Select Committee on Economic Affairs Written Evidence

Memorandum by Dr Peter Read


  1.  I have researched the economics of climate change for the last 15 years with a recent explicit focus on strategies for countering the threat of abrupt climate change. My 1994 book Responding to Global Warming "Points toward a key strategy .  .  . which links energy and forestry, North and South" (Michael Grubb) and is "a skilled attempt at fashioning policy and a deep foundation for thinking on the subject" (Thomas C Schelling). In effect that book and my subsequent work shows that the climate change problem is both more urgent and more easily dealt with than in the conventional wisdom.

  2.  The Committee's intent to leave aside consideration of control policies gives me some difficulty, since my work treats the problem and the response holistically. However, I Annex the abstract for my presentation to the Scientific Symposium "Stabilisation2005" held at the Hadley Centre 1-3 February . It is titled "Carbon cycle management with increased photo-synthesis and long-term sinks" and I trust that the Committee will find time to look into it and come to recognise that the nature of the problem, the nature of an effective response, and the distribution of costs and benefits are inextricably linked. Failure to recognise this has led to the problem being wrongly assessed (mis-specified) as one of reducing anthropogenic greenhouse gas emissions (largely CO2, largely from the energy sector) rather than using the mechanism provided by nature to manage the level of CO2 in the atmosphere.

  3.  Energy related emissions are just over 5 per cent of CO2 terrestrial flows into and out of the atmosphere, which suggests that mitigation investment in the heavily capitalised energy sector is likely to be less cost-effective than investment designed to increase photosynthesis on under-capitalised land. Accordingly, I have argued that policy-driven land use change offers lower cost response options than the conventional environmental economics prescription of raising the price of the polluting activity, ie the cost of using fossil fuels. Indeed, as outlined in the Annex, an effective response yielding global economic benefits is available. This reality has been overlooked in the intricacies of negotiating the Kyoto protocol, which has been informed, since the adoption of the Berlin Mandate, by the outdated comparative static general equilibrium price theoretics pioneered, as regards environmental policy, by Baumol and Oates in 1975.

  4.  By coincidence, it was also in 1975 that Schultz and Kneese commented in a Brookings Institute Report that, "conflicts between material well being and environmental goods are, in the long run, ameliorated by technological change" (or, implicitly, not at all). The economics of competing technologies is fundamentally dynamic and not amenable to general equilibrium theorising. But it was at that time awaiting the pioneering work of W. Brian Arthur, whose 1994 study Increasing Returns and Path Dependency in the Economy demonstrates that simply "getting prices right", eg by internalising the detrimental pollution externality, can easily fail to stimulate the most beneficial technological path. While not sufficient, it is at least necessary to incorporate into the analysis the dynamical benefits of learning-by-doing with desired and ultimately cost-effective new technologies, sloping the playing field enough to ensure they are adopted and that investment in undesirable technologies is progressively reduced.

  5.  But not only is technological competition path dependant, so also is a negotiating process, with participants extremely reluctant to reopen the can of worms that has been sealed by agreement at a previous meeting—the dynamic is always to move on, building on previous agreement. So there was no prospect that the path adopted after the Berlin Mandate would be influenced either by a reading of my book or of Arthur's. However, the impasse reached in negotiations for the post-2012 regime offers prospect of adopting a more holistic perspective than Baumol and Oates's, for which the position adopted by the Bush administration towards Kyoto may prove to be the grit in the oyster. Securing the pearl involves recognising the potential urgent nature of climate change, seeing it as one of carbon management rather than capping emissions, and driving the potential win-win-win technological changes that can radically alter the perceptions that appear to underlie the Committee's questions.

  6.  The nature of climate change is, along with the evolution of technological choice analysed by Arthur, an example of non-linear dynamics ("chaos theory"). This suggests that the policy-makers' (and negotiators) vision of global warming as a gradual process, to which an appropriate response can be gradually developed, may be incorrect. This intuition is substantiated by an understanding of the numerous positive feedback processes that can contribute to climatic instability, as revealed by paleo-climatological research. These include: the stability of the thermo-haline circulation that drives the North Atlantic "Gulf Stream"; the accelerating release of methane as tundra thaws; the destabilisation of land based ice on Greenland and in the West Antarctic Ice Sheet; the reversal of the CO2-fertilised biotic sink due to plant stress under raised temperature, etc. Several of these, on latest reports to the above mentioned "Stabilisation2005" Symposium, are giving increased concern on a decadal rather than millennial time-scale.

