An Introduction to Climate Change Economics and Policy

Felix R. FitzRoy, Elissaios Papyrakis

• Publisher: Routledge
• Year: 2016
• eBook ISBN: 9781317669067
• Topic: Politics & International Relations
• Subtopic: Business General
• Index: Politics & International Relations

The 2nd edition of An Introduction to Climate Change Economics and Policy explains the key scientific, economic and policy issues related to climate change in a completely up-to-date introduction for anyone interested, and students at all levels in various related courses, including environmental economics, international development, geography, politics and international relations.

FitzRoy and Papyrakis highlight how economists and policymakers often misunderstand the science of climate change, underestimate the growing threat to future civilization and survival and exaggerate the costs of radical measures needed to stabilize the climate. In contrast, they show how direct and indirect costs of fossil fuels – particularly the huge health costs of local pollution – actually exceed the investment needed for transition to an almost zero carbon economy in two or three decades using available technology.

1 Introduction

DOI: 10.4324/9781315769318-1

Climate change and the political landscape

The first edition of this book was written during the Great Recession of 2008–2009, an event that still casts long shadows in the form of persistently high rates of un- and under-employment and slow growth of most wages in many developed economies under misguided austerity policies. Just before the financial crash, former US Vice-President and climate campaigner Al Gore had been awarded the Nobel Peace Prize, jointly with the Intergovernmental Panel on Climate Change (IPCC) for their Fourth Assessment Report in 2007. Although surface warming seemed to have slowed down since 1998, this and the Fifth Assessment Report in 2013–14 contained ever-starker warnings about the threat of climate change and the urgency of mitigation measures to reduce greenhouse gas (GHG) emissions. But as scientists criticized these very conservative reports for neglecting ‘slow’ feedback effects that are difficult to quantify, Arctic sea ice and snow cover were receding far more rapidly than predicted, which will accelerate warming and sea level rise. Then, 2014 turned out to be the hottest year since records began, and 2015 has been even hotter, while faster warming measured in the deeper Pacific Ocean explained most of the previous, slower surface warming.

After a long sequence of inconclusive UN climate conferences and inadequate national and EU targets for emissions reduction announced in recent years, the latest international climate summit (COP 21) in Paris finally reached a ‘landmark accord’, hailed by politicians and participants as a major breakthrough.¹ For the first time, virtually all countries did agree in principle on the 2°C warming limit, and even on the desirability of a 1.5°C limit. However, the agreement offered no measures to achieve these goals beyond seriously inadequate ‘Intended Nationally Determined Contributions’ (INDCs), with no timetables, sanctions, carbon taxes or trading, and only token funding plans for poor countries. A five-year review process and transparency requirements offer a glimmer of hope for changing aspirations into actions, but implies that effective policies will probably be dangerously delayed. Of course, the 2°C target is itself much too high – actually a ‘recipe for disaster’ according to leading climate scientist James Hansen, who summarized the Paris Agreement more pessimistically than the politicians: ‘It’s just worthless words. There is no action, just promises.’

The sheer flood of commentary and information on the science, policy and economics of climate change has left many people unclear or confused on key questions – just how great and how urgent is the threat from climate change, and what will it cost to take appropriate action? For many years, confusion has been spread deliberately by lobbyists for the fossil fuel industries (some of whom had previously worked in a similar capacity for tobacco companies) and a few eccentrics who just ignored the real science. Confusion has been fostered by the media everywhere, including public service broadcasters such as the London BBC, which has often given more-or-less equal coverage to warnings by serious scientists and to denials by lobbyists masquerading as honest ‘sceptics’. Systematic public education on these vital questions has been neglected in most countries.

Much has also been written on policy for reducing GHG emissions from various perspectives. Economists have usually ignored the possibility of large-scale loss of life under catastrophic climate change if present policies are continued with ‘business as usual’ (BAU). They also exaggerate the costs of mitigation by neglecting the additional health and efficiency benefits from energy saving, conservation agriculture and a greener economy, though the IMF has recently estimated just the health costs of local air pollution at 3 per cent of global gross domestic product (GDP). Yet, radical mitigation could be achieved by investing about 4 per cent of global GDP, which would of course also save expenditure on fossil fuels of about the same magnitude. However, there are always political costs of change. Increasing efficiency by shifting taxes from ‘goods’ such as labour to ‘bads’ like pollution, and switching subsidies from fossil fuels and industrial agriculture to sustainable alternatives, does generate strong opposition from the losers and their government supporters. To avoid the risk of catastrophic climate change most proved reserves of fossil fuels would have to be left in the ground, thus writing off the main assets of some of the most powerful and wealthy multinational and state-owned corporations.

Structure of the book

Any book on the economics and policy of climate change needs to be rooted in the science of climate change and what it implies for how we react or should react as a global society. Chapter 2 provides a brief, non-technical overview of consensus on the basic science of climate change. It explains the role of greenhouse gases and carbon sinks, as well as the key feedback mechanisms that are likely to accelerate the pace of climate change and risk of runaway warming, such as methane emissions from thawing permafrost, and decreased surface albedo or reflectivity as ice and snow cover recede.

