Select Committee on Economic Affairs Second Report

Chapter 6: The Benefits of Climate change Control

95.  In Chapter 3 we outlined the likely impacts of climate change. We noted that there is considerable uncertainty about these impacts and when they might occur. We also noted that some of them will be reduced in terms of impact because of automatic ("autonomous") and managed adaptation. We urged that more attention be given to adaptation strategies in the face of realistic risks that the world will not act fast enough or on a sufficient scale to prevent impacts occurring. But other impacts are not subject to adaptation and this will be especially true for the low probability but singular irreversible events such as reversal of the thermohaline current. While impacts can be expressed in terms of individual events and their probable magnitude, it remains the case that some overall summary indicator is needed. Chapter 3 briefly investigated the estimates of "population at risk". But, ideally from a policy standpoint, the relevant indicator should bear comparison with the costs of control. This is why the monetised benefits of control are attractive indicators, however difficult they are to produce. We turn to the evidence on monetised benefits.

Estimates of monetised damage from warming

96.  Economists have estimated the monetary impact of global warming. These estimates are very uncertain, but uncertainty cannot be an argument for ignoring the estimates, since the same uncertainty exists for any other "metric" that might be used to measure these damages. Moreover, if a money metric is not used, it is possible only to conduct cost-effectiveness analysis rather than cost-benefit analysis. In cost-effectiveness analysis the measures of impact reduction arising from warming control are expressed in diverse units or in units such as change in population-at-risk. If the units of damage reduction (i.e. benefit) are not the same as the units for cost, it is not possible to say if a given level of expenditure on warming control is justified.

97.  Table 10 summarises available estimates of the money value of the damage done by global warming. Care has to be taken to interpret the numbers. The Integrated Assessment Models used to get these estimates use different assumptions about the level of temperature change, so one has to be careful to compare like with like. The models vary according to the level of adaptation to warming that they assume. The estimates of Professor Mendelsohn, for example, contain a lot of adaptation. The early IPCC estimates (which date from 1995) assume hardly any adaptation. The figures are "benchmark" estimates. If the science of warming is correct, warming does not stop at the temperature increases used in the models. So one would see damages carrying on rising. The convention in the studies is that damages are expressed as a percentage of current world GNP. So long as GNP keeps growing, those same damages expressed as a percentage of future GNP would be much lower. Only the Mendelsohn estimates relate damage to future GNP. Damages can be expressed in different ways. For example, to get a global figure, one might weight the damages in each region by regional output or population. Similarly, damages might be "equity weighted" as explained to us by Professor Richard Tol of Hamburg University[82] and
Dr Chris Hope of Cambridge University[83]. Equity weighting attaches a higher weight to damages borne by low income countries in order to reflect that these damages will assume a bigger proportion of their incomes than will damages to richer people.

98.  So, if we take, say, the Nordhaus estimates, these tell us that for a +2.5^oC warming one might expect to see global damage amounting to 1.5-1.9% of world GNP. However, in Africa that impact might be closer to 4% and in India 5%. The scale of the aggregate impacts reflects (a) the geographical incidence of warming and associated weather events, (b) the variable vulnerability of the economies of developing nations to these impacts, and (c) the smaller GNP of the relevant countries. Finally, Table 10 shows estimates for damages only. Controlling climate change will avoid some (not all) of these damages, but it may also bring other benefits known as "ancillary benefits". For example, if CO₂ emissions are controlled through traffic restraint, then congestion might ease and there will be benefits from the reduced congestion, better local air quality, and so on. It is generally accepted, though not by all economists, that these ancillary benefits can be added to the reduced global warming damages when conducting a cost-benefit analysis. Moreover, there will be some additional costs too, due to the dynamic effects of diverting expenditures towards climate control and away from other uses of resources.

99.  Table 10 suggests that, in terms of percentages of world GNP, damage is relatively low, even for +2.5^oC. The damages are not evenly spread. In general, developing countries lose more than developed economies. Some models suggest no real net damage to rich countries.

TABLE 10

Damages as % of regional and world GNP

Region	IPCC 1995 +2.5oC	Mendelsohn et al 2000 +2.5 Oc	Nordhaus and Boyer 2000 +2.5 oC	Tol 1999 +1.0 oC
N America USA		- 0.3	+ 0.5	-3.4
W Europe EU			+ 2.8	-3.7
OECD Pacific Japan		+ 0.1	+ 0.5	-1.0
FSU E. Europe Russia		-11.1	+ 0.7 - 0.7	-2.0
Mid East			+ 2.0	-1.1
L America Brazil		+ 1.4		+ 0.1
S Asia India		+ 2.0	+ 4.9	+ 1.7
China		-1.8	+ 0.2	-2.1
Africa			+ 3.9	+ 4.1
All developed countries		0.0
All developing counties		+ 0.2
World - output Weighted	+1.5 to + 2.0	- 0.1	+ 1.5	- 2.3
World - population weighted			+ 1.9	+ 2.7
World - equity weighted				- 0.2

100.  The monetised estimates do not seem to be consistent with the more alarming pictures of global warming damage painted in much of the scientific literature. However, only crude efforts are made in some of the models to account for impacts such as thermohaline reversal etc. Most of the models make no effort to account for large-scale singular events. The estimates are also benchmarked on a doubling of CO₂ concentrations relative to pre-industrial levels, i.e. on approximately 550 ppm. Damages will be larger if concentrations are permitted to go beyond this level. Finally, average world damages conceal the bias in the damages towards developing countries. Rich countries may still wish to act to prevent damage to these countries even if they might suffer little damage themselves.

