Select Committee on Economic Affairs Written Evidence

Memorandum by Professor Robert Mendelsohn, Yale University

  1.  It is a great honor to submit evidence to the House of Lords concerning the economics of climate change. I have been studying climate change impacts intensively for the last 12 years. I believe our understanding of climate change is now mature enough to make initial policy judgments about controlling greenhouse gases. The problem is a long range one and the future is always uncertain, but it is clearly time to act. The question is how to start.

  2.  Current estimates of climate change impacts are built using integrated assessment models (Nordhaus 1991). These models begin with forecasts of future emissions and then predict the cascading chain of events. From emissions, the models predict how the stock of greenhouse gases in the atmosphere change. This leads to a change in radiative forcing (heating) which in turn gradually warms the oceans. After a long lag (30 years), the oceans in turn lead to warming of the atmosphere. This change also affects precipitation patterns. All of these changes will affect a number of physical phenomena such as runoff, sea level, ecosystems, and crop yields. Finally, the models predict how these physical changes will affect society; the damages and benefits to expect over time. The models are now reasonably thorough about measuring economic impacts to agriculture, forestry, energy, water, and coasts (Pearce 1996; McCarthy 2001). But the models do not yet do a good job of capturing nonmarket impacts to biodiversity, ecosystems, and health.

  3.  One early assumption in the literature about impacts is that any change in the environment would be bad for everyone. Climate change would lead to immediate harmful effects for most every country in the world (Nordhaus 1991; Cline 1992). Subsequent research has shown this assumption to be incorrect. In most sectors that are sensitive to climate, climate response functions are actually hill-shaped (Mendelsohn and Schlesinger 1999). That is, each sector has an "optimal climate". This implies that warming would actually be good for regions that are "too cold" and harmful only for regions that are "too warm". For example, agriculture in the UK and especially northern and Eastern Europe would benefit from initial warming but agriculture in Africa is likely to be harmed (Mendelsohn and Williams 2004b).

  4.  Initial climate research also underestimated adaptation and assumed victims would make few changes as climate changed (Smith and Terpak 1989; Rosenzweig and Parry 1994). More recent research has revealed that adaptation is very important in every sector. For example, farmers will alter the timing of planting and harvests, switch crops, change production methods, and introduce irrigation all as adaptations to warming. A study just completed in California reveals that a dry scenario which would leave the state with 25 per cent less irrigation water. However, this would reduce net farming income by only 6 per cent, if water is reallocated to high valued farming (Howitt 2005). Adaptation will reduce the damages from warming and increase the benefits. Taking adaptation into account has reduced the overall impacts from climate change substantially.

  5.  Future economic growth has two large roles to play in climate change. First, economic growth will determine the magnitude of future emissions. It is not the current or past emissions that make climate change dangerous; it is future emissions. The faster the economy grows, the larger future emissions will become. However, it is not just the size of the economy, but also its nature. Energy is the primary source of future emissions as we burn inexpensive fossil fuels. If future growth entails less energy, emissions will be less.

  6.  Economic growth also affects the damages from climate change. As climate sensitive sectors grow, the climate damages to these sectors also increase (Mendelsohn and Williams 2004a). For example, as agriculture and forestry grow, the absolute magnitude of the impacts in these sectors is expected to increase. In practice, though, the fraction of GDP in climate sensitive sectors is likely to fall in the future. For example, agriculture is projected to grow but less quickly than the rest of the economy. As a result, the magnitude of impacts from climate change as a fraction of GDP may not increase over time even though the absolute damages will grow.

  7.  The IPCC has done an excellent job of reflecting the science of climate change (Houghton et al 1996; 2001). It is truly the authoritative voice for where the science stands. However, it has not done as good a job capturing the economics of climate change. For example, there are serious deficiencies in the economic components of the Third Assessment Report of the IPCC (Houghton et al. 2001; McCarthy et al. 2001; Metz et al. 2001). The 2001 Report failed to provide good baselines of future economic growth in its SRES scenarios. The SRES scenarios are fictional stories rather than empirically based projections of likely outcomes. This failure undercuts the value of the climate projections that were based on the scenarios. The Third Assessment Report also moved away from trying to quantitatively assess the value of the impacts of climate change so that they can be compared with abatement costs. The Second Assessment Report actually did a better job of assessing damages even though it had to rely on older literature (Pearce et al 1996).

