The Economics of Climate Change
CHAPTER 1: Introduction
1. Sir David
King, the Government's Chief Scientific Adviser, has stated that
"climate change is the most severe problem that we are facing
today—more serious even than the threat of terrorism"[1].
Much of the debate about global warming—its reality, causes
and the urgency of finding solutions—has been driven by
the science of climate change. Despite a huge literature on the
economic implications of warming, the costs of tackling it, and
the role of economic policy instruments in the control of greenhouse
gas emissions, economic arguments have not been to the fore in
the public presentations on the issue. Many people may, therefore,
be ignorant of key issues highlighted by an economic perspective—for
example: the close linkages between world economic performance,
the man-made forces influencing climate change, and the role of
technological change in reducing greenhouse gas emissions; the
considerable time lags between taking action and the effects of
those actions; the costs that must be borne now for benefits that
will not accrue to this generation; and the cost in terms of opportunities
forgone by spending resources on climate change control rather
than on, for example, addressing issues of global poverty now.
2. The economics is important. Indeed, the Chancellor
of the Exchequer has declared that "climate change is an
issue for finance and economic ministries as much as for energy
and environmental ones"[2].
We welcome this recognition of the central role of economics.
It is the driving force behind our inquiry. But we believe that
the Chancellor needs to broaden the scope of the Government's
interests, and the Treasury's interests in particular, in aspects
of the climate change debate that we feel have not yet been given
sufficient emphasis. Both the science and the economics of
climate change are explored in the publications of the Intergovernmental
Panel on Climate Change (IPCC). We are concerned that the links
between projected economic change in the world economy and climate
change have not been as rigorously explored as they should have
been by the IPCC. We believe the complex interactions between
world economic growth and climate change need additional scrutiny
at the international level, and that the United Kingdom Government
has a role to play in ensuring that this happens. We are also
concerned that clearer messages should be conveyed to the public
about the likely costs and benefits of climate change control,
who will bear those costs and benefits, and when. Since the
science of human-induced warming remains uncertain, the issue
is how to behave in the face of that uncertainty. Uncertainty
does not dictate doing nothing: none of the concerns we raise
constitutes a reason for not tackling climate change. Rather,
uncertainty dictates caution and the taking out of insurance against
the worst risks. But, like insurance against any other risk, insurance
costs money. It is important that the costs of such precaution
are better understood, and the risk-cost trade-offs are better
appreciated.
3. We believe there is an educative role to be
played by a more frank and open discussion of the economic issues
involved in tackling climate change, and that the public deserves
to be better informed about them. We do not believe, for example,
that many people are aware that the international efforts made
so far—The Framework Convention on Climate Change (1992)
and its first Protocol, the Kyoto Protocol (negotiated in 1997
and brought into force in 2005)—will make little difference
to future rates of warming, even if implemented in full. It must
be emphasised that these international agreements will have to
be supplemented with far more telling initiatives if climate change
is to be tackled in any significant way. Ultimately, a public
that is not adequately informed may react adversely to the discovery
that more and more cost burdens will fall on them, and on their
children, in the name of warming control. The fuel protests of
1999-2000 are testimony to the sensitivity of the public to even
modestly rising energy prices. Substantial increases in energy
prices must be an integral part of any policy for reducing carbon
emissions. Box 1 shows the time-profile of oil prices from 1970
to the present day. In real terms, oil prices today are about
half of their peak price in 1981 at the time of the Iran-Iraq
war. In nominal terms, prices are about the same. To encourage
reductions in carbon emissions, real prices need to rise further,
and by significant amounts. We are not convinced that there
is sufficient public awareness of this issue. Any public misperception
on these issues could threaten the political feasibility of getting
plans of action put into effect. If climate change is as serious
as most scientists claim, and as the Government accepts, then
it is important to convey the complementary message that the action
to tackle it will also have to be serious and potentially life-changing.
It is better to be honest now than to shield the public from the
economic realities inherent in the more pessimistic forecasts.
BOX
1
The path of oil prices 1970 to the present
The chart shows the evolution of real oil prices
(i.e. oil prices with inflation netted out) expressed in constant
2005 US dollars. While nominal prices (inclusive of inflation)
are about the same today as they were at the peak of oil prices
in 1981, the real price is about one-half. If there is to be a
major reduction in carbon emissions, energy prices, as typified
by the price of oil, will have to rise significantly in real terms.
Source: US Department of Energy
4. The Committee decided to restrict the scope
of its investigation to certain aspects of the economics of climate
change. We have done so because we are aware that the subject
is potentially very wide-ranging. In addition, other Parliamentary
committees have also investigated some of the issues[3].
The Committee decided to focus on (a) the way in which scenarios
of the future changes in the world economy affect the projections
of warming; (b) issues relating to the costs and benefits of tackling
climate change; and (c) the profile of economics in the governmental
and inter-governmental processes relating to climate change science
and control. We have not systematically investigated the important
issues of choosing policy instruments for tackling climate change—the
role of carbon and energy taxes, the EU emissions trading scheme
and other measures. Nonetheless, our inquiry strayed into these
areas and we have some comments to make.
1 Sir David King, Climate change science: Adapt, mitigate,
or ignore? Science. 303. 176-7, 2004. Back
2
Speech by The Rt Hon Gordon Brown, Energy and Environment Ministerial
Roundtable, 15 March 2005. Back
3
For example, the House of Commons Environmental Audit Committee
has looked at the international agreements and the role of the
UK in international negotiations: The International Challenge
of Climate Change: UK Leadership in the G8 and EU. (2004-05,
HC 105). See also House of Lords European Union Committee: The
EU and Climate Change. (2003-04, HL 179). Back
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