Exploring Economy-Wide
Impacts of Climate Change
In A Resource-Rich Country
Presented at the Annual International Seminar on “Macroeconomic Impact of Climate Change: Opportunities and Challenges,” August 1-2, 2008, Bali
Economic Estimates
•
A wide range of economic impact estimates of a
ton of carbon in the atmosphere (from small
negative numbers to $150 per ton); depend on
Æ
discount rate
Æ
equity weighting
Æ
value judgments
Æ
how climate and global economy evolves
•
More useful to look at why the estimates vary so
much
Æ
look at key
vulnerabilities and risks
before pondering the effectiveness of various
policy options to reduce those risks, either by
reducing greenhouse gases or promoting
Complex Climate System & Uncertainty
•
Extent of economic damages (and benefits) at
different times
•
Timing and extent of temperature change
•
Future emission levels
•
Impact of temperature changes on ecological
systems
•
etc
•
And time scale for climate policy is
very long
run
Discount Factor & Cost of Action Versus
Expected Benefit of Taking Action
• Disagreements Æ central questions about global‐ warming policy remain open.
• A small (large) social discount rate requires much
deeper (smaller) cuts in emissions and consumption today.
Æ Intergenerational neutrality Æ deep cuts in today’s emissions & consumption
Æ Each generation should leave at least as much total societal capital as it inherited
Æ Societies maximize minimum consumption along the riskiest path (e.g., stockpiling medicines, water, food etc to contemplate for possible drastic events)
Æ Societies should maximize economic well‐being of the poorest generation (Rawlsian) Æ sharp
Change in cereal production in developed and developing countries for a doubling of carbon dioxide levels (equiv to around 3°C of warming) simulated with 3 climate models
Developing Countries
•
Geographic disadvantage (already warmer and
suffer from high rainfall variability)
•
Primary sector
‐
dependent and climate
‐
sensitive.
•
Low income and inadequate public services
(health, education, clean water)
Æ
more
difficult adaptation
•
Many other problems need to be urgently
•
Drought:
If CC increases the frequency and
severity of the events,
the costs on
developing countries will grow significantly
Æ
drought exert greater pressure on
resources and
declines in the productivity
and output
of climate sensitive sectors.
•
Reduced water availability
combined with
even modestly higher temperatures will
reduce
agricultural productivity
and in some
areas may make crops unsustainable; e.g.,
maize yields in North Africa could fall by
between 15
‐
25% with a 3°C rise in
temperature
CC, Environmental Input & Productivity
• CC can reduce the quality of environmental input
Æ reduce output obtainable with a given supply of capital and labor.
• In practice, either the productivity of capital and labor is directly reduced, or a portion of the output
produced in a given year is destroyed by CC (extreme weather event).
• CC will affect species’ distributions and abundance, which in turn will threaten the viability of species
that are essential for sustained agricultural outputs, including native pollinators for crops and soil
Other Effects
•
Loss of essential species
•
Increased incidence of flooding
•
Forest and crop fires
•
Climate
‐
induced outbreaks of
pests and diseases
Falling agricultural output will directly
increase poverty
•
North
‐
Eastern Ethiopia: drought induced losses in
crop and livestock between 1998 –2000 were
estimated at $266 per household – greater than
the annual average cash income for more than
75% of households in the study region
Productivity and Poverty
•
Increased
agricultural productivity
has
been identified as a key factor in reducing
poverty and inequality
(Bourguignon and
Morrisson, 1998)
•
Zambia: an extra US$1.5 of income is
generated in other businesses for every $1
of farm income (Hazel and Hojjati, 1995).
Transmission Mechanisms
•
Concerns toward poverty in these
countries take a central stage.
•
How much will the resulting
productivity decline due to climate
change and resource depletion be
transmitted into lower income, higher
prices and higher poverty?
Æ
depends
on the extent
and the pattern
of
Resource Depletion
• Resource‐rich developing countries: natural resources and land are being degraded and depleted, rapid
emissions of CO2 Æ changes in global climate pose a threat for continued welfare improvements and
poverty reduction across many dimensions, lower future growth capacity by reducing productivity
• Principle: non‐renewable resource use must decline faster than or equal to the depletion rate; for
renewable resources, the use must proceed at a rate that is less than or equal to the rate of natural
replenishment Æ for developing countries, the
principle cannot be detached from poverty and other backwardness Æ income and prices invoked by
IPCC and Indonesia
• Increase temperature up to 2 degree Celcius
• Increase precipitation >= 66% simulations Æ Drought and flood
• CO2 dissolves into the ocean Æ carbonic acid & hydrogen ions Æ raise the acidity Æ affect microscopic plants and animals that form
shells find it harder to form the essential covering
Impact of Climate Change:
Main Principle
•
Damage function:
that can take a simple
form dependent on regional
temperature increases
•
Damage exponent:
Æ
critical in
Indonesia: Scenarios Throughout 2050
Based on Dynamic CFGE Model
1. Baseline:
Trend without climate change
2. BAU:
Trend with climate change and limited
efforts for mitigation and adaptation (low
productivity changes)
3. SC1 (Pessimistic):
Trend with climate change
without efforts for mitigation
Summary
•
Indirect effects:
Importance of systemic linkages
and indirect effects: sum total may exceed
(sometimes can contradict) direct effects that
motivate policies.
