Article: Mitigation of Climate Change: Cost of Action and Inaction

Here is a fact: Global sea levels are currently rising at approximately 1.25 inches per decade, and the rate of increase appears to be accelerating.  The last decade was the warmest on record both in the United States as well as globally.  The average temperature in the United States during the past decade was 0.80 Celsius (1.50 Fahrenheit) warmer than the 1901-1960.  

The scientific consensus is that these climate changes, and many others, are largely consequences of anthropogenic greenhouse gas (GHG) emissions that have led to a warming of the atmosphere and oceans. 

The conclusion of the scientific research divulges that anthropogenic GHG emissions such as carbon dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O) and Fluorinated gases (F-Gas) act like a blanket, absorbing the sun’s radiation and preventing it from escaping back into space. The net effect of this activity is a gradual heating of the Earth, a process which has been termed “Global Warming”.

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Here is another fact: The energy sector contributes two thirds of GHG emissions with CO2 emissions representing 90 percent of the total energy-related emissions. The rest of the GHG emissions are attributed to agriculture, land use and forestry sector and other industrial processes. 

The International Energy Agency (IEA) estimates that currently 1.3 billion people or 18 percent of the world’s population do not have access to electricity, and 2.6 billion people (40 percent) lack access to clean cooking facilities.  

Based on the understanding that the Global Gross Domestic (GDP) is set to increase from around $80 trillion today to around $260 trillion by 2060 which will have a direct impact on increasing wealth levels as well as improving global economy.  Consequently, global energy demand will set to balloon over the coming decades, and the backdrop of its impact on the climate makes the choice of how that energy is generated, and indeed how much of it we use versus how much we save, of critical importance.

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Not too long ago, the world’s first comprehensive climate agreement adopted in Paris in December 2015, included a commitment to keep the rise in global temperatures “well below” 20C compared to pre-industrial times, while striving to limit them even more, to 1.50C degrees.   

It is critical to understand that in order to limit temperature increase to 2°C would require CO2 emissions (not including CH4 and N2O) to be limited to approximately 3,010 GT CO2.  Unfortunately, we have already emitted more than 60 percent of this total “Carbon Budget”, leaving little room to expand CO2 emissions if we are serious about limiting the temperature increase to 2°C.  In fact, if it wasn’t for land and ocean “carbon sinks”, annual CO2 concentrations would be accumulating in the atmosphere at a much higher rate. 

Here is an example of how some groups are making efforts: At the Paris Agreement 140 World Bank client countries committed to implement their Nationally Determined Contributions (NDCs) as part of an agreement to limit global warming to less than 2°C by 2100, and make best efforts to limit warming to 1.5°C. At the same time, public and private actors have renewed their global commitments to increase investments and R&D, boost carbon pricing, and end wasteful energy subsidies.    

At the same time, the organizations around the world are faced with the question whether to proceed with the implementation of policies to stem climate change or to delay those policies until a future date.  Here is a couple of realities reported in the report, Climate Change Action Plan, published by the World Bank Group (WBG):

  • Climate change is a threat to the core mission of the WBG.  Current weather extremes already affect millions of people, putting food and water security at risk, and threatening agricultural supply chains and many coastal cities. Without further action to reduce extreme poverty, provide access to basic services, and strengthen resilience, climate impacts could push an additional 100 million people into poverty by 2030; and
  • Climate change presents enormous challenges and opportunities for development, making it essential that climate and development be tackled in an integrated way. The world needs to feed 9 billion people by 2050, provide affordable energy access to all, and extend housing and services to 2 billion new urban dwellers—and to do so while minimizing emissions and boosting resilience.
  1. Cost of Action:

The Intergovernmental Panel on Climate Change (IPCC) estimates, over time, the economic impact of governments implementing climate policy could add up to between 3 and 11 per cent of “Global Consumption”, an economic unit similar to GDP (Gross Domestic Product). That may sound like a lot at first, but once the figure is put alongside the cost of doing nothing (Inaction), it looks less pricey.

The IPCC bases its estimates on a future where there is 3 percent annual economic growth. That’s by no means certain – and the World Bank estimates it’s been below this for the last two years – but it allows the IPCC to make theoretical statements about how much implementing climate policy could cost.

In order for it to remain “likely” that the two degrees target can be achieved, the IPCC says governments will have to implement policies that will cost between 0.04 and 0.14 per cent of global consumption growth each year. The average cost could be around 0.06 per cent a year which means that global economic growth of 2.94 percent per year, in contrast to 3 percent growth in a fictional future where there is no climate change (known as a baseline scenario), according to the IPCC’s calculations.  Here is a graph to illustrate the point:

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According to the MIT Technology Review, major reports conducted around the world have concluded that stabilizing GHG to avoid catastrophic climate change is possible and can be done at a relatively low cost. But the details of the reports make it clear that when you factor in real-world issues—such as delays in developing and implementing technology and policy—the cost of solving climate change gets much higher. For instance, switching from fossil fuels to low-carbon sources of energy will cost $44 trillion between now and 2050, according to a report, Energy Technology Perspective 2016 – Towards Sustainable Urban Energy System, released this week by the IEA. That sounds like a lot of money, but the report also concludes that the switch to low-carbon technologies such as solar power—together with anticipated improvements in efficiency—will bring huge savings from reduced fossil-fuel consumption. As a result, the world actually comes out slightly ahead: the costs of switching will be paid for in fuel savings between now and 2050.

