Select Committee on Economic Affairs Minutes of Evidence

Examination of Witnesses (Questions 209-219)

Professor Richard Tol


  Q209Chairman: Professor Tol, you are welcome. I know you have been here sitting listening to how we proceed and the way to handle this, but we are nevertheless extremely grateful to you for coming along. As I said to your predecessors, it is helpful to us if you speak up and relatively slowly so that the record is as accurate as we can make it. Is there anything you want to say in advance of questions or can we go straight to questions?

  Professor Tol: Only that it is an honour to be here.

  Q210Chairman: That is a very nice thing for you to say, and we appreciate that. There are two aspects of your work that particularly interest us: the work you have done on the debate over the IPCC emissions scenarios; and the findings of your Integrated Assessment Model "FUND" on costs and benefits of tackling global warming. On the first, the emissions scenarios, we know you are aware of the debate sparked by Professor Henderson, who came and talked to us a little while ago, and Mr Castles. What is your view on how this debate now stands?

  Professor Tol: This is a very difficult issue actually, so my answer will be a bit longer. The first point is that all of the scenarios used in the climate change debate have assumed convergence of per capita incomes. That was addressed before, but that is perhaps not a valid assumption. But everybody has assumed that so far. Therefore, we basically have to live with that. It is not so that you can just take a scenario and replace it with something else in a matter of five minutes; it requires a lot of work. All these scenarios assume convergence. Castles and Henderson are very right to criticise these scenarios because they essentially assume convergence based on market exchange rates, which is ludicrous I think. It should have been based on purchasing power and exchange rates, and therefore these scenarios are biased. It does not stop there. Castles and Henderson in their critique unfortunately forgot that there is another convergence assumption that has been made in all the scenarios, and that is the convergence of energy efficiency, how much energy you use in your economy. In all the scenarios that are there, convergence is assumed as well. That is much more in line actually with the historical evidence. The switch from MER to PPP for market exchange rate to purchasing power exchange rates works the opposite direction in energy efficiency because the gap in energy efficiency between poor and rich is obviously much smaller, if you think that they are much richer than you would think if you measured a market exchange rate. So these two convergence estimates, and convergence from market to purchasing power exchange rates actually offset one another[2]. At the moment it is simply not clear whether they would fully offset each other or whether they would hardly offset each other, or somewhere in the middle. I think that Henderson and Castles overstated that bias. The next issue is that the bias is there and we do not really know how large it is, but we can compare it to other uncertainties that are in the projections. I think that most people working in this area would say that the error or the bias introduced by (the exchange rate) or choice of exchange rate is actually fairly small compared to the wider uncertainty that there is about the future. It may be a small bias. That is true on a global scale, if we are talking about global emissions. It is not true on a regional scale because Castles and Henderson are right that we should have projected slightly lower emissions on a global scale, but the whole issue with exchange rates you use does not really affect the rich countries but only the currently poor countries. Therefore, global emissions may fall a little bit, but the portion in those emissions that is due to developed countries' emissions grows considerably and that of course changes the whole political debate on who is responsible and so on and so forth. The real issue is actually there. The final point—and that is what I think is the real contribution of Castles and Henderson—that they held the community that has developed these scenarios to the light. They point out a great weakness in what has been done in the IPCC but also in other corners of the climate and energy community. That is where these scenarios come from, and who builds them. If you look a little bit deeper into this, you find that the SRES (and IPCC) scenarios were essentially built by people who know a tremendous amount about energy supply. If you are interested in energy supply the team that built the SRES scenarios are the dream team, that is the people you want round the table if you want to talk about energy supply. But if you then move to other equally interesting issues such as energy demand or population growth or economic growth, you would find that the SRES team was perhaps lacking in expertise. Also, the modes that were used, the SRES scenario exercises, were essentially models that have been developed traditionally for energy policy analysis, and now all of a sudden these models have been used to build scenarios, and that is not what they were originally designed for. From that perspective, historically, it was not a surprise that the SRES scenarios would at some point be criticised by eminent economists such as Henderson. It may have been perhaps a surprise that it took so long! Another point came to light during this whole debate—and I was at the very start of SRES, which was in 1996, and it was one of the most controversial debates that I have ever seen. Going back to the convergence assumption, from the very start onwards it was clear that the SRES team had placed itself under constraints of political correctness, that is to say because it is an IPCC exercise it has to be reviewed by all the governments in the world, and if you come up with scenarios in which the African countries, which are a fairly large bloc (in the UN)—if they do not grow fast enough, they will never approve our scenarios. So this is what we cannot assume—and that self-censuring was right there from the start.

