The Stern Review

After the discussion on risks, uncertainties and probabilities in the economics of climate change, I would like to come back to the Stern Review that was introduced at the beginning. The Stern Review on the Economics of Climate Change has been used as a basis for UK governments to move forward with climate policy. The review examines the evidence on the economic impacts of climate change and the economics of stabilising greenhouse gases in the atmosphere. It concludes that 'the benefits of strong, early action on climate change outweigh the costs' of inaction.

"The effects of our actions now on future changes in the climate have long lead times. What we do now can have only a limited effect on the climate over the next 40 or 50 years. On the other hand, what we do in the next 10 or 20 years can have a profound effect on the climate in the second half of this century and in the next"- Stern Review

It concludes that tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries. They estimate that the excess of benefits over costs, in net present value terms, from implementing strong policies would be in the order of $2.5 trillion. Furthermore, on the question of uncertainties, it mentions that uncertainty is an argument for a more, not less, demanding goal, due to the significant adverse effects of worst-case climate change scenarios. Hence, the earlier effective action is taken, the less costly it will be.

Therefore, we can see that in some ways the review agrees with the kyoto protocol in that governments should do more to reduce emissions but the review presents several key factors that are significantly different from the scientific and economic community. The most important factor that is different is the estimated costs and benefits. Where the review concludes that the benefits of abatement outweigh the costs (by using low discount rates), the IPCC assessments and other studies have concluded that benefits are not significantly different from costs.

At this point, I would like to introduce an evening presentation from Bjørn Lomborg and Dimitri Zenghelis at LSE.

We have previously heard from Bjørn Lomborg on his stance in mitigating climate change. Dimitri Zenghelis, who was head of the stern review team, presents his side of the argument and refutes some of the points made by Lomborg (start viewing from 0:50:50). Particularly, he highlights the occurrence of low probability events (such as abrupt and adverse climate change) and how people buy insurance as well as including uncertainties and discounting in climate change mitigation. He also shows us that it is inappropriate to use Lomborg's methodology to mitigate climate change.

In my opinion, this again highlights the importance of choosing suitable models for estimating economic impacts of climate change. Zenghelis also mentions the problem of getting 'locked in' to a high carbon infrastructure if we delay the creation of innovative markets that might induce greener technology. This shows the importance of looking beyond the current century and further into the future and I believe this is an important aspect to be considered in mitigating climate change. 

Kyoto Protocol- a facade?

An agreement has been reached to extend the Kyoto Treaty by 8 years to 2020, which hopefully by then, a more suitable and equitable Treaty can be drawn up and implemented. I would like to direct you to the video that can be found in that news article, where it shows Andy Atkins from Friends of the Earth. He claims that the current agreement reached at the UN conference is an 'empty deal'. This is because no new cuts have been mandated and the agreement was only an extension of the existing treaty (which already has severe limitations in reducing greenhouse gas emissions). The article mentions that one thing that came out of the talks was the recognition for a global effort to reduce greenhouse gas emissions but implementing an equitable and all-inclusive policy would be a 'monumentally difficult'.

Andy Atkins's comments are in some ways similar to his comments after the Durban climate talks in 2011. 

Interview with Andy Atkins (2011)

He says that there is a framework (or 'shell') where theoretically policies can be implemented to help developing countries reduce greenhouse gas emissions but the 'shell' is essentially empty. The problem faced at the Doha talks seems to be a continuation of this. Countries agree that developed nations should help developing countries to mitigate and adapt to the impacts of climate change. This effort has culminated in the establishment of the green climate fund this year. However, even though there is much hype about this, countries have refused to comment and promise any form of funds to reach the targeted level of investment by 2020. This is most likely due to the economic and political implications back at home (as explained in my previous post). Most notably, the US government has refused to promise any form of funds to help developing countries mitigate climate change impacts but President Obama has recently asked congress for $60bn for the damages caused by Hurricane Sandy.

In my opinion, this shows that the problem of mitigating climate change is very much politically and economically influenced. When political or economic concerns override the peripheral concern for the changing climate, there will be a stagnation of policy implementation (which is in many ways what we are experiencing at present). As such, there needs to be more 'action' and less 'talk' if we were to rein in the negative effects of climate change. 

The Kyoto Protocol

After having a brief look at how people assess risk and make decisions, we can extend the analogy covered in the previous post to our analysis of abrupt climate change. I will like to discuss this in terms of the Kyoto Protocol. 

The Kyoto Protocol was enacted to combat a persistent rise in greenhouse gas concentrations and global warming. It has led to a large increase in the efficiency of energy use and the development of alternative sources of energy. Governments have also tried to work out market inefficiencies and market failures by implementing emissions trading platforms and clean development mechanisms. 

Böhringer (2003) presents a review of the Kyoto protocol and his perspectives of what should be changed to the protocol and how it can be improved. He starts off with describing the problems with managing climate change and coming out with 'first-best','second-best' or 'third-best' policies. It comes as no surprise that one of the problems is that of uncertainties and the different risk perceptions of different countries. 

