Economics of Climate Change

Group - 9
Akshat Jain(WMP4007)
Anindya Sharma(WMP4012)
Deepak Gupta(WMP4024)
Gaurav Gadhia(WMP4027)

Wednesday, December 08, 2021

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What is Economics of Climate Change?

 Climate change is an externality with a difference:

o Global
o Long-term
o Uncertain
o Potentially large and irreversible
From An Economic Perspective Climate Change is a
Unique “Externality”

• The emission of greenhouse gasses imposes costs on

others that are not borne by the emitter.

• The costs will be felt over a long time period and over the
entire world.
• But, the exact nature of costs is uncertain: they will be
shaped by policies, market mechanisms, & other events.

• Those most affected—future generations– cannot

speak up for their interests
There is now an overwhelming body of scientific evidence that
human activity is causing global warming, with the main
sources of greenhouse gases as:
Increase in Global Temperatures

Recent estimates suggest that, even if emissions peak in the next

decade or two and then fall sharply, the impact on global temperatures will still be
very large
 Current and Projected emissions
 Rich countries dominate current emissions;
 Without action to mitigate, emissions will rise strongly; and
 Emissions from developing countries are likely to rise more rapidly.

This implies that both stronger ambition on the part of the rich countries and the
involvement of developing countries will be necessary if emissions are to be substantially
reduced.
 SMALL CHANGES CAN LEAD TO
BIG IMPACTS
• A 1 degree change in temperature can mean millions of dollars in damage if
the variance is from 32 degrees F

• The impact of the 1 degree F variance from 32 degrees F gets even larger if
it is accompanied by precipitation

• When ocean waters rise above 82.4 degrees F, evaporation increased

dramatically, providing huge reservoir of potential energy for storms

Economic Impacts Therefore are Difficult to Determine

Projected Impacts of Climate Change
 The economics of climate change
 Until now, the economics of climate change has been focused on
› modeling the implications of growth for emissions,
› examining and modeling the economics of technological options,
› calculating ‘social costs of carbon’, and
› exploring tax, market and other structures.

 we must now focus on the analysis that

› individual countries will need to assess their own policy positions, together with an analysis
of how to generate strong international action.

 If that analysis and understanding are shared and jointly endorsed,

international agreement is much more likely.
 The Nature of Economics
THE UNIQUE AND COMPLEX NATURE OF THIS EXTERNALITY SUGGESTS ECONOMICS
MUST COVER A BROAD RANGE OF ISSUES Including The Economics Of:

o Growth and development

o Innovation and technological change
o Institutions and governance
o National and international economies
o Demography and migration
o Public finance
o Information and uncertainty
o Environmental and public economics generally
 Because Of The Complex Interaction Among These Issues,
Climate Change Is Not Amenable To Simple Fixes

 Our response will depend on the choices we make about:

• Growth
• Development
• The kind of society we want to live in
• Type of environment we want to live in
• Opportunities for future generations
 SCENARIOS AND 2 DEGREE THRESHOLD
.Business as Usual: Annual emissions continue to increase at current rates for next 50
years, as do other GHGs.
“The business as-usual scenario yields an increase of about 5 degree F of global
warming this century.” “The last time the Earth was five degrees warmer was three
million years ago when the sea level was 80 ft higher.” [rising 20 ft or more per century]

Alternative Scenario: CO2 emissions level off this decade, slowly decline for a few
decades, and by mid-century decrease rapidly.
“…with global warming under two degrees F, still produces significant rise in the sea
level, but its slower rate, probably less than a few feet per century...” “The warmest
interglacial periods were about 2 degrees F warmer than today and the sea level was as
much as 16 Ft. higher.”
 Impacts For Indian Region

o 20% rise in summer monsoon rainfall

o Extreme temperatures and precipitations are expected to

increase

o Both day and night temperature are going to increase. But

nights are going to be warmer.

o Regionally within India

 Northern India will be warmer.

 All states will have increased rainfall except Punjab,

Rajasthan, Tamil Nadu where it will decrease.

 Extreme precipitations will increase particularly in west

coast and west central India

 Wetter Forest types in NE and drier in NW predicted to

increase
 Impacts For Indian Region

o Hydrological cycle is likely to be altered.

o Drought and flood intensity will increase.

o Krishna, Narmada, Cauvery, Tapi river basin will

experience severe water stress and drought condition
and Mahanadi, Godavari, Brahmani will experience
enhanced flood.

o Crop yield decrease with temperature and rise with

precipitation. (high agreement).

o Prediction of loss of wheat is more.

o Rabi crops will be worse hit which threatens food

security. (In India kharif accounts for 78% cereal
production and Rabi 72% of food production. )
 Impacts For Indian Region
Sector Assumptions Impact Strength/weakness
Agriculture    

Price change
Temperature change from 2.7 – effectignored, CO2
Aggregate 5.4 Cross section data used Loss upto $87 billion, loss fertilisationeffect not
agriculture Local adaptation included of half of agricultural GDP included
Rice and wheat
yield A2, B2 scenario decline

1.5°C rise in temperature and a

2 mm day -1 increase in
Rice yields precipitation decrease by 3 to 15 % CO2 fertilisation ignored

+2 and +4 oC change in
temperature; ± 20 and ± 40 %
yields of soyabean change in precipitation. - 22 to 18 % CO2 fertilization ignored
Considers imperfect
farm level net Temperature rise 2.0-3.5° C , landmarked and
revenue farm-level adaptation loss 9-25% administered price
loss between 15%- 42% without considering the
Yield of Rice wheat Temperature rise 2.5°C to 4.9°C and 25 %- 55% carbon fertilization effect
GDP   drop between 1.8 to 3.4%
 Most Vulnerable Sectors In India

 Agriculture dependent communities

 Forestry and forest dependent communities
 Municipal drinking water
 Power production and costs
 Public health
 Coastal infrastructure, tourism and recreation

As warming increases other sectors are likely to be impacted

 Global Warming May Fundamentally Change
the Way the Economy Operates
1. Direct Effects on Output — for example,
reduce water availability; higher water,
energy, materials and transportation
costs; restrictions on GHG generation in
processes and products; increased
insurance costs, or none.

