The debate about the cost of mitigating climate change is as polarized as the debate about the scientific basis of climate change was until recently. At one end of the spectrum of opinion are those who argue that any serious effort to cut emissions will prove economi- cally ruinous, adding that the environmental impacts won’t be so severe that we can’t adapt to them. At the other end are those who claim that such an effort will stimulate the economy and bring a host of side benefits and that the tran- sition to a low-carbon economy can be smooth.
Economic analyses of climate change have also resulted in a wide range of cost estimates and have not succeeded in resolving the controversy. For instance, the Stern Review on the Economics of Climate Change published last October was meant to be the definitive economic study of climate change. It put the net annual cost of stabilizing emissions at around 1 percent of global GDP. However, the different approaches and models used to estimate the cost of mitiga- tion resulted in a range of -2 percent (net economic gain) to +5 percent (net cost) of annual GDP with some extreme estimates putting the cost even higher. The Stern Review was criticized from both sides. Some said it grossly understated the cost of reducing emissions while exaggerating the impact costs. Others thought the whole exercise was mis- guided because it assumed stabilizing emissions at a level that they deemed too high and risky. In Canada, the strong and opposing reactions to the recent study put out by the federal government on the cost of achieving our Kyoto emission reduction target certainly showed how heated and politicized this debate has become.
Why do estimates of the cost of mitigating climate change vary so widely? Putting a price tag on such a complex, wide-ranging, uncertain and long-term environ- mental challenge is a difficult and value-laden exercise. The wide range of cost estimates reflects the different approach- es and assumptions on which the economic models are built. Since climate change is likely to continue to be a cen- tral policy challenge in Canada and may even become a key electoral issue, it is important and timely to examine some of the factors driving the differ- ences in the numbers.
First, what is meant by climate change mitigation? There should be no misconceptions about the magni- tude of the challenge of stabilizing atmospheric concentrations of GHGs at a level that would prevent ”œdanger- ous” climate change. While there is still uncertainty and debate about what constitutes ”œdangerous” climate change and on exactly how much emissions need to be reduced to pre- vent it, stabilization at any of the lev- els that scientists are even willing to consider will eventually require reduc- ing global annual emissions far below current levels. In addition, the reduc- tions will most likely occur in a con- text of continued population and economic growth such that, in Canada, emissions per capita and per unit of income will have to shrink to a fraction of what they are today.
Since the bulk of GHG emissions come from energy use and pro- duction, reducing emissions entails first and foremost massively increas- ing low- and no-carbon-emission power generation as well as achieving an unprecedented rate of energy effi- ciency improvement and sustaining it for decades to come. Abatement costs principally result from energy-related changes. Examples include outfitting major carbon-emitting facilities with the capacity to capture and store those emissions; changing production processes and equipment in order to release fewer emissions and/or con- sume less energy; better insulating houses and buildings; and switching from polluting (albeit cheap) coal to natural gas or renewable energy sources. At the most basic level, the cost of reducing emissions is a func- tion of the level of emission reduction and the timeframe to achieve that reduction. High levels of emission reduction are more expensive in the short term because a lot of energy- using and -producing capital stock is long-lived. For example, light bulbs have a very short life-span, which makes it possible to ban incandescent light bulbs in favour of more energy- efficient bulbs over a few years. However, other energy-related capital stock such as cars, manufacturing equipment, houses and buildings, planes and urban development infra- structure has a much longer life-span, which can slow abatement progress or raise its cost. Nevertheless, the rela- tionship between emission abatement level, timing and cost is not linear or static.
One of the main factors that affect mitigation cost estimates is assump- tions about the potential and future pace of technological innovation. For instance, in the case of electricity gen- eration, commercially available renew- able energy technologies, other than hydroelectricity, are generally more expensive and have some practical limitations that have up to now pre- vented them from being used on a large scale. The faster more efficient and practical technologies enter the market and the faster their prices come down as production increases, the lower the costs of reducing emissions. Conversely, pessimistic assumptions about technological progress yield high mitigation cost estimates.
While visions of 3- litres-per-100 km cars becoming bestsellers next year may be too opti- mistic, assumptions that we have reached the apex of technological develop- ment and that future gains in energy efficiency are going to be very difficult to achieve are probably just as unrealistic. Past experience shows that when we become serious about addressing an environmental prob- lem, solutions start to appear and dire predictions of economic ruin don’t materialize. In the case of acid rain, the major emitters, metal smelters in Sudbury, initially insisted that abate- ment requirements were not justified and that the costs would result in ”œa net loss to Ontario.” However, accord- ing to Pollution Probe, by 1999, Sudbury’s two major producers of smelter emissions, Inco and Falconbridge, had reduced their emis- sions of sulphur dioxide by about 90 perccent from 1960 levels.
