Uncertainty and climate change

I was at a conference on uncertainty and climate change in Berkeley last week, and gave the wrap-up panel discussion with Geoffrey Heal. We’d discussed a wide range of uncertainties and ambiguities, from future emissions scenarios to model uncertainty to perception and communication issues, and we were asked to comment on how, with so much uncertainty, economists can make useful recommendations.

Before I give the answer I came up with, a few side issues

First, as I mentioned briefly, while everyone at this workshop and many others were working on ways to reduce, manage and understand uncertainty, there is also a large and (at least until recently) very well-funded group working, to create and disseminate uncertainty, ignorance and confusion, with sufficient success that much of the political right in Australia and nearly all in the US have been (with their own complicity) deluded into thinking the problem is illusory.

Second, it’s a straightforward implication of standard economic analysis that the more uncertainty is the rate of climate change the stronger is the optimal policy response. That’s because, in the economic jargon, the damage function is convex. To explain this, think about the central IPCC projection of a 3.5 degrees increase in global mean temperature, which would imply significant but moderate economic damage (maybe a long-run loss of 5-10 per cent of GDP, depending on how you value ecosystem effects). In the most optimistic case, that might be totally wrong – there might be no warming and no damage. But precisely because this is a central projection it implies an equal probability that the warming will be 7 degrees, which would be utterly catastrophic. So, a calculation that takes account of uncertainty implies greater expected losses from inaction and therefore a stronger case for action. This is partly offset by the fact that we will learn more over time, so an optimal plan may involve an initial period where the reduction in emissions is slower, but there is an investment in capacity to reduce emissions quickly if the news is bad. This is why its important to get an emissions trading scheme in place, with details that can be adjusted later, rather than to argue too much about getting the short term parts of the policy exactly right.

A third point, raised by Michael Hanemann is that the global average conceals a lot of seasonal and regional variation. He suggested IIRC that on current estimates, a 3.5 degree global average increase corresponds to an 8 degree increase in winter temperatures in Southern California, with huge implications for water supplies derived from snowfall.

Anyway, back to my main point. The huge scientific uncertainty about the cost of inaction has obscured a surprisingly strong economic consensus about the economic cost of stabilising global CO2 concentrations at the levels currently being debated by national governments, that is, in the range 450-550 ppm. The typical estimate of costs is 2 per cent of global income, plus or minus 2 per cent. There are no credible estimates above 5 per cent, and I don’t think any serious economist believes in a value below zero (that is, a claim that we could eliminate most CO2 emissions using only ‘no regrets’ policies).

For anyone who, like me, is confident that the expected costs of doing nothing about emissions, relative to stabilisation, are well above 5 per cent of global income that makes the basic choice an easy one. Any agreement that comes out of Copenhagen or its successors will be better than no agreement.

A slightly trickier question is: what is the best target? I don’t have a good answer to this, but, given the politics of the process I don’t need one. The nature of such negotiations, with every country looking to shift as much of the cost as possible to others, ensures that there is almost no likelihood of getting an agreement that is too strong. In the present case, we can put some numbers on this. On the same kind of reasoning as I gave above, it seems clear enough that a 450 ppm target would be beneficial relative to a 550 ppm target. And, given the commitments and offers already on the table, the likelihood of anything stronger than 450 ppm is close to zero.

So, despite all the uncertainties, the policy position I would like to see Australia take to Copenhagen is clear enough. Aim for an agreement on a 450 ppm target, with emissions cuts on track for this until 2020 and with the capacity to revise later when we have more information. With all its imperfections, the currently proposed ETS (including a 25 per cent cut in emissions as part of a global agreement) is consistent with this position and therefore should be supported unless and until something better can be put in its place.

35 thoughts on “Uncertainty and climate change

  1. Perhaps I am being dense, but I am always confused in these discussion as to three different interpretations of 2% in this context? Call world income today $60 trillion. Three options:

    1) One time cost of 2%, meaning $1.2 trillion.
    2) Annual cost of $1.2 trillion (which becomes less important as we become richer).
    3) Cost is 2% of global income each year. So it is $1.2 trillion this yeat, $1.23 trillion (or whatever) next year and so on.

    Apologies if this is obvious to everyone else.