•
Costly:
Long
‐
term expense of neglecting climate
change and cost of resource depletion can be
substantial (undermining growth, stability &
poverty)
•
Policies:
to mitigate climate change and reduce
resource exploitation by investing in resources to
raise long term productivity are essential to
Bali’s UN Framework Convention on
Climate Change (UNFCCC) conference
• Replace the Kyoto Protocol expiring in 2012 (37
industrial nations to reduce greenhouse gases by a modest 5% on average in the next five years).
• Intergovernmental Panel on Climate Change (IPCC): Emissions should be reduced by 25% to 40% below 1990 levels by 2020 Æ expunged by the US
• Bali Roadmap: Developing world to consider "mitigation actions" ‐ voluntary actions to slow
emissions growth (including China and India). Developed countries to make mitigation
"commitments," mandatory caps as in the Kyoto
Climate Change & REDD
• Reducing Emissions from Deforestation and
Degradation (REDD), to be approved under the
Climate, Community & Biodiversity (CCB) Standards Æ sale of carbon credits to companies and
individuals seeking to offset emissions and burnish their environmental reputations Æ finance forest conservation, crucial future global climate change
• Credits typically cost $4 to $8 per ton of pollution reductions.
• Ulu Masen forest in Aceh: forest ecosystem of
750,000 hectares located in the 5 northernmost Districts: Aceh Besar, Aceh Jaya, Aceh Barat, Pidie and Pidie Jaya Æ 3.3 mill tons of carbon credit per year, or $16.5 mill ($5 a ton), will go to villages
Benefits
• Reduce deforestation (e.g. illegal logging) by 85% Æ prevent 3.3 million tonnes of CO2 emissions each year for 30 years (equivalent of 1.5 million flights
from London to Sydney)
• Mitigate climate change and deliver biodiversity:
Secure the survival of the forest’s threatened species, e.g. Sumatran tigers (just 300‐400 left), orangutans, and some undiscovered species
• Community benefits Æ incentive payments to local stakeholders initially financed by ODA but later
supported by the sale of carbon credits. Local villages will receive payments (projected $26
Institutions
•
Collaboration between
Fauna & Flora
International (FFI),
the
Government of Aceh
and
Carbon Conservation
. The
Rainforest
Alliance
, an international nonprofit
conservation organisation, validated the
project’s conservation plans as meeting the
CCB Standards.
•
FFI currently implements part of the Aceh
Forest and Environment Project (AFEP),
administered by the World Bank and the Multi
‐
Donor Fund for Aceh and Nias (MDF) in the
Private Sector’s Interest
•
VER trade on voluntary
carbon market and
future REDD credits in post
‐
Kyoto
framework
•
Deal typically includes: Pre
‐
payment for
exclusivity; Guaranteed off
‐
take agreement
for credits over first four years; Call option
for further carbon credits; Performance
• Merrill will pay villagers in Aceh to stop logging their forests Æ $4 per credit for 500,000 credits
per year over the next four years ‐‐$8 million in all. (The other $1 million buys an option to acquire
more credits.)
• Merrill then hopes to sell them for a profit to companies that want to voluntarily offset their
carbon emissions. Currently, these voluntary credits
‐‐each one represents a ton of CO2 that is
prevented from entering the atmosphere ‐‐ sell from between $2 and $20 each
• Merrill will get carbon credits, also known as carbon offsets ‐‐ that's the "crop" in carbon farming. The
Risks
• Exclusion of customary tenure holders
• Failure of benefit sharing mechanisms
• Up front investment needs and investor influence on design
• Divergent interests: cheap ‘low value’ vs expensive ‘high value’
• Difficulty for investors, managers and communities to communicate
• Perverse incentives focus on degraded forest
• Standard is set by a group called the Climate, Community and Biodiversity Alliance (CCBA), whose members include environmental groups Conservation International, The Nature
Conservancy and the Rainforest Alliance, and
