Select Committee on Economic Affairs Second Report

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.


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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