Harry Clarke

La Trobe University

Economic Society of Australia, Victorian Branch.

Plan

1.Background science & politics – role of

scientific uncertainty.

2.Core economics of climate policy under

uncertainty

3.Australian policy

4.Final remarks
1. Climate science

Climate science has developed over 2 centuries in

applied & fundamental directions.

Predictions of theory are convincingly supported

by evidence.
Science – we know…

Warming is occurring. With very high probability

due to anthropogenic GGEs. The AGW
hypothesis.

Charney Sensitivity. Doubling of CO2 over pre-

industrial times (ignoring slower feedbacks) brings
≈ 30C (mgs) temp. increase. More at poles.
Science –
uncertainty….

Lots of genuine uncertainty...

Climate sensitivities uncertain & time horizon

-variable. Some feedbacks drive higher
sensitivities, aerosol cleanup may ‘unmask’
greater heating. Ice sheet melting creates
stronger LR responses. Regional effects.
IPCC & uncertainty

Uncertainties a focus of IPCC reports - clouds, aerosols,

Antarctic sea ice….etc.

e.g. in Physical Science Basis Report 43 key uncertainties

listed.
A low weight on AGW scepticism is
appropriate

Garnaut on Garnaut Review:

“…accepted views of mainstream science ‘on a

balance of probabilities’. There is a chance that it
is wrong. But it is just a chance. To heed instead
the views of the small minority of genuine
sceptics in the relevant scientific communities
would be to hide from reality. It would be
imprudent beyond the normal limits of human
irrationality.”
Is human activity significantly changing
temperatures?

Doran-
Zimmerman
(2009)

75/79
climatologi
sts said
yes.
Doran-Zimmerman
conclusion

1. The debate on the authenticity of AGW

largely nonexistent in science.

2. The challenge, is to communicate this to

policy makers & to a public that
continues to mistakenly perceive a
debate among scientists.
Politics
1957 Revelle & Suess - heating a policy concern – CO2
emissions - “large scale geophysical experiment”.

Unanimity of policy concern led to 1992 Climate

Convention & ongoing role for IPCC.

But late 1980’s marked the birth of climate change

delusionism.
Delusionism

An influential political movement rejecting science &

seeking to sow ‘seeds of doubt’’ regarding AGW.
George C. Marshall Institute & the Heartland Institute.

Same groups have denied passive smoking damage,

CFCs cause ozone layer hole, SO2 cause acid rain etc.
More...

Delusionism fostered by press balance

ideas – ‘right’ to equal treatment.

 Science has addressed delusionist claims

but claims get repeated (‘warming stopped
in 1998’).
More…

As an economist I refuse to debate the science.

No more reason to question validity of

science than to take seriously the views of
physicists who push crank money theories.
2. Climate change
economics
Ambitious – seeks to determine opportunity costs
of mitigating & not-mitigating GGEs.

Complex – irreversibility, nonlinear responses,

threshold effects thrown together in dynamic
setting with system & ethical uncertainties.

Some simplification from relatively small role

macroeconomic role of energy sector.
Evaluating via CBA a ‘real
options’ task:

Risk/uncertainty - Valuation of costs/benefits

stochastic processes.

Dynamics – stock pollutant & learning dynamics

Irreversibility – sunk cost & ecological/

environmental.
CBA Methodology

Use use CBA with uncertainty,

irreversibility & dynamics.

Many issues…...
Intertemporal
valuations

Low discount rates make sense.

Intra-generational attitudes.

Discount factor convex in discount rate.

Promptness or ‘wait-to-
learn’

 Increasing costs of abatement create incentives to act now.

Technology might provide an offset.

 Differing irreversibilities tug analysis in opposite directions.

 Sunk cost irreversibilities – delay to learn –offset by

‘no regrets’ options.
 Catastrophic irreversibilities – act decisively now –
increased flexibility via backstop options.
Convexity of damages

Forecasts of 3oC mean increase in temps, will cause

moderate damage (5-10% of GDP).

3oC = mean(2oC& 4oC) = mean (00C & 6oC)

In last case, no warming, no damage. But equal

probability of 60C warming, a catastrophe.

More uncertainty strengthens case for decisive action.

Catastrophic uncertainties

Given various possible states of world but one where:

Catastrophic costs occur with non-negligible

probability.

