Hong Kong Polytechnic University Impact of Climate Change

Hong Kong Polytechnic University Impact of Climate Change – An Economic Perspective Dr. K. S. Lam

Climate Change ? 1980 !2007 Warming of the climate system is unequivocal by IPCC, 2007

Reference: Stern Review on the Economics of Climate Change • by: Sir Nicholas Stern • U. K. Government Economic Service

Climate change Economic Impact • • Three methods: Disaggregate techniques Economic models Compare current and future ‘social cost of carbon’ with the marginal abatement cost.

• Method 1

Method 1 – Resource Costs Analysis • Impacts: • Melting glacier will initially increase flood risk and then strongly reduce water supplies, threatening 1/6 of the world’s population. • More intense precipitation • Declining crop yields. • Coastal flooding. • Cold related deaths will decrease, heat related deaths will increase. • Vector borne diseases become more widespread. • Ecosystems – 15% to 40% of species facing extinction at 2 C. • Ocean acidification.

Past experience on Costs (developing countries) • Global losses from weather related disasters amounted to a total of around $83 b during the 1970 s, $440 b in the 1990 s. • Number of great natural catastrophic events increase from 29 to 74 from 1970 to 1990. • IMF estimates costs of over 5% of GDP per large disaster on average in low-income countries between 1997 and 2001. • In 1991 -92, the logistical costs of importing cereal into drought affected southern African countries were $500 m. • In 1991 -92, drought in Zimbabwe, increase deficit from 6% to 12% of GDP. By the end of 1992, real GDP has fallen by 9% and inflation increased to 46%, food prices increased by 72%. • In 1998, the reconstruction costs after Hurricane Mitch in Honduras was equivalent to $1250 per capita.

Method 1 – Costs of Developed countries • Major costs: – USA, a 5 or 10% increase in typhoon wind speed is predicted to double annual damage costs. Sep 2005, Hurricane Katrina, 1836 death, $81. 2 b lost. – UK, annual flood losses alone could increase from today 0. 1% of GDP to 0. 2% to 0. 4% of GDP when temp rises by 3 to 4 C. – Europe, 2003 heat waves caused 35000 death and agricultural losses of $15 million.

Results of Resource-cost analysis • At 2050, temperature will rise by 2 to 3 C. • The technology-based analysis identifies one set of ways in which total GHG emissions could be reduced to ¾ of current levels by 2050. • The costs amount to under $1 trillion. • Equate to around 1 ± 2½ % of annual GDP. • Able to tackle climate change at low cost.

• Method 2

Method 2 Modeling Climate Change from emissions to impacts Population, technology, production, consumption Emissions CO 2 concentrations Global climate Regional climate and weather Direct impacts food, water, health, eco Socio-economic impacts

Method 2 – IPCC future scenarios

Method 2 – Integrated Assessment model • Model future emissions by sector

Method 2 – Integrated Assessment model • Model future climate – Calculate impacts by superimposing climate change onto a future world and compare it to the same future world without climate change. • Aggregate over consequences – within generations – over time – according to risk • Quantitative in comparing consequences of different kinds and for different people.

Method 2 – Integrated Assessment modeled 3 categories of economic impact 1. includes only the impacts of ‘gradual climate change’ on market sectors of the economy. 2. includes the risk of market sector and catastrophic climate impacts at higher temperatures. 3. includes market impacts, the risk of catastrophe and direct, non-market impacts on human health and the environment.

Method 2 – Integrated Assessment model • The model assumes GHG can be cut in 4 ways: – – Reducing demand Increased efficiency Action on non-energy emissions: stop deforestation. Switch to low-carbon technologies: vehicles, power plants,

Method 2 – Resource costs • Results: – Resource costs estimates suggest that an upper bound for the expected cost of reductions is likely to be around 1% (-1% to +5%) of GDP by 2050 (stabilization at 550 ppm CO 2 e). – Energy efficiency has the potential to be biggest single source of emissions savings in the energy sector. – Prevent further deforestation would be relatively cheap among the non-energy emissions. – Large scale uptake of clean power, heat and vehicles is required for radical emission cuts. We need to cut 60 to 75% – It is unlikely that any single technology will deliver the necessary cut. – It is uncertain which technologies will be cheapest.

Previous Macroeconomic models • Results: – Also came up with the cost of stabilization at 500 – 550 ppm CO 2 e were center on 1% GDP (-2% to 5%) by 2050.

• Method 3

Method 3 – Analyzing the costs and benefits • Methodology: – comparisons of the current level and future trajectories of the ‘social cost of carbon’ SCC with the ‘marginal abatement cost’ MAC. • SCC – the total damage from now into the indefinite future of emitting an extra unit of GHG now. • MAC – the cost of reducing emissions by one unit.

The optimum degree of abatement in a given period

Method 3 – Analyzing the costs and benefits • Costs and benefits: – Social cost of carbon today is $85 per tonne of CO 2. – Well above marginal abatement costs in many sectors. • Results: – Net benefit in net present value terms would be of the order of 2. 5 trillion.

• Climate change – • Future Target Level of GHG

All 3 methodologies require a target level of future GHG – Todate, 2. 7 trillion barrels of oil equivalent of oil gas and coal have been used up. At least 40 t remain in the ground, of which 7 t are economically recoverable. Reserves last comfortably up to 2050. – The world is already irrevocably committed to further climate changes.