  8.  There are many attempts to integrate the science and economics of climate change in the literature. This line of inquiry began several decades ago with the building of the first integrated assessment model of climate change (Nordhaus 1991). Since then, many groups around the world have built similar models. In addition to the integrated assessment modelers, many others economists around the world have been active contributors to the climate change literature. For example, CSERGE, led by David Pearce, has made many contributions in the UK, Richard Tol from the Netherlands has done considerable research on climate impacts, IIASA in Austria has been working on this problem for years, and there is an important group in Potsdam Germany.

  9.  Of course, with a problem as complex and long lasting as climate change, there is need for additional research. The UK, with its strong commitment to economics and its solid foundation in science, is in an excellent position to help. Better projections describing how the world will change in the long run are needed. We need to know more about what our mitigation options might be in the future, not just at the moment. We need to know more about the climate sensitivity of economic and especially nonmarket sectors (health and ecosystems). We need to know what adaptation options are realistic in the future and what plans need to be laid to make them happen. We need to know how climate change will affect people across the globe, especially in the low latitudes. We need to explore what institutions have to be created to encourage efficient regulation of greenhouse gases globally. The IPCC member governments and especially the UK have the skills and resources to help considerably in this effort.

  10.  The literature is becoming clearer and clearer that the distribution of impacts from climate change will be striking (Mendelsohn, Dinar, and WiIliams 2005). The medium to high income countries in the mid to high latitude countries will see benefits in some sectors (agriculture and forestry) that are at least as large as the damages in other sectors (coastal and energy). In other words, the net damages to mid to high latitude countries will be very small if not beneficial this coming century. The impacts to poor low latitude countries will be harmful across the board. It does not matter whether one measures impacts in dollars, effects per person, or Purchasing Power Parity (PPP), there will be distributional impacts from climate change. Climate change will hurt the poorest people in the world the most. The bulk of the damages from climate change this century will be borne largely by the poorest quartile of the world's population who live in rural impoverished communities in the low latitudes (Mendelsohn, Dinar, and WiIliams 2005).

  11.  Current estimates suggest that there will be benefits to warming for mid to high latitude countries over the first half of this century, which may turn to small damages by the end of the century. There will also be net damages to low latitude countries that will start immediately and will get only worse over time as warming progresses. Adding these effects together, the global impacts from greenhouse gases will be small for the first half of the century and only gradually become larger by the end of the century.

  12.  These results suggest that another ton of carbon will cause between 0-$5 of damage this decade. This marginal damage will rise over time as the stock of greenhouse gases accumulate. Projected estimates of the future marginal damage of carbon emissions lie between $50-$100 per ton by 2100. These marginal damage estimates provide important guidance for how much to spend on mitigation costs. At the moment, one might only want to spend up to $5 per ton. In the future, one would be willing to spend far more. Of course, current policy does not lock future governments into specific mitigation policies. As each generation learns more about climate change from both research and living with it, future societies can adjust their policies to take into account new insights.

  13.  These results suggest an initial mitigation strategy that is relatively modest. It is consistent, however, with what Europe is actually planning to do under the Kyoto agreement. Counting the shrinking economies of Eastern Europe and Russia, Western Europe is planning only modest abatement expenditures this decade. The recent abatement proposal for the United States (McCain-Lieberman bill) would also commit the US to a modest program. These proposals will not stop climate change, they will only slow it down slightly. However, modest commitments give the world a realistic opportunity to begin. A modest abatement program makes it far more likely that every country in the world would be willing to participate. The world can then focus on building global institutions to control greenhouse gases. Given how long it has taken the world to build institutions to support global trade, it is not too early to start building global institutions to control climate change. Starting modestly and increasing abatement over time makes both economic and political sense.

26 February 2005


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