Most writers on the consequences of climate change acknowledge that the world’s poorest countries will bear the greatest burden of water shortages and failing food supply. However, most discussions of policy response to climate change pay little or no attention to agriculture, which is of particular importance for the livelihoods of billions of poor households in the developing world (while accounting for tiny fractions of output and employment in developed countries).

Chapter 3 examines the prospects for agriculture in a changing climate, summarizing extensive evidence that modern agriculture is already under severe threat from the very same methods that have dramatically raised yields – as well as water and energy requirements – over the past 50 years. The predicted rising temperatures and worsening droughts in major food-producing regions that are already hot and arid, are likely to have devastating consequences for agriculture, with global impact. Each additional temperature rise of 1°C during the hot growing seasons of many important agricultural areas is predicted to reduce grain yields by at least 10 per cent. Large-scale crop failures resulting from future warming and water shortages in such areas, would cause prices of staple foods to rise dramatically, and indeed lead to mass starvation among the world’s poorest peoples.

Historically, famines have always been local or regional, and there has never been a global food shortage, but the combination of declining water reserves, increasing temperatures and growing population in the developing countries means that agricultural catastrophe, probably accompanied by global conflict, becomes the most immediate threat from continued climate change. Surprisingly perhaps, simple well-tried techniques of conservation, or no-till agriculture and large-scale reforestation, could substantially reduce this threat. As well as lowering the GHG emissions from modern agriculture, these methods reverse currently accelerating carbon loss from eroding soils, and actually capture atmospheric carbon in accumulating soil organic material. Input costs are reduced, and sustainable yields increased in the long run, so abatement of GHG emissions can be combined with the co-benefits of more efficient, resilient and sustainable farming (that also produces healthier food). Further mitigation measures are, of course, urgently required, as even the most robust agriculture will ultimately be decimated if runaway warming is triggered by growing fossil fuel consumption.

Chapter 4 looks at the links between economic growth, well-being and the environment. A major theme of our approach is that the costs of climate change mitigation have been exaggerated under the influence of fossil fuel lobbying, and the prevailing ideology of ever-increasing material consumption and economic growth, whatever the real environmental costs. One reason is that many policies to reduce emissions will have substantial co-benefits, in the form of reduced pollution and better human and animal health in the short to medium term. A second point is that possibly slower economic growth due to mitigation policies is not really a ‘cost’ in the advanced economies. In fact, 30 years of careful survey research by social scientists shows clearly that, in rich countries, subjective well-being does not increase with average real incomes in the long run (though short-term economic fluctuation certainly influences welfare, but with negative effects of recession offsetting the gains from recovery). Other reasons are the erosion of ‘social capital’ and human relations that is often the price of material growth, and the importance for subjective well-being of relative income, particularly when basic needs have been met. Recent surveys suggest that, even in China, where fast growth and poverty reduction have been absolute priorities, rapidly increasing inequality has been accompanied by declining happiness and life satisfaction.

It follows that, even if mitigation policies to reduce emissions also slow down the rate of material growth in rich countries, this does not imply a future cost in terms of reduced subjective well-being. In poor countries, which are the main focus of Chapter 5, economic growth can bring real benefits to all, though most of the benefits are usually appropriated by a wealthy minority. Sustainable development and distributional justice, without the environmental degradation and growing inequality that have hitherto always accompanied early industrialization, should thus become a major goal of international policy. The developed economies are responsible for most of the existing stock of GHGs in the atmosphere, and most discussion of policies for abatement has focused on these countries. But the largest developing countries, China and India, are now among the fastest-growing polluters (and economies), and China has overtaken the US in total emissions. We will therefore consider policies for reducing GHG emissions in both developing and developed countries, as well as the related issues of aid, trade and globalization in relation to the environment and sustainable development.

In Chapter 6 we argue that the ethical principles of justice provide an essential foundation for policies to protect unborn generations and the poorest countries from climate change, though this aspect has been neglected by many economists. Related issues arise in connection with current and persistently inadequate aid for these nations, in the face of growing threats to agriculture and water supply, and rules of international trade that mainly benefit the rich countries. Increasing aid for the world’s poorest peoples can be an integral part of effective mitigation. With 20 per cent of carbon emissions from (mostly tropical) deforestation, carbon credits for forest preservation would combine aid to poorer countries with one of the most cost-effective forms of abatement. Perhaps the most cost-effective but politically fraught policy reform would be the removal of several hundred billions of dollars of direct annual subsidies from the two biggest recipients in the OECD – destructive industrial agriculture and fossil fuels. A small fraction of this would accelerate the already rapid rate of technical progress and investment in renewable energy in many areas, as well as encouraging the essential switch to conservation agriculture.

Turning to international agreements in Chapter 7, we evaluate existing and proposed mechanisms as a means to reduce global emissions. With few incentives for mitigation, and the absence of sanctions against the worst polluters such as China and the US, Kyoto has largely been a failure in the fight against climate change. Emissions trading in the EU has been equally unsuccessful in its first phase, with free distribution of carbon allowances or permits to the biggest emitters, who have used their market power to raise prices and generate huge windfall profits. Permit prices have fluctuated, but generally they have remained far too low to provide an adequate incentive for investment in alternative or decentralized energy generation. While more permits should be auctioned in future stages of the EU ETS, there is always strong industry lobbying for exceptions.

