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The Economics of Avoiding Dangerous Climate Change

The Economics of Avoiding Dangerous Climate Change

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erry Barker, University of Cambridge, UK


Tyndall Centre Working Paper 117, June 2008

Summary:

The problem of avoiding dangerous climate change requires analysis from many disciplines. Mainstream economic thinking about the problem has shifted with the Stern Review from a single-discipline focus on cost-benefit analysis to a new inter-disciplinary and multi-disciplinary risk analysis, already evident in the IPCC Third Assessment Report. I argue that this shift is more evidence of the failure of the traditional, equilibrium approach in general to provide an adequate understanding of observed behaviour, either at the micro or macro scale. The economics of the Stern Review has been accepted by governments and the public as mainstream economic thinking on climate change, when in some critical respects it represents a radical departure from the traditional treatment. The conclusions regarding economic policy for climate change have shifted from “do little, later” to “take strong action urgently, before it is too late”.

This editorial sets out four issues of critical importance to the new conclusions about avoiding dangerous climate change, each of which have been either ignored by the traditional literature or treated in a misleading way that discounts the insights from other disciplines: the complexity of the global energy-economy system (including the poverty and sustainability aspects of development), the ethics of intergenerational equity, the understanding from engineering and history about path dependence and induced technological change, and finally the politics of climate policy. I argue that equilibrium economics fails to provide an adequate and coherent explanation of why human behaviour is leading to climate change (via economic choices and the use of the atmosphere as free waste waste disposal) with the aim of guiding climate policy. In contrast, the Stern Review considers traditional cost-benefit analysis as a marginal approach inappropriately applied to global climate change, which is a significant, multidisciplinary and systematic problem. This is one reason for the intemperate response from some traditional economists to the Stern Review. Their criticisms illustrate the sensitivity to the implied criticism of their methodologies and conclusions, when equilibrium economics underlies most text books of economics and journals of economic theory.
erry Barker, University of Cambridge, UK


Tyndall Centre Working Paper 117, June 2008

Summary:

The problem of avoiding dangerous climate change requires analysis from many disciplines. Mainstream economic thinking about the problem has shifted with the Stern Review from a single-discipline focus on cost-benefit analysis to a new inter-disciplinary and multi-disciplinary risk analysis, already evident in the IPCC Third Assessment Report. I argue that this shift is more evidence of the failure of the traditional, equilibrium approach in general to provide an adequate understanding of observed behaviour, either at the micro or macro scale. The economics of the Stern Review has been accepted by governments and the public as mainstream economic thinking on climate change, when in some critical respects it represents a radical departure from the traditional treatment. The conclusions regarding economic policy for climate change have shifted from “do little, later” to “take strong action urgently, before it is too late”.

This editorial sets out four issues of critical importance to the new conclusions about avoiding dangerous climate change, each of which have been either ignored by the traditional literature or treated in a misleading way that discounts the insights from other disciplines: the complexity of the global energy-economy system (including the poverty and sustainability aspects of development), the ethics of intergenerational equity, the understanding from engineering and history about path dependence and induced technological change, and finally the politics of climate policy. I argue that equilibrium economics fails to provide an adequate and coherent explanation of why human behaviour is leading to climate change (via economic choices and the use of the atmosphere as free waste waste disposal) with the aim of guiding climate policy. In contrast, the Stern Review considers traditional cost-benefit analysis as a marginal approach inappropriately applied to global climate change, which is a significant, multidisciplinary and systematic problem. This is one reason for the intemperate response from some traditional economists to the Stern Review. Their criticisms illustrate the sensitivity to the implied criticism of their methodologies and conclusions, when equilibrium economics underlies most text books of economics and journals of economic theory.

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Published by: Tyndall Centre for Climate Change Research on Aug 29, 2008
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09/03/2010

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The Economics of Avoiding DangerousClimate Change
 