Should act to avoid that state irrespective of discount

rates or strategic issues. Favours unilateralism & taking
prompt action.
CBA under Knightian
uncertainty

If losses large relative to policy costs (the case!)

activism sensibly motivated by minimax regret.

A probability-free insurance principle.

 In remote case where climate science gets it wrong

we will have squandered a small bit of GDP.
Technology uncertainty

Substantial on CCS technologies, new nuclear.

Explore a portfolio of technologies

(renewables, nuclear) & focus on CCS.
General empirical
observation

Even with uncertainty there is

presumption - cost of active policy low
relative to doing nothing.

e.g. Stern & Garnaut Reviews, IPPC

(2007), Nordhaus, Weitzman (2009).
3. Australian policy

Australia heavily impacted on by unmitigated

climate change. A ‘fringe climate’ society.

Australia a ‘small country’ - our GGEs a small

fraction of global total.
Policy resolves into
focus on:

Adaptation
Mitigation
Policies helping good global response.
Adaptation

Plausibly expect 1.8-2oC warming from

current GGE concentrations.

So case for adaptation – in agriculture,

industry, urban settlements & biodiversity
resources.
Adaptations not subject to ‘free-rider’ market
failure issues of mitigation policies.

Can rely on market-driven responses & policy

responses encouraging market-driven
responses.
Example - agriculture

Policy - provide info & expand technological

choices farmers have. Market failures mean
info investment & R&D need to be a major
focus.

Redesign policies which reduce need to adapt

– e.g. drought relief.
Mitigation

If only adaptation pursued - a race to

collective disaster.

US & China provide 50% of GGEs, but 15

countries provide 80%, another 158 providing
20%. Small countries are important.

& Australia should not provide negative moral

suasion.
ETS the cheapest way to limit GGEs. Regulation
more expensive. Global ETS reduces costs by
20%. A key message for industry.

Preferred option - best ETS should charge for

GGEs on a consumption basis. Exempt exports
& subject imports to BTAs unless exporting
country charge carbon production.

Eventually all countries should charge carbon

production.
Australian CPRS will be phased in - unlimited
permits @ $10/tCO2 from 2011/12 with full
permit auctioning from 2012/13 @ ≈ $29/tCO2.

Revenues returned to households, fuel excise

offsets, trade-exposed firms, electricity
generators.
Main effect - electricity prices will rise 25% in
2012/13 – consumers face substitution
effects.

Impacts on brown coal generators but 93% of

capacity still in place by 2020.

Potential for nuclear power & renewables –

but limited background capacities.
Assessment
Should pursue ambitious targets & commit to impose
BTAs after 2025 (cf. Waxman-Markey).

Australia gains with CCS initiatives – a sound R&D

focus. Agriculture contributes 1/3 of world CO2 & most
NO & CH4. Australia should watch NZ.

Need to reduce policy uncertainty by setting up

credible climate change institutions.
4. Final Comments
Major parties could not approve CPRS in Senate. Unless
the Coalition seeks electoral oblivion the Bill will pass.

Proposed CPRS reasonable – apart from exemptions to

electricity sector.

Waiting to 2013 to decide on agriculture - but must

eventually be bought into CPRS - carbon sequestration
synergies with sustainable agriculture .
Australian Government plans will match a
comprehensive agreement in Copenhagen.

Sensible conditional & unconditional targets.

Stronger targets not sensible now though

they will be.
Final words – picked (almost) at
random
The new climatology of the American south-west……..

Science 25 May 2007:

Vol. 316. no. 5828, pp. 1181 – 1184

Model Projections of an Imminent Transition to a More Arid Climate in Southwestern

North America
Richard Seager,1* Mingfang Ting,1 Isaac Held,2,3 Yochanan Kushnir,1 Jian Lu,4 Gabriel
Vecchi,2 Huei-Ping Huang,1 Nili Harnik,5 Ants Leetmaa,2 Ngar-Cheung Lau,2,3 Cuihua Li,1
Jennifer Velez,1 Naomi Naik1

How anthropogenic climate change will affect hydroclimate in the arid regions of southwestern
North America has implications for the allocation of water resources and the course of regional
development. Here we show that there is a broad consensus among climate models that this
region will dry in the 21st century and that the transition to a more arid climate should already be
under way. If these models are correct, the levels of aridity of the recent multiyear drought or the
Dust Bowl and the 1950s droughts will become the new climatology of the American Southwest
within a time frame of years to decades.

Note–broadconsensus&imminent!
Thank you.