In the case of the ozone layer, producers of CFCs, important ozone- depleting substance initially resisted the idea of a ban on CFCs. While con- tinuing to argue publicly against ban- ning CFCs, privately they were doing research into finding an alternative. When they succeeded, they changed their position 180 degrees, as a ban would open a global market for their alternative product. Only a few months later, the Montreal Protocol on Ozone Depleting Substances was ratified, and is it now considered the most successful multilateral environ- mental agreement.
As these and many other cases show, technological development can be helped along through different channels such as support for research and development, regulatory pres- sures, stimulating market demand or learning by doing.
Some argue that there are insuffi- cient low-cost and commercially viable technologies to achieve the level of emission reductions needed to stabi- lize the global climate. However, this is not a justification for postponing action. First, there is an urgent need to pick the low-hanging fruit. While there is no apparent single and cheap quick fix to the problem of climate change, the experiences of businesses and communities across Canada and of other countries show that there exist a number of readily avail- able solutions at zero or low cost. These are often not adopt- ed because the incentives to reduce GHGs are nonexistent or too weak. The sooner they are adopted, the better. Emissions accumulate in the atmosphere and can stay for hundreds of years. If 10 megatonnes a year are cut starting today instead of in five years from now, the result is 50 megatonnes less in the atmosphere.
Even without technological breakthroughs, a number of studies have found that it would be technically possible to achieve significant emission reductions.
Last year, the National Round Table on the Environment and the Economy (NRTEE) commissioned a study on Canada’s options for reducing energy- related GHG emissions to 60 percent of current levels by 2050. The study concluded that ”œit can be done, at least from a technological standpoint […] using existing and near-term technolo- gy only.” Ensuring that Canada can achieve large emission reductions over the next few decades means adopting the policies that will facilitate this right now. The NRTEE study also called for introducing long-term price and policy signals that GHG reductions are and will continue to be a priority. Such signals are required to make sure investment decisions affecting Canada’s energy use and production start taking GHGs into consideration. Houses built today to suboptimal ener- gy-efficient standards will still be standing 30 or more years from now and will have wasted energy all that time. Retrofitting is sometimes an option, but it is often more expensive than building it right in the first place.
Cost estimates also vary depending on whether the ancillary benefits from GHG emission reductions are taken into consideration and, if so, how they are valued. Abating GHG emissions can lead to additional public health, environmental and economic benefits. For example, improving cars’ and trucks’ fuel efficiency can help reduce emissions that contribute to both climate change and air pollution. Raising energy efficiency standards can lead to energy savings. Some of these benefits, such as energy savings, have a market value. Other benefits, such as a lower risk of asthma and heart attacks and the associated lower hospital admissions, work absenteeism and loss of lives from cleaner air, don’t have a market value. While the latter benefits are very real, it can be very complicated (and some would argue inappropriate) to put a monetary value on them, which explains why some economists choose to leave them out of their estimates.
As for the benefits that are econom- ically relevant and come with a price tag, their value largely depends on the choice of discount rate. The choice of discount rate can have a determining effect on the cost-benefit analysis. It determines how much future benefits are worth and how soon into the future their value dwindles down to zero when translated into a present value. The higher the discount rate, the lower the present value of future benefits. This is a crucial issue in climate change cost-benefit analysis since the ancillary benefits and the benefits from the avoided damage from climate change occur mostly in the future.
Some economists choose to use a discount rate based on the market because it better reflects the economic situation with which investors are faced. Other economists find dis- counting morally unacceptable and prefer to use a lower rate. The Stern Review, for example, used a very low discount rate to reflect the value to future gen- erations of short-term efforts at cli- mate change mitigation. This further illustrates why it is important to look at the assumptions at the basis of the cost estimates. Knowing how the dol- lar figures were arrived at makes it pos- sible to decide how to balance the information provided by the cost-ben- efit analysis with other considerations. Cost-benefit analysis can be a useful tool to inform policy-making because there are competing demands on lim- ited public and private resources. However, it doesn’t necessarily reflect all that has value to Canadian citizens. It cannot be the only source of infor- mation for climate change policy, with all its complexities, uncertainties and attached moral and ethical issues.