  2. The current CPRS introduction plan means that it will be at least 2012 before CPRS starts producing real reductions in emissions. So if we are really serious about urgent climate change action we should put CPRS to the side till at least 2020 and take direct action on the big ticket emission items for which there are commercially available solutions. There is no reason why at least the following action cannot be in place before the next election:
    1. Set up a series of contracts for the supply of clean electricity.
    2. Ditto for the conversion of coal fired power stations to gas fired.
    3. Ditto for the reduction of net emissions in general. (Allows room for proposals such as charcoal sequestration.)
    3. Announce that regulations will be introduced that will limit the average fuel consumption of new cars to 5 litres/100km starting Jan 2010 with the limit ramping down to one litre/100km by 2020.
    4. Expand current programmes and introduce new programmes to encourage small scale efforts to reduce net emissions.

    The size of the contracts should be large enough to ensure that total fossil carbon related emissions will be reduced by at least 30% by 2020.

  3. I like the line of argument in the post, but let’s pause for a moment and consider the adequacy of a 450ppm target.

    Back as far as the Stern Review (Executive Summary, Figure 2, 2006) we were told that 450ppm means a 50% chance of exceeding 2C, which, frankly, is dangerous. The same graph gave us a 5% chance of exceeding 3.8C which is near the threshold for the end of civilisation as we know it.

    Those calculations were in terms of short-term “Charney” feedbacks only. Double it if you take James Hansen’s stuff seriously.

    The next thing to consider is whether a 60% reduction by 2050 will get us to 450ppm or into overshooting. If we overshoot, that implies net negative emissions later.

    Well might we research and revise as we go!

  4. And just to support your point

    @Brian Bahnisch

    unless we prevent substantial decomposition of Arctic permafrost — (plus 1degC for that) we get a feedback that makes our 60% reduction moot. So our interim target has to focus on stabilising as close to 400 (if not lower) as possible.

  5. I was at a conference on uncertainty and climate change in Berkeley last week…

    What? ProfQ isn’t videoconferencing anymore?!

    I’m sorry, but flying half way around the world to gasbag about climate change is the very height of hypocrisy. All climate change conferences should be insist on videoconferencing for any delegates who have to travel more than a few hundred kilometres. If the organisers of such conferences can’t do this simple thing, what can we expect of the rest of society?

  6. @TerjeP (say tay-a)

    “Quicker if you think the way they did during the Manhattan Project.”

    And exactly could be said of Concentrating Solar Thermal with storage. A Manhattan project style rollout of CST could almost completely replace coal in a shorter space of time than nuclear, GENIII or GENIV.

    Do not be deluded by Peter Lang’s false analysis and Tom Blee’s false promises. GEN IV in not in production anywhere in the world nor has the industrial process to reprocesses the fuel been demonstrated in anything other than laboratory conditions. GEN IV has more than one technological barrier to overcome and is at least 20 years away from even a pre-production prototype of a complete IFR. Also I am not against GEN IV nuclear as I fully support the LFTR style reactor and would welcome its deployment to process existing spent nuclear fuel however this would be only in the framework of a mainly renewable solution

    CST with molten salt storage is, by contrast, in pre-production right now at Solar Tres after a completely successful lab scale project called Solar Two that demonstrated all aspects of molten salt as a working fluid and 10 hour storage. With a small amount (less than 10%) of supplemental fuel CST power plants are not intermittent and can replace baseload power plants. They can be rolled out much faster than nuclear and will be a far better solution than nuclear will ever be

  7. @carbonsink

    I like the inconsistency of those who deny climate change. On the one hand they argue that even if it were true, it would be pointless for any individual country to do anything as it wouldn’t make any difference BUT they then turn around and criticise individuals who believe climate change is real for not trying to save the world from climate change by relying on simply changing their own behaviour. So a country makes no difference at all, but one individual not hopping on a plane will make it all go away. What is worrying is that this type of thinking seems to be achieved without resort to drugs.

    My view is that it is increasingly looking as though we may have left it too late, so I intend to do all the air travel I can before the eventual desperate attempt to save the unsaveable.

  8. John, one point neglected in the costs and benefits of mitigating greenhouse gases is that in the process you clean up a lot of associated pollution.

    Even in Australia, pollution associated with vehicular emissions costs billions of dollars annually. The costs in more heavily polluted places like China must be gargantuan.

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