Chapter 8 reviews the economic instruments and incentives for reducing GHG emissions. Although carbon taxes have many theoretical advantages, China plans to introduce a comprehensive carbon cap-and-trade system, but with too low a carbon price initially to be effective. Applied ‘upstream’ to all producers and importers of fossil fuels, cap and trade could improve considerably on the European system that only covers large industrial emitters, and perhaps be politically more acceptable than new taxes. This long-overdue initiative by China may encourage other countries to follow, so that international, and ultimately global, carbon trading could result. A carbon tax or ‘fee and dividend’, with all revenues returned equally to all citizens of a country, could also gain majority support as most people would benefit. However, there is very little prospect at the moment of starting with one of the far-reaching ‘top-down’ global agreements on carbon trading or taxation that have often been proposed, before there is more experience with functioning national or regional systems.

Most economic analysis of climate change and mitigation, as we explain in Chapter 9, has seriously underestimated the risks of runaway, irreversible warming under current policies, or BAU, and resulting catastrophic effects on third-world agriculture that could lead to starvation for billions of the world’s poorest people. At the same time, the costs of switching to sustainable conservation farming and alternative energy supply have been exaggerated by agribusiness and fossil fuel industries. Economic growth is simply assumed to continue unabated for the next century or two, and the worst (but assumed to be unlikely) impact of climate change is estimated by standard ‘integrated assessment’ models (IAMs) as a few per cent of a much larger global GDP.

As pioneering climate economist Nicholas Stern and others have pointed out, IAMs essentially assume their main results (including growing populations with no large-scale loss of life) and are based on fundamental misunderstanding of the latest climate and environmental science, as well as neglect of the basic ethical issues. Really catastrophic outcomes of runaway warming are not only possible, but even likely, if GHG emissions are not reduced much more rapidly than under current targets. The global conflict potential of large-scale starvation in the poorest regions, and the collapse of fragile but nuclear-armed states will threaten prosperity and security even in the most affluent countries. Prudence and concern for the welfare of our children justify major investment in mitigation, as insurance against these risks. In the developed countries we have the additional ethical responsibility for having produced most of the GHGs in the atmosphere today. The biggest developing nations are now catching up as polluters, while devastating their environments and the health of their citizens, as well as increasing the likelihood of globally catastrophic climate impact in the future. These countries are repeating all the mistakes made by the West in earlier industrialization, with little public awareness of the prime threat to their own populations. A refocusing of trade and aid policies to promote ‘cleaner’, sustainable development thus becomes all the more urgent.

In Chapter 10, which concludes the book, we show that the current economic crisis offers huge opportunities for ‘green fiscal policy’, government spending on labour-intensive, energy-saving projects (that would also reduce unemployment, particularly in construction sectors that have been hardest hit by collapsing housing bubbles), and of course on renewable energy. These opportunities have been largely missed, with only a very small share of green projects in the stimulus packages of the major economies.

In our discussion of policy responses to climate change and environmental degradation we emphasize the ethical and distributional issues, to complement the economic, cost–benefit aspects that usually dominate the discussion. We find that substantial mitigation can be achieved with measures that actually improve health and welfare, and that most of the perceived costs of the necessary and drastic emissions reduction are political and distributional. There are also real psychological costs of changing familiar habits, even when more environmentally friendly behaviour also brings personal benefits in the long run. So we come back to the crucial issues of public education about the magnitude of the threats facing us all and, more optimistically, about the feasibility and multiple benefits of effective ‘insurance’ policy, issues that summarize the two main aims or themes of this book.

Note

1. Website: Stavins, R. (2013) ‘The Warsaw climate negotiations, and reason for cautious optimism’, An economic view of the environment – blog, Harvard Kennedy School, 28 November, available at http://www.robertstavinsblog.org/2013/11/28/the-warsaw-climate-negotiations-and-reason-for-cautious-optimism/.

2 Basic science – and some politics – of climate change

DOI: 10.4324/9781315769318-2

The IPCC’s Fifth Assessment Report (AR5), published in October 2013, confirmed the overwhelming scientific consensus on the main causes of climate change – burning fossil fuels and land use change, and the urgency of major mitigation efforts. However, like the earlier reports it still suffers from the inevitable conservat...

Table of contents

• Cover Page
• Half Title Page
• Edition
• Series
• Title Page
• Dedication
• Dedication
• Contents
• Preface
• Acknowledgements
• 1 Introduction
• 2 Basic science – and some politics – of climate change
• 3 Sustainable agriculture Sequestering carbon for food security
• 4 Economic growth, well-being and sustainability
• 5 Development in a changing climate
• 6 Ethics and climate change
• 7 Kyoto, Paris and other international environmental agreements
• 8 Incentives for mitigation Carbon taxes and emissions trading
• 9 The costs of climate change and the benefits of mitigation
• 10 Green fiscal policy From austerity to full employment in a low-carbon economy
• Bibliography
• Index