  Q211Chairman: You have given all those erudite comments, and they sound very convincing to me, but I also form a conclusion that whilst they may be right, at the end of the day they do not make much difference either. The emissions we are looking at are not so wildly out; they are just different, but not sufficiently different. What are you saying?

  Professor Tol: The switch from market exchange to purchasing power exchange rate makes a relatively small difference in global emissions. It makes a large difference in regional emissions. But it particularly points us to a lot of work that will need to be done in the future still. I was at a meeting discussing this, three weeks ago in Washington DC. That is how you started the question—where does the debate stand? After one and a half days of vigorous debate we concluded there is something fishy going on. We do not know whether it is a small fish or a big fish.

  Q212Lord Goodhart: One of the things we are looking at very closely here is the question of costs and benefits of climate change. Can you explain how damages from global warming would be calculated?

  Professor Tol: Yes, I can, because that is what I have been doing for the last 15 years. Actually, it is very simple—and that is a bit embarrassing because it is so simple. One starts with estimating what we usually refer to as the physical effects—how much faster would plants grow; how much higher would the dykes need to be; how many people would be killed or not get killed because of infectious diseases or heat stress, or what-have-you? That is the first thing you estimate, things that are physical or natural. The second thing one estimates is what would be the price of these things, or the equivalent welfare loss. It is easy if you are talking about dyke building and investment costs for building the dykes, but if you are talking about loss of human life it is somewhat trickier.

  Q213Lord Goodhart: It must be very tricky. Do you weight it according to the place and part of the world that they are in? Do you value the cost of a life in western Europe higher than you do in central Africa?

  Professor Tol: That depends on the analysis you are interested in. Originally these estimates are based on local prices. That is perfectly acceptable to most of us, that if you want to compare costs of dyke building in India or in Bangladesh to costs of dyke building in Netherlands, you would use a local price. By the exact same logic, if you are talking about loss of life and you are using a local price, what would it mean to them to have an increased risk of mortality or morbidity and what would it mean to us? Initially these prices or values are local, and then the next step is to find how you add them up and compare them. That strongly depends on what decision-maker you are informing. In a national context these things are well established. If you are designing a policy on road safety in the United Kingdom, you would never say that Scotsmen deserved less safety than Englishmen because the Scots are poorer—or maybe they are richer now, I do not know. You would never make such an argument because you would get killed in Parliament. There is no need to explain that here. But on a global scale you do not have that sort of mechanism, so essentially you have to decide. If you were putting yourself in a position of a global dictator who controls the whole world—a benevolent dictator of course—or if you were to put yourself in a position as somebody in a global parliament, then you would argue that somebody dying in Bangladesh should be equally worthy as somebody dying in the UK.

  Q214Lord Goodhart: Even in this country, in the UK, when somebody is killed in a road accident and their estate sues for damages, they will get more damages if they were more highly paid and lost more expectation of salary.

  Professor Tol: Very true. That is what would happen if you were talking about a market system or a court system, but as a national government you would never design a policy that way. It depends on the application and interest. From the perspective of the global decision-maker, it is quite clear that you should value everybody equally. From the perspective of a national decision-maker, that is not true. What matters to the UK Government is how much they value UK citizens relative to Bangladeshi citizens. That is not necessarily related to how Bangladeshis value themselves.

  Q215Lord Goodhart: Do you put any kind of evaluation on things that produce an economic loss? For example, if one of the consequences of global warming is the extinction of the polar bear, do you put any value on that; and, if so, how do you do it?

