Memorandum by BP
INTRODUCTION
1. Economic aspects of climate change are
as important and as contentious as the scientific dimensions.
Even if the science of climate change were perfectly understood,
economic aspects would be critical in the assessment and comparison
of policy options and their timing. The economic aspects will
always be complex. The overlay of scientific uncertainty multiplies
this complexity.
2. Nevertheless, despite these difficulties
it is still important that economic assessments of climate change
and mitigation policies be undertaken in order to assist in the
determination of most suitable policy options.
THE SCIENTIFIC
DIMENSIONS
3. BP believes that policy should be predicated
on the scientific consensus having established the need for precautionary
action. There is a broad consensus of scientists that believe
that the world is warming and that human activity, including the
burning of fossil fuels, has been a causal factor in most of the
recent temperature changes.
4. While acknowledging the very large degree
of uncertainties within the science, BP believes it is reasonable
and prudent to assume that a continuation of current energy trends
will raise global greenhouse gas concentrations, and that these
in turn will exacerbate global warming. This could manifest itself
in various ways, such as further increases in temperature, a rise
in sea level and an increase in climatic instability. We have
stated publicly that we feel that it is time to begin to take
action in face of these very long term problems.
THE ECONOMIC
RESPONSE
5. Acceptance of this precautionary approach
demands an economic response. Economic analysis of the problem
has tended so far to focus on cost-benefit analysis. The work
undertaken in the 1990s often focused on the physical mechanisms
of climate change and potential damage it might cause. More recently,
and especially in the economic work involved in the production
of the IPCC's Third Assessment Report (TAR) in 2001, this has
been extended to include the costs of mitigation over very long
periods of time. However, one should emphasise that underlining
all this is the reality that attempts to assess the costs and
benefits associated with changes in the energy mix are likely
to meet with a greater degree of accuracy than estimates covering
the totality of costs as a consequence of changes in the climate.
6. Ancillary costs and benefits will also
inevitably develop from climate change mitigation policies. But
the temptation to address more than one issue with a single policy
instrument should be resisted.
7. This is because it is very easy to exaggerate
the "double dividend" which is sometimes claimed from
a single instrument. For example, there can of course be ancillary
effects of imposing a tax, in addition to its main purpose, and
these must be taken into account. But in general, policies should
aim at redistributing such revenues in a tax neutral manner. It
is better to use single instruments for single objectives.
8. Finally, the understandable urge to be
seen to be "doing something" must be resisted if the
resultant costs outweigh the benefits, or possibly undermine the
long-term economic strength which will be required to develop
new technologies and invest in mitigation programmes.
THE WORK
OF THE
IPCC
9. BP considers that the work of the IPCC
Working Group (II) was very valuable. Most importantly it indicated:
— There is a massive range of uncertainties
with respect to macroeconomic and energy prospects over a century.
The fundamental differences between the range of credible scenarios
is striking.
— There are a range of technologies
that exist today that could, over a long period of time, effect
a global transition towards a sustainable level of greenhouse
gas emissions and a sustainable global climate.
— The costs of these today and in the
future are very unclear. Nevertheless, sets of apparently reasonable
assumptions can lead to the conclusion that the long term costs
of emission abatement need not be high.
10. The choice of policy instruments in
implementing mitigation strategies is critical. The economic benefits
of global emissions trading is clearly high.
11. Nevertheless, all such economic analysis
faces a set of fundamental problems:
— The economic objectives may conflict
from time to time. For example, in some instances lowest cost
outcomes could conflict with sustainability and equity objectives,
where they do not fully represent the cost of important externalities,
eg local air quality. There will be a need to compare winners
and losers.
— Conclusions can be very sensitive
to discount rates. The intergenerational dimension of the climate
problem makes the issue more complex, while indicating a possible
rationale for use of discounts rates that are lower than market
rates.
12. Further economic analysis will be needed
continually at the national, regional and global level as scientific
knowledge increases, lessons are learned from policy implementation,
technologies advance and costs change. To date there is no reason
to believe that economic research has been inadequate as the world
has struggled to understand the issue of global warming and policy
options. First class UK economists have been involved in the work
of the IPCC and in independent studies.
13. BP believes that at this stage it is
impossible to define with any meaningful accuracy who will bear
the costs of future climate change and of possible resulting mitigation
policies. Specific cases can be identified with some degree of
certainty (eg very low lying island communities) but other dimensions
are too uncertain. This is especially so of the regional dimension,
where it is virtually impossible to analyse or predict specific
risks on a country-to-country basis. It is even unclear, for example,
whether the UK would become warmer or colder as and when the world
warms further.
CONCLUSION
14. In broad terms BP believes that there
is no single technology or instrument that will "solve"
climate change. Market based policy options tend to be most likely
to deliver lowest cost options. However, each major policy option
requires a cost benefit analysis.
15. Trading of emission permits has shown
itself to be a valuable tool. The value is greater to the degree
that trading is permitted across national boundaries.
16. Continuing scientific and economic research
is required to better understand the problem and mitigation options.
Knowledge sharing needs to remain a key element of climate policies.
23 March 2005
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