The wrong answer to climate change

A report from Britain’s main climate change research institution, the Tyndall Centre, published at the end of last month, argued that the UK government’s current target for the reduction of greenhouse gas emissions by 34 per cent by 2020 was inadequate. The report’s authors asserted that a cut of 70 per cent in emissions is required, something that can only be achieved, they claim, by shrinking the size of the UK economy in a ‘planned recession’.

Professor Kevin Anderson, director of the Tyndall Centre, has said that meeting the government’s target of keeping temperature rises to less than two degrees above pre-industrial levels would necessitate ‘a moratorium on airport expansion, stringent measures on the type of vehicle being used and a rapid transition to low-carbon technology’. He added: ‘For most of the population it would mean fairly modest changes to how they live; maybe they will drive less, share a car to work or take more holidays in Britain.’ (1)

I believe such a response is neither appropriate nor necessary. It would be more cost-effective to adapt to climate change rather than continually cut carbon emissions. I am the co-author of the World Bank’s Interim Report on the Costs of Adaptation to Climate Change, published last month (2). I was responsible, among other things, for the analysis on the biggest component of adaptation costs – infrastructure – and for putting all of the numbers together.

All of the headlines prompted by the World Bank report have focused on the large numbers – a cost of $75billion to $100billion per year for adaptation to climate change in developing countries up to year 2050. But the report itself tells a rather more nuanced story. Expressed as a proportion of gross domestic product (GDP), the cost of adaptation in developing countries is roughly 0.2 per cent of GDP per year in the period 2010-19, falling to about 0.1 per cent of GDP in 2040-2049.

The estimated figures for high-income countries, though not included in the report, are similar. Expressed as proportions of baseline spending (that is, before the effects of climate change are taken into account) in the sectors covered by the study, the report estimates additional spending of about one to two per cent per year. That’s well within the ordinary, year-to-year variability for spending in these sectors.

There is no doubt that the costs of adapting to climate change – expressed relative to GDP – for low-income countries will be higher than for middle- and high-income countries, but even so they are not that high and they will fall sharply over time. This is a major issue to consider when it comes to deciding how to distribute aid – both over time as well as across countries – but it is not a sensible basis for determining global policies around climate change.

I have read some criticisms of our work on the grounds that we have not taken into account, for example, the costs of restoring damaged ecosystem services – naturally occurring benefits like a supply of water or food, or a forest that will absorb carbon dioxide. Such responses fail to understand the starting point of any proper assessment of the economics of adaptation. The world is not like an insect in amber, petrified at a particular point in time. Economic development necessarily involves change. Our goal was to estimate the costs of restoring the level of human welfare to what it would have been had no climate change occurred. The evidence shows that the costs of adapting to climate change in agriculture, forests, fisheries and so on are really small and may be negative in some countries – that is, climate change generates net benefits. So, for example, there will be a loss of mangroves as a result of climate change, but that would happen anyway and the economic value of the services that are lost is minimal.

The suggestion that a planned recession for the next decade is required to address climate change is simply absurd. On reasonable assumptions the total cost of the recent recession in the world economy is greater than the total cost of adaptation for the next 40 years, even on the basis that we get back to pre-recession growth rates by 2011. Far from shrinking the economy, adaptation can be minimised by faster – rather than slower – economic growth and development since many of the costs are fixed. All that is required is the adoption of some reasonably sensible and fairly modest policies, rather than ill-conceived and intemperate assertions about how everything has to change.

Climate change does pose a real challenge to the way the world economy operates, but this is considerably different to the kind of policies urged by Professor Kevin Anderson and his like. The real problems are:

1. How can or should we address the very uneven burden of adaptation across countries? Few believe that current mechanisms of international assistance are a good way of transferring resources to deal with climate change, but neither are there any good alternatives at the moment.
2. How can we address the risks of climate change in a sensible way? The economics of climate change have always been, in effect, about the insurance premium that we are collectively willing to pay in order either to avoid or to cope with outcomes that are unlikely but very costly. In conceptual terms, it is no different from dealing with the prospect that sooner or later the world will be hit by another large meteorite of the kind that wiped out the dinosaurs. There is a small probability that the costs of adapting to climate change will be rather large – say, greater than five per cent of GDP – for some (not all) countries. What kind of insurance arrangements should we put in place to deal with such possibilities?

Claims that we are all doomed unless immediate action is taken are not helpful, in part because they are not true and in part because they are a distraction from developing some more reasonable but limited policies. If we are prepared to pay something to avoid the worst outcomes of climate change, these policies must aim for a balance of emissions reductions and adaptation.

Many economists have argued that drastic emissions reductions in the near future – of the kind advocated by Professor Anderson – represent an extremely expensive and inefficient approach, especially for developing countries, because the costs of retrofitting or scrapping long-lived capital assets such as power plants are so high. Managing a transition to lower emissions over a longer period is the better option as it allows for the development of more cost-effective technologies and provides an opportunity to collect better information on the scale and consequences of climate change (3). The fact that adaptation to climate change over the next 40 years is likely to be relatively inexpensive strengthens the case for avoiding costly remedies that are driven by arbitrary targets rather than a proper assessment of the alternatives.

Gordon Hughes is professor of economics at Edinburgh University and co-author of the World Bank report Economics of Adaptation to Climate Change Study. He is also co-author of the 1992 World Development Report on Development and the Environment, including a chapter on international environmental concerns which provided one of the earliest economic reviews of global warming.

(1) Planned recession’ could avoid catastrophic climate change, Daily Telegraph, 30 September 2009

(2) Economics of Adaptation to Climate Change Study, World Bank, 30 September 2009

(3) An Analysis of Mitigation as a Response to Climate Change, Richard Tol, Copenhagen Consensus, 14 August 2009