  Professor Tol: There is a debate on that. In my model I do it. A lot of people prefer not to do it. I do not use values for the polar bear particularly. The basic method is as follows. It is clear that people care about such species and that people pay to go and see them and so on, so they represent a value to human-beings—that is clear. The question is how to estimate that. There are more reliable or less reliable methods for doing so. If we are talking about species loss, unfortunately we are forced to use the less reliable methods because the reliable ones do not work; but, yes, they are included. Essentially, it is based on questionnaires, asking people: "The polar bear is threatened. Suppose that you could save it; how much would you be willing to pay each year to help save the polar bear?" Then you can calculate the risks and so on and so forth—what would be the value of the polar bear. You can derive these values. They are awfully soft, I immediately admit. Unfortunately, if you do not do it, then implicitly you set the value to zero and that is not what you want, so you use these methods, and because the impacts of climate change on eco-systems and species is still so vague, in my model I only use average values for these things.

  Q216Lord Sheppard of Didgemere: I wonder if you can help educate me on the concept of equity weights. Can you explain how they are used and what the bottom-line effect is on your model, and the justification?

  Professor Tol: I already started to answer this in the previous answer. Equity weights are essentially a trick one uses to come from the regionally divergent prices to an aggregate. The national or the regional effects are estimated in dollar terms or whatever, and then you want to aggregate them, but then you need to correct for the fact that the dollar to a poor man is not the same as a dollar to a rich man. That is where the equity weights come into play. You express things as an equivalent welfare loss, and then add up and then convert back into dollars or pounds or euros. That is essentially what equity weighing does. It reflects the position of the global decision-maker, not the national or regional decision-maker or individual, so in that sense they are an academic construct. Equity weighing is terribly important, though it is not clear how important it really is. It is important because most people agree that developing countries and poorer countries are more vulnerable to climate change than richer countries. Therefore, if you use equity weighing you are placing more weight on the damage in developing countries, and therefore the impact estimates go up. The marginal damage cost estimates, so the additional damage that is done by an additional tonne of carbon dioxide emitted, go up by a factor of three or two of five. So the optimal carbon tax would go up if you used equity weighting.

  Q217Lord Skidelsky: I would like to go back to an earlier part of this cost benefit analysis. Is there any credible way of measuring emissions because the whole calculation really depends on that? Everything else in the argument then depends on it because the rate of global warming depends then partly on the rate of emissions. If industry burns coal, you can infer that a certain amount of CO2 will be released into the atmosphere, but how much will obviously depend on the technical characteristics of the coal-burners and so on. I can see that you know what the world price of coal is, and you know how much coal is consumed, and you can come to a dollar figure of total coal consumption and therefore a figure for damage from CO2 emissions, assuming a certain relationship between coal burning and CO2 emission. However, how do you build in the technical characteristics of the different types of production into this aggregated model? I am just interested because it seems to me that unless you have a credible method of measuring these things you also cannot begin to start trading emissions if you want to go on to policy.

  Professor Tol: There are two answers. First, I am not a real expert in this, so maybe somebody else will correct me. If we are talking about burning of fossil fuels it is fairly easy. When you burn fossil fuels you oxidise the carbon that is in the fuel, and that is the process of burning. You know how much carbon is in a tonne of coal or a litre of oil or a cubic metre of gas because that is basically why you burn it, so it is fairly well known. If you are talking about cars, burning gasoline, you either get carbon dioxide or carbon monoxide out, and you know exactly how much of this, and you also know to a fairly close degree what is the share of carbon monoxide and carbon dioxide. That is fairly well under control. Then of course you can also monitor how much carbon dioxide enters into the atmosphere, so you can check. Things become much more complicated if you are talking about emissions from agriculture, nitrous oxide and methane and so on, and that is more sophisticated; but I am no expert there. With regard to trading emission permits, what matters there is not how much carbon is emitted physically but how much carbon is emitted legally, because you are trading a legal document and the regulator will have specified how to do this and how you account for it. Whether that is anything to do with reality is a different matter, but that is the legal reality.

  Q218Lord Skidelsky: A poor country can say, "we are legally entitled to do this; you say we are doing that, and therefore we have to pay a penalty , but we deny it". One can see all sorts of—

  Professor Tol: Yes.

  Q219Lord Skidelsky: I am sorry, I am taking you beyond what we are talking about at the moment.

  Professor Tol: You are right.

2   I should have said: If one switches from market exchange rates to purchasing power parity, convergence of per capita income as well as convergence of emission intensity change, and these two changes offset one another. Back

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