101.  The evidence presented to us indicates that these estimates of monetised damage are highly controversial within IPCC deliberations. Indeed, we note that in the 1995 Second Assessment Report, damages and benefits were afforded a separate chapter in the report of Working Group III. In the Third Assessment Report of 2001 the monetary estimates are confined to a sub-section of Chapter 19 of the report of Working Group II. That chapter is intended to be a summary of other chapters, but the monetary damage estimates are introduced there for the first time. Moreover, there is no discussion at all of the estimates in the 2001 IPCC Synthesis Report. It appears to us that the IPCC has made a conscious effort to downplay the economic approach to measuring damages. We acknowledge, as does IPCC, that these estimates are uncertain. But it is hard to justify the minimal discussion of the estimates on this basis since all the IPCC Reports contain detailed discussions of various non-monetised impacts that must be equally uncertain. We urge the Government to press the IPCC for a proper detailing of the estimates and a discussion of the uncertainties in the next IPCC Assessment Report in 2007. Brief inspection of the plans for that report does not provide encouragement. According to the outline on the IPCC's website, there is to be no discussion at all in 2007 of the "integrated assessment" models and the estimates of damage costs are given even less space (in Chapter 20 of WGII and
Chapter 2 of WGIII).

102.  In his evidence to us, Dr Terry Barker of Cambridge University confirmed that some past controversies on monetary valuation have made the IPCC nervous of monetised damage estimates. In particular, he noted that monetised values of "human life"—more strictly, what people are willing to pay to reduce risks to life and limb—were widely criticised[84]. We can see why such procedures would appear controversial, especially as "willingness to pay" will be constrained by income, making the life of someone in a poor country appear less "important" than a life in a rich country. But placing money values on life risks is in fact commonplace, and is part of the Government's approach to cost-benefit appraisal of regulations and of major investments in transport and in health and safety. No government treats life risks as if they should be zero. Hence costs and risks are traded off on a regular basis. If the argument is not about monetising the risks but about the inequality of the valuations used, then it is possible to have more sympathy. But the procedures for "equity weighting" described above go a long way to correct this basis in the use of a willingness-to-pay metric. Whatever the rights and wrongs of these arguments, we are concerned that, by trying to avoid controversy, the IPCC is not facing up to the realities of making choices. If nothing else, economics forces those choices into the open.

The social cost of carbon

103.  A very convenient way of summarising the money value of the damage done by warming is to compute the extra damage done to the world as a whole from one extra tonne of carbon released now. In the economist's language, this is the "marginal damage" from emissions. It has also come to be known as the "social cost of carbon" (SCC). Defra currently has an "official" guide value for SCC of £70 tC, but with a range of £35-140 tC. This was based on an earlier review of the integrated assessment models. In 2004 Defra instituted a review of these estimates, culminating in two consultancy reports in 2005 which have yet to be finally reviewed and released. Since these estimates of the SCC are derived from the monetised values of damages, they are just as subject to issues of uncertainty, equity weighting, discounting, and so on.

104.  We applaud Defra and the Treasury for pursuing a consensus view of the size of the SCC. Failure to arrive at such a number (or range of numbers) encourages misallocation of resources between government departments, and this has been the driving force behind finding an agreed SCC. Moreover, SCC estimates can be compared directly with the marginal costs of abatement discussed in Chapter 5[85]. If the SCC exceeds the marginal costs of control, then, prima facie, the climate target being considered is too strict. If the SCC is less than the marginal cost of control, there is scope for making the target stricter. Effectively, these comparisons amount to conducting a cost-benefit analysis[86]. It seems to us that this is exactly the kind of exercise that Defra and the Treasury should be conducting in their climate policy appraisal, whether it is the Kyoto Protocol targets, the long-term 60% target, or any of the mechanisms being used to meet these targets—such as the Renewables Obligation or adoption of windpower. Dr Helm made it clear that he thought these policies would not pass a cost-benefit test if this comparison was made[87].

Conclusions on benefit estimates

105.  While we agree with others that the monetised benefit estimates for controlling global warming are uncertain, we are concerned that the IPCC appears to be playing down these estimates in favour of often detailed descriptions of individual impacts that cannot be brought into comparison with the likely costs of control. Perhaps one reason for this lack of emphasis is that the economic measures of damage give the impression that the benefits of warming control are smaller relative to the costs. But whatever the outcome of a comparison of costs and benefits, such a comparison needs to be made. Not providing it conveys the impression of a partial approach to the economics of climate change. It is imperative that the damages from greenhouse gas emissions be spelled out in monetary terms so that the public and government can better appreciate the trade-off between current sacrifices and future benefits from emissions control. We urge that explicit comparisons be made between the monetary cost of adaptation measures and their benefits. While we were reassured by Defra that they would be pressing for a higher profile for the economics in the IPCC's Fourth Assessment Report, we consider that the Treasury has a duty to reinforce Defra's intent. Indeed, given the potential importance of this issue, both in terms of public expenditure and of overall economic cost, the Treasury should become directly involved itself, making its own economic assessment of the issue.

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82   Evidence from R. Tol (Vol II, pp 66-77) Back

83   Evidence from C. Hope (Vol II, pp 24-35) Back

84   Evidence from T. Barker (Vol II, pp 78-86) Back

85   Marginal benefits are the same as the SCC avoided.  Back

86   As noted previously, one might want to add the (marginal) ancillary benefits of control to the SCC to derive an overall marginal benefit of control. This would then be compared to the marginal cost of control. Back

87   Evidence from D. Helm (Vol II, pp 87-95) Back