  7.  However, the Atmosphere-Ocean General Circulation Models that provide the basis for long run climatic projections are generally less sensitive than nature and fail to reproduce the dramatic changeability of the paleo-climatic record. Yet it is these Models' projections that inform the gradualist perceptions of economists and policy makers, as exemplified in William Cline's 1992 study of "The Economics of Gobal Warming" and embodied in the DICE model, which provides the work-horse for most policy-oriented analyses. Whilst climate scientists constantly strive to reproduce the paleo-climatic record in model projections, the difficulty of doing so with computer models, along with scientific conservatism, results in the message received by the policy-making community being one of gradual change, for which the DICE-based prescription is for delayed action pending improvements in technology and improved ability to pay, given continuing economic growth (together with the pervasive influence of non-zero discounting). Thus the perceptions of economists have failed to match the real concerns of scientists.

  8.  The evolving concept of CO2 capture and "sequestration", stimulated mainly by US DoE funding (and driven by coal industry survival concerns, in the face of prospective climate policy) led recently to the concept of BECS "Bio-Energy with CO2 Storage". BECS constitutes a "negative emissions energy system" (growing biomass absorbs CO2; capturing the CO2 emitted, when the biomass is burned as bio-energy feedstock, prevents it getting back to atmosphere). On a large enough scale, BECS can yield pre-industrial CO2 levels by around mid-21st Century. Such management of the carbon cycle is order of magnitude better that can be achieved with the zero-emissions energy technologies stimulated by an emissions cap and consequential high price on emissions. It gives some prospect of effective response, if the threat of abrupt climate change becomes imminent. This led Bob Watson, former IPCC Chairman, to prompt the UN Foundation to support an expert workshop on the policy implications of abrupt climate change, which I convened in Paris end September 2004 (please visit for details).

  9.  This workshop concluded that the world would be better placed to respond to abrupt climate change in the event it is shown to have become imminent, say in 2020, if by then there is in being a large scale global bio-energy market with South-North trade in bio-fuels such as ethanol and Fischer-Tropsch bio-diesel. However, large-scale bio-energy carries so many ancillary benefits that the abrupt climate change aspect comes last in the list on page 2 of the Annex. In providing greater energy security (a concern of the USA) a WTO-acceptable basis for farm support (an EU concern, given the high cost of agriculture in the recent East European accessions) and prospects of sustainable rural development with export led growth based on trade in bio-fuels for many developing countries (a concern of G77) it is a prospectively negotiable way ahead for a "coalition of the winning" after 2012, and hopefully sooner. In linking the Prime Minister's dual concerns for climate change and progress in Africa, it could provide a basis for G8 agreement during his Chairmanship.

  10.  Managing land so as to substantially increase the total amount of terrestrial photosynthesis, and hence the supply of biomass, raises concerns related to the human "ecological footprint". These neglect the reality that natural ecosystems do not maximise the sustainable productivity of the land where they have evolved. Such simple investments as stock-proof fencing to prevent animals destroying crops and plantations at the seedling stage can improve on nature. Carbon fixing soil amendment yields environmental benefits, including enhanced fertility and water retention. Efficient management of part of the land, in lieu of widespread unsustainable traditional land management, can enable natural bio-diversity to flourish in conservation areas.

  11.  Such efficient management can yield food and forestry products co-produced with bio-fuels on existing cropland. Alternatively (and hence additionally) estimates of land requirements to effectively mitigate all current anthropogenic emissions of CO2 fall well short of the 1.5Gha of potential arable land (IPCC 2001) that is not in use. So there is no shortage of land but of investment in land. Additional biomass can be used in lieu of fossil fuel; its carbon content, in the form of bio-char ("charcoal") can be used for soil amendment with 5K-yr half life; or it can be used as wood, or in advanced materials such as carbon fibre, for long-lived artefacts. Note that "defossilisation" is a far less daunting prospect for the energy sector than decarbonisation. Biomass can be the basis for bio-fuels and bio-electricity using here-and-now technology (and with ample prospect of technological improvement) that is highly compatible with fossil fuel technology and hence gives rise to minimal "stranded assets" in the existing energy infrastructure.

How are the current estimates of the scale of climate change damage derived?

  12.  It is a mistake to balance costs and benefits in a situation of fundamental uncertainty since there is no basis for establishing the probability distributions needed for the calculation of expected values. An alternative approach (Chapter 3 of Responding to Global Warming) uses "decision theory" to determine a matrix of outcomes under different policy decisions and different possible "states of nature" and to select policy options that avoid the risk of unacceptable outcomes. In practical terms, this means directing scientific effort towards detecting thresholds and triggers for such outcomes as, eg, a failure of the Gulf Stream that keeps Europe warmer than Siberia, and taking low cost steps to be prepared for effective action if/when such a threshold appears to be imminent.

How far do the estimates of damage depend on assumptions about future global economic growth, and how valid are those growth assumptions?