All 3 methodologies require a target level of future GHG – At present, 430 ppm CO 2 e. – 450 ppm CO 2 e is already almost out of reach, – the damage will be unreasonably high when it exceeds 550 ppm CO 2 e. – Emissions target is then about 5 Gt. CO 2 e per year. 80% reduction from present level. – Models focus at 450 to 550 ppm CO 2 e.

• Results of all 3 methods are similar

Economic impact of Climate Change • All 3 methods leads to similar conclusions: • For 2 to 3 C rise, – Risks and costs of the climate change could be 5% to 20% average reduction in global capita consumption, now and forever. – The annual costs of stabilisation at 500 -550 ppm CO 2 e to be around 1% of GDP by 2050 - a level that is significant but manageable.

• Climate change – • the Economic Impact

Impact on coastal areas • 200 m people live in coastal floodplains. • 2 m km 2 of land $1 trillion worth of assets less than 1 -m elevation above current sea level. • 22 out of 50 mega cities in the world are at risk of flooding from coastal surges: Tokyo, Shanghai, New York, London, Hong Kong. . • Some estimates suggest 150 – 200 million environment refugees by 2050 (2% of projected population).

Impacts on wealth and output • At 1 -m rise in sea level • PRD, 1, 100 km 2 inundated. Using Hong Kong’s reclamation cost, it requires $14 billion dollar to recover the lost land.

Impacts on wealth and output • Energy – High latitude, reduce winter heating and increase summer cooling. Save energy. – mid and low latitudes, increase energy use due to air conditioning demands. – For a 3 C , Italy winter energy fall by 20%, summer energy increase by 30%. Hong Kong increase by 15% per year. – Risk of energy disruption. Overloading of power plants due to • rising temperature of cooling water, • peak load capacity exceeded during heat wave episode.

Climate change impact on food

Climate change impact on Health • Significant shift from cold-related death to heat-related death.

Impacts on Global financial market • Financial market help moderate costs and impacts. – insurance to spread lost over society, – hedge with derivatives to smooth commodity prices, – insurance premium will rise, – amount of capital that insurance companies have to hold also rise. – If the insurance industry looks to access additional capital from the securities and bond markets, investors are likely to demand higher rates of return for placing more capital at risk, causing a rise in the cost of capital. – When 3 C , storm intensity increases by 6%, insurers’ capital for typhoon increase by 90% in US and 80% in Japan – an additional $76 b in today’s prices.

Impacts on Global financial market • Financial market might not be helpful to poor countries. – push up cost of insurance. – raising deductibles, – cutting back or restriction on coverage, – when compensation cost is too high, failure to insure, – banks might be unable to offer finance for mortgages or loan in high risk areas.

Impacts on Global financial market • The costs of extreme weather events are already high and rising, annual losses $60 b since 1990 s (0. 2% world GDP), $200 b in 2005. • Insurance industry data show that weather-related castrophe losses have increased by 2% each year since 1970 s.

Impacts on developed countries • Less cold-related death, more heat-related death, overall increase in mortality. • Tourism may shift northward. – Glacial related tourism will suffer. – Australia estimates $32 b loss in tourism due to bleaching of Great Barrier Reef. • Northward shift in economic activity and population in the N hemisphere.

New opportunities – New Markets for low-carbon energy products are likely to be worth at least $500 bn per year by 2050. – Carbon trading, emission trading – new products such as weather derivatives, catastrophe bonds. – Carbon capture and sequestration. – Reform of inefficient energy system. – Reform energy subsidies – currently about $250 bn per year. – Co-benefits: reduce ill-health, air pollution, preserve biodiversity, energy security. .

• Conclusion

Conclusion • Global warming is affecting the whole world. • Its impact is all dimensions: – the sea, the land the sky – the tropics, subtropics, temperate and tundra • Economic impact of climate change is definite, negative and astronomical.

Conclusions • Urgent action is needed now! • The benefit of strong, early action considerably outweigh the costs. • Mitigation can be done in a way that does not cap growth. • The earlier action is taken, the less costly it will be. • Ignoring climate change will damage economic growth. • No action create risk of major disruption to economic and social activity, later in this century and in the next, on a scale similar to world wars. • It will be difficult or impossible to reverse these changes.

• Climate change – • Caveat

Caveat • Uncertainties and risks in the economics impacts are pervasive.

• Climate change – • the greatest market failure

Climate change – Market failure • Global in its causes and consequences – The incremental impact of an extra tonne of GHG is independent of where it is emitted. • Impacts are long term and persistent – GHG stays for hundreds of years. There are severe time lag for the earth to respond after which the economic and social response will follow. • There is a serious risk of major, irreversible change with non-marginal economic effects.

Climate change – Market failure • Those who produce GHG are bringing about climate change. • They impose costs on the world and on future generations. • But they do not face the full consequences of their actions themselves. • So emitters do not have to compensate those who suffer. • GHG are an externality, one that is not ‘corrected’ through any institution or market, unless policy intervenes.

Climate change – Market failure • Climate is a public good: those fail to pay for it cannot be excluded from enjoying its benefits. • One person’s enjoyment of the climate does not diminish the capacity of others to enjoy it too. • Markets do not automatically provide the right type of climate because there are little returns to investors for doing so.

Climate change – Market failure • Rich countries produced the majority of GHG emissions. • All countries are affect by climate change but to different extent. • Developing countries will be badly hit. • This is a double inequity.

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