Terry Barker
 
June
 
200
8
 
Tyndall Centre for Climate Change Research
Working Paper
11
7
 
Springboard Editorial for 
Climatic Change
Issue on the Stern Review
1
THE ECONOMICS OF AVOIDING DANGEROUS CLIMATE CHANGE
Terry Barker, University of Cambridge, UK 
Abstract
The problem of avoiding dangerous climate change requires analysis from many disciplines.Mainstream economic thinking about the problem has shifted with the Stern Review from asingle-discipline focus on cost-benefit analysis to a new inter-disciplinary and multi-disciplinaryrisk analysis, already evident in the IPCC Third Assessment Report. I argue that this shift ismore evidence of the failure of the traditional, equilibrium approach in general to provide anadequate understanding of observed behaviour, either at the micro or macro scale. Theeconomics of the Stern Review has been accepted by governments and the public as mainstreameconomic thinking on climate change, when in some critical respects it represents a radicaldeparture from the traditional treatment. The conclusions regarding economic policy for climatechange have shifted from “do little, later” to “take strong action urgently, before it is too late”.This editorial sets out four issues of critical importance to the new conclusions about avoidingdangerous climate change, each of which have been either ignored by the traditional literature or treated in a misleading way that discounts the insights from other disciplines: the complexity of the global energy-economy system (including the poverty and sustainability aspects of development), the ethics of intergenerational equity, the understanding from engineering andhistory about path dependence and induced technological change, and finally the politics of climate policy. I argue that equilibrium economics fails to provide an adequate and coherentexplanation of why human behaviour is leading to climate change (via economic choices andthe use of the atmosphere as free waste waste disposal) with the aim of guiding climate policy. In contrast, the Stern Review considers traditional cost-benefit analysis as a marginalapproach inappropriately applied to global climate change, which is a significant,multidisciplinary and systematic problem. This is one reason for the intemperate responsefrom some traditional economists to the Stern Review. Their criticisms illustrate thesensitivity to the implied criticism of their methodologies and conclusions, when equilibriumeconomics underlies most text books of economics and journals of economic theory.
 Tyndall Working Paper No. 117, June 2008Please note that Tyndall working papers are "work in progress".Whilst they are commented on by Tyndallresearchers, they have not been subject to a full peerreview. The accuracy of this work and the conclusions reached are the responsibility of theauthor(s) alone and not the Tyndall Centre.
1
This Working Paper is a preview. The original publication will be available atwww.springerlink.com.
 
2
1 Introduction
Since the early 1990s, it has been internationally recognized that one consequence of economic activity has been the accumulation of greenhouse gases and that this may lead toclimate change. This already threatens development in poor countries that are mostvulnerable to climate variability. If unchecked, it will threaten future generations withunknown but potentially catastrophic climate events, given the availability of fossil carbon atcurrent prices relative to carbon-free alternatives, which could raise concentrations to levelsnot seen for millions of years. At the same time the costs of reducing the emissions have been agreed as negligible in relation to expected growth in incomes. Yet, after 17 years,global action has been limited and emissions have continued to grow. Indeed, the politicalrecognition of the urgency of the problem has only become evident at a global scale since the publication of the Stern Review of the economics of climate change in 2006.One reason for this delay has been the response by a clique of economists, dating from the publication of the first IPCC Report in 1990, to the concern and calls for action by the climatescientists. The response came in the form of the mis-application of a tool developed byequilibrium economists for prescriptive public policy: the cost-benefit analysis. This editorialaddresses the question of how and why the focus of the
economics
of climate change has shiftedfrom the single-discipline cost-benefit analysis, as in the IPCC Second Assessment Report in1995, to the multi-disciplinary uncertainty analyses in the subsequent IPCC Reports of 2001 and2007 and the radically different policy prescriptions of the 2006 Stern Review.The application of traditional cost-benefit analysis has yielded, with some exceptions, policy prescriptions of insignificant carbon taxes and delayed action until more information is availableon the problem and more R&D has been done to lower the costs of any response. The newmainstream uncertainty analysis, in contrast, suggests that a political global decision needs to betaken urgently on targets to avoid dangerous climate change and that cost-effective and equitable policies and measures should be implemented strongly without delay to accelerate progresstowards a complete decarbonisation of the world economy.Defining dangerous in this context is a social and political task. Implicitly some progress has been made with the European governments’ 2
˚
C target for average long-term globaltemperatures above pre-industrial levels, the G8’s 50% reduction in global GHG emissions below 1990 levels by 2050 as agreed by the meeting in Heiligendamm, Germany, June 2007,and the “deep cuts” of the UNFCCC Bali Action Plan of December 2007. The AR4 WG3Summary for Policymakers gives an indication of just how deep the cuts will have to be. It presents six scenarios from the literature on the scale of action required. For a chance less than50:50 that the target will be met, the scenarios suggest that global CO
2
emissions will have to be between 50% to 85% below 2000 levels by 2050, and becoming negative (through sequestrationand storage) by 2070 and beyond. Therefore to be reasonably sure of avoiding dangerousclimate change defined as a 2
˚
C rise or less, the world should be aiming for completedecarbonisation by 2050 or earlier, to be safer. All sectors in all countries should be aiming tostop emitting GHG into the atmosphere as soon as possible without excessive cost
2
. Without
2
The carbon price associated with this target is not the topic of this paper, but it is of great interest. Withoutsufficient literature to assess such a price, it is necessary to extrapolate from the AR4 literature on less stringenttargets (Barker 
et al 
, 2007, pp. 636, 648 and 659-661). A precautionary, provisional estimate for a global pricefor the 2
˚
C target appears to start in the range $US80 to $US100/tCO
2
by 2020 and earlier if possible, risingafter 2020 and all in year 2000 prices.

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