  13.  As noted above, damage estimates under gradual climate change are an irrelevance since we have no basis for estimating the probability of such gradual change. Economic growth may be brought to a standstill or put into reverse by armed conflicts resulting from the failure of climate based production systems that are essential to life, but which yield produce that is low-priced in the consumption patterns of advanced economies. The DICE model treats all output as equally essential. However, growth is not inevitable but dependant on wise policy and good fortune as regards the state of nature.

How does uncertainty about the scale of the problem and its impact affect the economics of climate change?

  14.  Uncertainty is inevitable in a non-linear dynamic system where small current events can radically change the subsequent evolution of the system. This does not mean that such systems cannot be stabilised by suitable negative feedback control mechanisms. But without effective policy to create such mechanisms, uncertainty is pervasive to the problem and invalidates much of the economics that has been done on climate change. There is great uncertainty as to the climatic effect of raised levels of CO2, similar uncertainty regarding the impacts of these climatic effects, moderate uncertainty about the pace of technological change, and some uncertainty about its direction (that can be resolved by a well-conceived agreement between a "coalition of the winning" on a technologically-oriented policy to secure the policy-desired direction). As regards the great uncertainty, it should be noted that the IPCC's Third Assessment Report range of 1.4 to 5.8 degrees Celsius by 2100 is a range from the possibly benign to the certainly catastrophic, which should not be regarded as a continuum. Furthermore, it emerged at the Stabilisation2005 symposium that this is only a 90 per cent confidence range on a (subjective) probability distribution, and that the upper end of possibilities could be an extinction-threatening 10 degrees Celsius.


What has been the approach within the IPCC to the economic aspects of climate change, and how satisfactory has it been?

  15.  The work of the IPCC is dominated by the published literature and therefore gives too much emphasis to what is known and insufficient warnings regarding the importance of what is not known. When what is thought to be known is incorrect, this can lead to seriously wrong assessment. In making that comment I have no wish to denigrate the devoted and largely unthanked contribution made by hundreds of scientists from both the natural sciences and the social sciences. However, scientific conservatism leads to unwillingness to question the outputs of other disciplines: economists accept the gradual change predicted by the climate models; scientists accept economic folklore that getting prices right is effective; few question that land use change is costly and likely inequitable. The consequence has been that the contribution of economists to the work of the IPCC has been poorly focused on the nature of the problem, which they have perceived in the Baumol-Oates tradition of capping CO2 emissions rather than managing the carbon cycle.

Is there sufficient collaboration between scientific and economic research?

  16.  Furthermore the weight of scientific information contained in the IPCC's Assessments is so great that public perceptions are based on "Summaries for Policy Makers" that are the property of the member Governments, with a process of line by line agreement ensuring an anodyne result. This masks the reality that the division of the Assessments into working group 1 (climate science) working group 2 (ecological science) and working group 3 (social science) inhibits inter-disciplinary collaboration in the assessment process. Added to the rubric that its work should be "policy relevant but not policy prescriptive", the effect is that no framework exists within the IPCC process in which natural and social scientists can work together to devise an effective response strategy. It is for that reason that the Expert Workshop that I convened last autumn (para 8 above) was organised outside of the IPCC process.

Could IPCC member governments, and the UK in particular, do more in future to contribute to the robustness of the economic analysis?

  17.  As regards what is incorrectly known, it is not at all well appreciated within the economic profession that the doubling of pre-industrial levels of CO2 was adopted within the climate modelling community as a basis for model comparison and has no scientific basis as a criterion of what is a safe level. It was transferred to economic analyses as a social construct, what economic analysts thought the policy-making community—and the voters—would accept, given the analysts perceptions of the cost of response. These were in turn based on "top-down" misperceptions of the cost of response based on macro-economic behaviour through decades of low oil prices, interrupted only briefly by the OPEC price hikes. Nevertheless that episode stimulated enough innovation to provide ample evidence of the availability of low cost "bottom up" response strategies which, as noted above (para 4), require a technologically aware policy package for their effective take-up.

  18.  IPCC member governments, possibly at the instance of the UK government, could improve the robustness (relevance) of economic inputs by initiating a problem-oriented approach. As noted at the recent Stabilisation2005 Symposium, this would involve reviewing the set of plausible unacceptable outcomes from continued high levels of greenhouse gases—uniquely high in geological time going back over 1 million years—and then providing a technological assessment of how to avoid such outcomes. The problem oriented approach would then involve the description of alternative measures for driving such technological change, only then followed by economic assessment of the cost-effectiveness (see para 22) of such alternatives.


In monetary terms, the impact of change and the costs of control may be greater in rich countries than poor ones. But is this an adequate measure?