2. Increased Depreciation of Capital — for

example, equipment and technologies
will need to be replaced at accelerated
rates (faster than normal depreciation)
to suite a changing climate.

3. Adverse Effects on Human Skills and

Health — for example, increased heat,
psychological stress, and pathogens will
increase employee illness &
absenteeism & reduce productivity.
 Cumulative Effects Impacting Economy-wide Productivity

o Decreased output in a few sectors reduces incomes which reduce purchasing power
and effects other sectors.

o Corporations may face more environmentally related litigation and insurance related
payouts, both as emitters of GHG and from non-compliance with new regulations if
political climate changes due to public alarm*

o Insurance costs may rise substantially—or not be available at all--constraining

business activity.
o Restrictions on trade, transportation and travel and market instability may grow.

* (Sources: What is the Economics of Climate Change, Stern Review, UK; Climate Change Futures, Harvard Medical School, Swiss Re,
UNDP 2005)
APPROACHES TO ECONOMIC
ASSESSMENT
Integrated Assessment Models:
Tries to capture the links between GHG
emissions, climate change, and impacts
on the economy and society.
o expensive;
o time consuming.

Sectoral Analysis: Application of basic

economic analysis to key market sectors
using temperature, water use & other
scenarios.
o rapid,
o Less expensive. However, has
similar limitations to Integrated
Assessment Models
 CLIMATE POLICY EVALUATION CHART
Environmental Economic Equity Administrative Political
Effectiveness Efficiency Feasibility Feasibility

Voluntary and Information Poor Medium to Good Good Good

Poor

Prescriptive Regulation Medium to

Good to Poor
Good Good Good
Poor

Financial
Disincentives Medium Poor Good Poor
Good

Financial Incentives Medium Poor Medium Good

Poor

Emission Cap and Trade Good Good Medium Medium

Permits Good

Niche Market Regulation Good

Good Good Medium
Medium

(Adapted from What is the Economics of Climate Change?, Stern Review, London, 2006; & Sustainable
Fossil Fuels, M. Jaccard, 2005, and U.S. Technologies and Innovation Policies, Pew Center, 2003)
 Bottom Line: Global Warming May Fundamentally
Change the Way the Economy Operates

1. Direct Effects on Output—for example, reduce water availability; higher water,

energy, materials and transportation costs; restrictions on GHG generation in
processes and products; increased insurance costs, or none.

2. Increased Depreciation of Capital—for example, equipment and technologies will

need to be replaced at accelerated rates (faster than normal depreciation) to suite
a changing climate.

3. Adverse Effects on Human Skills and Health—for example, increased heat,

psychological stress, and pathogens will increase employee illness & absenteeism
& reduce productivity
 MITIGATION & ADAPTATION POLICIES ARE NOT
ALTERNATIVES

Both will have costs but both can produce economic benefits

Possible Criteria for Evaluating Climate Policy:

o Environmentally Effective
o Economically Effective
o Administratively Effective
o Equitable
o Politically Feasible
 Theory Of Externalities Suggests Some Basic Policy
Approaches For Reducing GHG
o Tax the emitter equivalent to the marginal external social costs
o Ultimately borne by households, raises revenues that can be used to achieve other goals, provides incentives to
economize on the damaging activity

o The allocation of property rights linked with emissions trading

o Provides large emitters the flexibility to trade emission rights across sectors.

o Direct regulation
o Tends to place burden on industry (which generally passes on the costs to consumers—if they can/will pay)

o Provide financial incentives

o Usually popular, sends clear signals, but often suffers from free rider problem.

Each option has different distributional & public finance implications.

 Recommendations
Recommendations are worth considering:
 Recommendation 1: Take a leading and coordinating role in research into the effects of climate
change at local level for all states as well as for regions

 Recommendation 2: Ensure that the organization and responsibility for coastal protection and
climate change adaptation is clearly defined in each member state and list key actors per states

 Recommendation 3: Stimulate the proactive involvement of national authorities in climate change

adaptation

 Recommendation 4: Create a central database presenting the climate change adaptation strategies,
plans, programmes and measures applied as well as investments made in the different member states.

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 SUMMARY
o Current trends show the economic impacts of climate change will
be significant & increase the warmer it gets.
o Warming poses risks and opportunities. If done right, solutions are
likely to increase efficiency and productivity of U.S. and world
economy
o Doing so will require broad mix of policies tailored to specific
sectors and regions aimed at stimulating innovation
throughout the economy.
o Innovation must also focus on the institutional structures and
systems that support the policies
o Must avoid ideology and think in new ways.
 A KEY HUMAN LEARNING DISABILITY

“I’m sure glad the hole is not on

my end.”

Our Inability to See Connections Across Boundaries

in Time & Space