Impact of Climate Change

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Impact of Climate Change An Economic
PerspectiveDr. K.S. Lam
Hong Kong Polytechnic University
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Climate Change ?1980 ? !2007
Warming of the climate system is unequivocal by
IPCC, 2007
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Reference

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

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Climate change Economic Impact

• Three methods
• Disaggregate techniques
• Economic models
• Compare current and future social cost of
  carbon with the marginal abatement cost.

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• Method 1

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Method 1 Resource Costs Analysis

• Impacts
• Melting glacier will initially increase flood
  risk and then strongly reduce water supplies,
  threatening 1/6 of the worlds 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.

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Past experience on Costs (developing countries)

• Global losses from weather related disasters
  amounted to a total of around 83b during the
  1970s, 440b in the 1990s.
• 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 500m.
• 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.

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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, 81.2b 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.

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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.

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• Method 2

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Method 2 Modeling Climate Change from emissions
to impacts
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Method 2 IPCC future scenarios
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Method 2 Integrated Assessment model

• Model future emissions by sector

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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.

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Method 2 Integrated Assessment model

• modeled 3 categories of economic impact
• includes only the impacts of gradual climate
  change on market sectors of the economy.
• includes the risk of market sector and
  catastrophic climate impacts at higher
  temperatures.
• includes market impacts, the risk of catastrophe
  and direct, non-market impacts on human health
  and the environment.

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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,

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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 CO2e).
• 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.

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Previous Macroeconomic models

• Results
• Also came up with the cost of stabilization at
  500 550 ppm CO2e were center on 1 GDP (-2 to
  5) by 2050.

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• Method 3

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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.

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The optimum degree of abatement in a given period
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Method 3 Analyzing the costs and benefits

• Costs and benefits
• Social cost of carbon today is 85 per tonne of
  CO2.
• 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.

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• Climate change
• Future Target Level of GHG

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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 40t
  remain in the ground, of which 7t are
  economically recoverable. Reserves last
  comfortably up to 2050.
• The world is already irrevocably committed to
  further climate changes.

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All 3 methodologies require a target level of
future GHG

• At present, 430 ppm CO2e.
• 450 ppm CO2e is already almost out of reach,
• the damage will be unreasonably high when it
  exceeds 550 ppm CO2e.
• Emissions target is then about 5 GtCO2e per year.
  80 reduction from present level.
• Models focus at 450 to 550 ppm CO2e.

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• Results of all 3 methods are similar

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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 500-550ppm
  CO2e to be around 1 of GDP by 2050 - a level
  that is significant but manageable.

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• Climate change
• the Economic Impact

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Impact on coastal areas

• 200m people live in coastal floodplains.
• 2m km2 of land and 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).

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Impacts on wealth and output

• At 1-m rise in sea level
• PRD, 1,100 km2 inundated. Using Hong Kongs
  reclamation cost, it requires 14 billion dollar
  to recover the lost land.

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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.

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Climate change impact on food
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Climate change impact on Health

• Significant shift from cold-related death to
  heat-related death.

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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 76b in
  todays prices.

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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.

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Impacts on Global financial market

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

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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 32b loss in tourism due to
  bleaching of Great Barrier Reef.
• Northward shift in economic activity and
  population in the N hemisphere.

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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..

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• Conclusion

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Conclusion

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

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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.

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• Climate change
• Caveat

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Caveat

• Uncertainties and risks in the economics impacts
  are pervasive.

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• Climate change
• the greatest market failure

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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.

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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.

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Climate change Market failure

• Climate is a public good those fail to pay for
  it cannot be excluded from enjoying its benefits.
• One persons 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.

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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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• The End