He defines mitigating global warming as a problem of provision of a global public good. This means that the benefits of mitigation are non-rivalry (the marginal cost of providing the good is zero) and non-excludable (others who do not pay for it are not excluded from the benefits). He acknowledges that due to the uncertainties involved in calculating the costs and benefits of abatement, this has delayed the progress in policy solutions. He mentions that 'together with [the] irreversibility of both [greenhouse gas] accumulation in the atmosphere and accumulation of capital investments, [uncertainties] imply a trade-off between the risk of premature abatement action and risk of delayed action.

In my opinion, this is reflective of the discussion on risk perceptions and disaster preparedness. Similar to the correlation that Miceli et al (2008) discovered between risk perception and disaster preparedness, if people were to perceive abrupt climate change as possible and most probable, they will likewise be more willing to invest in precautionary measures (such as investment in green technology and cutting back emissions). 

However, Böhringer also mentions that there is a problem of incentives and we are faced with a problem of 'tragedy of the commons'. Although all countries could be better of if they behaved cooperatively, each has an incentive to deviate from the Pareto-efficient outcome. This suggests that there might be less incentives for countries to bear the costs of abatement. One example is the withdrawal of Canada from the Kyoto Protocol as the country believes that it has been marginalised by undertaking abatement measures. Since the implementation of the policy, the greenhouse gas emission cuts have been more than replaced by the increase in emissions by non-participating countries. However, heavy costs are still imposed on participating countries which have led to one country, Canada, withdrawing form the program. Hence, this shows that it is important for policy actions to be more equitable and fair across countries. 

For more information about the Kyoto Protocol:
-visit the UNFCCC website


References:

Böhringer, C (2003) 'The Kyoto Protocol: A Review and Perspectives', ZEW Discussion Papers, No. 03-61, http://hdl.handle.net/10419/23995.

Why do people live in areas that are prone to adverse weather conditions?

One of the question that has been asked at the beginning of the debate on abrupt climate change and progressively more adverse weather conditions, is why do people choose to live in areas that are prone to catastrophic floods or annual Hurricanes/ Tornadoes. 

BBC (2012)

BBC Magazine posted an interesting article a few days ago asking the same questions. Classical economic models would predict that housing prices in these flood prone areas (or areas where previous floods have occured) would fall. Due to the intrinsic costs of living in these areas, demand for housing should be very low. However, reports have shown that adverse events do not have a long term impact on house pricing. People still choose to live in such areas, citing reasons such as: 'it will not happen to me', 'Having a river at the bottom of the garden was a big attraction, as I like to do a bit of fishing. [And] it felt like a nice community'. 

Miceli et al (2008) describes the perceptions of flood risks in an Alpine valley in Italy. The study conducted collected information on individuals and communities living in high risk areas in order to understand the risk perception of the people living in these areas, amongst other things. They find that people perceive risks both cognitively and affectively and their perception of risk correlates significantly with disaster preparedness. With higher perception of risks, there will be increased disaster preparedness, which provides an explanation to why people might still consider living in these areas prone to adverse conditions. Furthermore, it has also been found that it is often not simply a lack of awareness, but rather, assessments of local risk based on experience that people underestimate the impact of rare or extreme event and continue to live in these disaster prone areas (Burningham et al 2007). For example, the authors highlight that when people were made aware of the history of severe flooding in certain housing areas, the general response was that they believed that castratophic events (50 or 100 year floods) will not impact them. The study also points towards denial as a factor when home owners purchase properties that have had experiences of flooding. 

However, the above explanations only look at the perspective of the home owners. One should also consider the perspective from the building companies, town councils and government institutions. Some people might consider living in these areas prone to disasters not by choice but by circumstance. The BBC article mentions that local authorities like to redevelop old industrial and mill towns, which are often near rivers. Another BBC investigation in Wales shows that even with regulations set in place, local development authorities still approved plans to develop new housing projects on river flood plains. 

Hence, we can see that there are many reason that might explain the persistence of the people living in areas subjected to areas that are prone to disasters. One should consider the different perspectives in this problem. The demand for a good is the quantity that people are willing and able to purchase at the given price. If people are unable to purchase the goods, naturally there will be no demand for such goods. Therefore, in the face of higher probabilities of adverse weather conditions due to climate change, governments should take more initiative in planning and restricting home owners' ability to built houses in areas of high risks. 



References:

Burningham, K., Fielding, J. and Thrush, D. (2007) ''It'll never happen to me': understanding public awareness of local flood risk', Disasters, 32, 2, 216-238. 

Miceli, R., Sotgiu, I. and Settanni, M. (2008) 'Disaster preparedness and perception of flood risk: A study in an alpine valley in Italy',  Journal of Environmental Psychology, 28, 2, 164-173.