  19.  The issue of equity in burden sharing and impact assessment using standard cost benefit techniques was the subject of a major disagreement in relation to Chapter 6 of the IPCC's 1995 second assessment report (Working Group 3 contribution) where the summary for policy makers is at variance with the text of the Chapter (which is the property of the authors, not the member countries). The problem arose because it was unacceptable to some member countries that the value placed upon a statistical human life was lower than the value placed in other, richer countries. Of course, the application of cost benefit analysis requires that distributional issues have been settled elsewhere, eg by government at the national level. In the absence of effective supra-national government, the application of CBA trans-nationally is clearly inappropriate, a fortiori with a simple monetary calculus. The development of a strategy that yields multiple benefits rather than costs, as with the Expert Workshop (para 8) proposal for a global bio-energy market (see Annex), may help resolve some distributional issues.

What would be the relative costs and benefits of using resources, otherwise expected to be allocated to climate change control, instead to expand international development assistance?

  20.  It has always been a concern of G77 countries that new and additional resources should be made available through international transfers to defray any costs they incur in response to climate change mitigation and adaptation. So far rather little has been forthcoming through the CDM and through GEF expenditures on capacity building, a G77 grievance. But to terminate such flows and claim that compensating increases were being made to official development assistance, in a context of long term decline in such assistance, would rouse suspicion of some sleight of hand. It would thoroughly muddy the waters as regards prospects of developing country participation in the work of the UNFCCC. Yet such participation is essential for success in mitigating climate change. Prospective growth of developing country emissions, under a business as usual pattern of development in their energy sectors, will far outweigh anything that can be done to constrain industrial countries' emissions. Thus the cost of such a proposal will be the ultimate failure of the UNFCCC process. Of course, if the view is taken (contrary to my views expressed above) that climate change damages are certainly slight, and that such failure doesn't matter, then—as pointed out by Thomas Schelling in his 1992 Presidential Address to the AEA—the best thing we can do for developing countries is to boost their growth, making them better able to afford the cost of the minor impacts, when they occur.

When are damages likely to occur and how satisfactory is the economic approach to dealing with costs and benefits that are distant in time?

  21.  The discount rate employed in cost benefit analyses of climate change response strategies is usually taken as exogenous, determined either "descriptively" (ie the risk-adjusted market rate of real return on investment) or "prescriptively" (by reference to welfare theoretical assessments of the social rate of time preference). Apart from the general inapplicability of cost benefit analysis in relation to a problem of pervasive uncertainty noted above (para 12) the application of a decision theoretic approach in which some outcomes, under combinations of foolish policy and an unkind state of nature, lead to low or even negative growth rates points to the need for the discount rate to be endogenous to the scenario (and likely time variant) and not based on a history of economic growth that is discontinuous under such scenarios.

  22.  It should be noted that the UNFCCC's wording envisages cost effectiveness analysis rather than cost benefit analysis, an approach which greatly shortens the time horizon and leaves it to scientific experts to determine how the ultimate objective under the Conventions Article 2 should be quantified. But as regards inter-generational equity, work by Geoffrey Heal and collaborators, based on Rawlesian equity considerations, suggests that—given present indifference between the welfare of generations 200 or 2,000 years ahead—it is appropriate to single out a selection of "worst served" generations under any particular scenario and to select policies that ensure they are no worse off than the present. That—if I understand this very difficult work correctly, which is by no means certain—seems to me to be a reasonable basis for securing intergenerational equity.

What other associated benefits might there be from reducing greenhouse gas emissions?

  23.  As discussed above, the attempt to respond to climate change by reducing emissions is costly and likely doomed to failure through inability to secure international agreement on the deep cuts that are needed to achieve stabilisation even at 550ppm by 2100, still more so in relation to stabilisation at the sharply lower levels that may prove to be needed if the threat of abrupt climate change becomes imminent. Modest co-benefits may follow from such a programme, in terms of reduced local pollution associated with more efficient use of fossil fuels, particularly in transportation, but these are trivial compared to the magnitude of the risks that are run by neglecting the threat of abrupt climate change.

  24.  To reiterate the core message of this submission, climate change response must be seen in terms of carbon cycle management rather than capping emissions. If that approach is taken after 2012, and hopefully before, very great associated benefits can flow to the many land-rich but otherwise impoverished developing countries that can become exporters of bio-fuels. The take-off of sustainable rural development can be funded by carbon credits financed ultimately by demands for energy services, especially personal mobility, in developed countries. Numerous other benefits follow as detailed in the Annex, p 2. Crucial to the realisation of this prospect is to seize the opportunity offered by the breakdown of the Kyoto process that is ironically coincident with its coming into force. The reality of this breakdown is manifest in the decision of COP10, meeting in Buenos Aries in December, to hold an inter-governmental seminar in May to discuss possible ways forward. It is my hope, in providing this evidence, that the Committee will be persuaded to give its support to the expert workshop's recommendation to develop a large scale global bio-energy market.

1 March 2005

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