Another important factor affecting cost estimates is assumptions about how cost-effectively emission reductions can be achieved. Some cli- mate policies are more cost-effective than others. For example, a number of economists have shown that introduc- ing national or international emission trading significantly reduces the cost of GHG reductions, because this strategy directs investment in emission reduc- tions to where the cost is the lowest. Another example is a carbon tax; the success of this policy can be affected by how the revenues generated by the tax are recycled and whether other eco- nomically burdensome taxes can be cut to stimulate employment and invest- ment. (For a discussion of the cost of some climate policies, see Jaccard et al. (C.D. Howe Institute, May 2006.)
Even if it were possible to agree on the cost of mitigating climate change, whether abatement costs are seen as justified or not largely depends on the alternative, which is not mitigating. Adaptation to climate change is not costless and mitigation cannot be post- poned forever. While there may well be an initial positive economic effect from climate change for Canada, due to longer growing seasons for example, even the most optimistic economic studies have cost curves that turn into the negative sooner or later. Nobody should feel comfortable with the idea that in the time that it takes to drive to the grocery store, we are releasing GHGs that will stay in the atmosphere for hundreds of years from energy that has taken millennia to store in the earth’s crust.
Paying to fix environmental prob- lems is like paying for home mainte- nance. Nobody looks forward to paying to fix the roof or replace the scratched wood floor. Anybody can think of a better way to spend the money and effort. However, once we start realizing how much it costs to fix environmental problems, perhaps that will serve as motivation to find ways of doing less damage to the environment in the first place.
Is any mitigation cost justified, seeing as Canada’s GHG emissions account for only 2 percent of global emissions and major emitters, namely the United States, China and India, have not committed to emission reduction targets? Canada may produce only a small percentage of the world’s GHG emissions, but it is among the top countries in the world in terms of emissions per capita (for comparison with other OECD coun- tries, see Cinq-Mars, Policy Options, October 2006). European countries, like Sweden or Norway, also account for a small percentage of global emis- sions. Yet this has not prevented them from adopting ambitious climate change policies, even though their emissions per capita and per unit of income are already much lower than Canada’s. Canada has a long way to go before it is in any position to justify inaction at home based on inaction in certain other countries.
Also, the fact that the United States doesn’t have any national emis- sion reduction target doesn’t mean that nothing is being done to address climate change. States and cities are introducing their own climate initia- tives, with Arnold Schwarzenegger, California’s Republican governor, lead- ing the advance. A number of recent developments also suggest that the wind may be changing in Washington: the Democrats’ victory in the November mid-term elections, the recent US Supreme Court decision effectively forcing the Environmental Protection Agency to regulate carbon dioxide emissions from vehicles and the fact that the main candidates for the 2008 presidential election have come out in favour of federal measures to curb emissions.
Furthermore, in trying to get other countries to commit to GHG emission targets, credibility matters. But over the last decade or more, Canada has lost the credibility it once enjoyed on the global climate scene. Indeed, Canada was once an international leader on climate change.
In 1988, Canada convened the International Conference of the Changing Atmosphere, where Prime Minister Mulroney committed Canada to reducing its carbon dioxide emis- sion by 20 percent by 2005. It has been said that the road to the land- mark 1992 Earth Summit in Rio de Janeiro, where the United Nations Framework Convention on Climate Change was opened for signature, was paved with maple leaves. In the past, when faced with transnational and international environmental threats, we realized that if we were going to get other countries on board, we had to clean up our own house first. This was the case with acid rain, where Canada started reducing its own emis- sions before the United States was even willing to discuss it.
Finally, whether the cost of reduc- ing emissions is seen as prohibitive or as an affordable insurance policy depends on one’s location in the economy. GHG reduction will affect certain economic sectors more than others. Those who stand to lose from attempts to reduce emissions are gen- erally keenly aware of it as their losses are likely to be more immediate and concentrated. In comparison, there are many potential winners but they are spread across the world or do not exist yet, being future generations and businesses yet to develop around tech- nologies yet to be invented. This is a fundamental difficulty for climate change politics and it brings us to the real crux of the debate.
The most pertinent questions in the debate on climate change are less how much climate change mitigation will cost or whether we can afford it, but how we can come to an agreement about what is a fair and politically acceptable distribution of the costs and benefits; what are the most cost- effective policies to achieve the transi- tion to a low-carbon economy and society; and how we can develop the capacity to identify and deploy all the available solutions to the climate change challenge in a timely and smooth way. These are the questions that need to be addressed constructive- ly. Debating the scientific evidence and the total economic cost of climate change has held us back from taking meaningful action for too long.