The IPCC issued a report recently which cited that efforts to stabilize levels of GHG emissions would require investments of about $13 trillion through 2030. It also noted that reducing emissions would reduce the rate of economic growth (as a result of such factors as higher energy prices). But it would do so by, on average, less than a tenth of a percentage point per year between now and 2100.

These cost estimates, however, are based on idealized scenarios. They give a sense of what getting away from fossil fuels will cost if we all act now and make smart decisions going forward, and if technologies work out the way we hope they will.  One of the biggest factors is how long it takes to start reducing emissions. In 2012, the IEA estimate for the cost of switching to low-carbon energy was only $36 trillion, $8 trillion less than the current estimate. The increase is largely because in the intervening time, emission rates have increased and GHG levels in the atmosphere have risen, making the problem harder to solve.

2.Cost of Inaction:

Now focusing on the impacts of inaction or delaying action to stem of climate change, the cost of inaction has been studies extensively.  According to a meta-analysis of published model, concerns the cost of trying to hit the same climate target with a later date for the mitigation policies. It illustrates that the cost of achieving a given target would rise by about 40 percent.  Although there is considerable variability in costs for a given delay length because of variations across models and experiments, there is an overall pattern of costs increasing with delay.

Vox Cepr’s Policy Portal reviewed 16 studies that compare 106 pairs of policy simulations based on integrated climate mitigation models. The simulations comprising each pair implement similar policies that lead to the same climate target (typically a concentration target but in some cases a temperature target) but differ in the timing of the policy implementation, nuanced in some cases by variation in when different countries adopt the policy. Because the climate target is the same for each scenario in the pair, the environmental and economic damages from climate change are approximately the same for each scenario. The additional cost of delaying implementation thus equals the difference in the mitigation costs in the two scenarios in each paired comparison.

For example, of the 14 paired simulations with ten years of delay, the average delay cost is 39 percent. The regression line shown in Figure 4 estimates an average cost of delay per year using all 58 paired experiments under the assumption of a constant increasing delay cost per year (and, by definition, no cost if there is no delay), and this estimate is 37 percent per decade. This analysis ignores possible confounding factors, such as longer delays being associated with less stringent targets, and the multiple regression analysis presented in the Annex below controls for such confounding factors.

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The costs of delay in these studies depend on a number of factors, including the length of delay, the climate target, modelling assumptions, future baseline emissions, future mitigation technology, delay scenarios, the participants implementing the policy, and geographic location. More aggressive targets are more costly to achieve, and meeting them is predicted to be particularly costly, if not infeasible, if action is delayed. Similarly, international coordination in policy action reduces mitigation costs, and the cost of delay depends on which countries participate in the policy, as well as the length of delay.

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The second conclusion is that the more ambitious the climate target, the greater are the costs of delay. This can be seen in Figure 5, in which the lowest (most stringent) concentration targets tend to have the highest cost estimates. In fact, close inspection of Figure 1 reveals a related pattern – the relationship between delay length and additional costs is steeper for the points representing CO2e targets of 500 ppm or less than for those in the other two ranges. That is, costs of delay are particularly high for scenarios with the most stringent target and the longest delay lengths.

This, however, is only one factor to consider in assessing the timing and magnitude of action on climate change. Because of the fact that CO2 accumulates in the atmosphere, delaying action increases CO2 concentrations. Thus, if a policy delay leads to higher ultimate CO2 concentrations, that delay produces persistent economic damages that arise from higher temperatures and higher CO2 concentrations.

3. Conclusion:

A recent report published by Citibank elucidates that taking action now against the growing threat of climate change would save an astonishing $1.8 trillion by the year 2040.  This is based on the forecasts that the sums of money to be spent on energy, both capital expenditure and fuel, over the next quarter century will be unimaginably large, at around $200 trillion.

If the scientists are correct, the potential liabilities of not acting are equally vast. The cumulative lost GDP from the impacts of climate change could be significant, with a central case of 0.7 percent -2.5 percent of GDP to 2060, equating to $44 trillion on an undiscounted basis. If a risk-adjusted return is derived on the extra capital investment in following a low carbon path, and compare it to the avoided costs of climate change, the returns at the low point of between 1 percent and 4 percent, rising to between 3 percent and 10 percent in later years.

Resources:

  1. The Cost of Delaying Action to Stem Climate Change;
  2. Energy Darwinism II – Why a low carbon future doesn’t have to cost the Earth;
  3. World Bank Group Climate Change Action Plan;
  4. IEA: Energy Technology Perspectives 2016 – Towards sustainable Urban Energy Systems;
  5. IPCC: Talking Global Warming could Slow Global Growth – by 0.06 percent;
  6. GDP Growth (Annual %);
  7. MIT Technology Review: How much will it cost to solve climate change;
  8. IPCC: Special Report on Impact of Global Warming; and
  9. The Cost of Delaying Action to Stem Climate Change