estimate the risk-adjusted cost of capital in the Russian energy sector (including energy production and consumption technologies represented in the TIMES framework) to be approximately 43% (including a risk-free interest rate) and demonstrate the high risk of investment into energy-efficient and low-carbon technologies. Any future low-carbon emissions pathway depends on the ability of the Russian government to reduce climate and energy policy uncertainties, and to reduce financial risks through improvements of the general investment climate.

Key policy insights

• The high cost of capital investment into Russian energy production and consumption may prevent the adoption of new energy-efficient and low-carbon technologies.

• These investment risks, if not addressed, will delay Russia's low-carbon transition for the coming decades.

• Adopting a clear and unambiguous long-term climate and energy policy is important to reduce these risks and alleviate some of the barriers to the new technologies.

• The first step could be ratification of the Paris Agreement and adoption of a long-term emission target for the period up to 2050.

     

Modelling risk adaptation and mitigation behaviour under different climate change scenarios

The main objective of this study is to simulate household choice behavior under varying climate change scenarios using choice experiments. Economic welfare measures are derived for society’s willingness to pay (WTP) to reduce climate change induced flood risks through private insurance and willingness to accept compensation (WTAC) for controlled flooding under varying future risk exposure levels. Material flood damage and loss of life are covered in the insurance policy experiment, while the WTAC experiment also captures the economic value of immaterial flood damage such as feelings of discomfort, fear and social disruption. The results show that WTP and WTAC are substantial, suggesting a more prominent role of external social damage costs in cost-benefit analysis of climate change and flood mitigation policies.