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The Economics of 350
Frank Ackerman et al. 
www.e3network.org 

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We cannot afford half-measures
Stopping global warming and protecting the Earth’s climate is a daunting challenge. To prevent a climate crisis we have to move quickly to transform the ways in which we create and use energy, develop petroleum-free transportation, and much more. These changes will not be free; there is already resistance to paying for the first steps along this road. Some think that reaching for more ambitious mitigation targets, and quicker reductions in emissions, would mean economic disaster. Some economists have become known for advocating only slow and modest responses to climate change, lest the costs of mitigation become too large.

This report demonstrates that the 'go slow' recommendations are unjustified. A number of economic analyses, informed by recent scientific findings and using reasonable assumptions, suggest that more ambitious targets and quicker action make good economic sense. The warnings about climate change are growing steadily more ominous — but it has not, as a consequence, become impossibly expensive to save the planet. We can still afford a sustainable future.

The bad news about climate change relates mostly to the costs of inaction. As greenhouse gas emissions grow, it is the cost of doing nothing that is becoming unbearable, not the cost of taking action. If there is reason for optimism amidst the dire warnings it is this: the costs of insuring the planet against climate disaster are not prohibitive. The best estimates of the costs of a vigorous, immediate effort to rebuild the world economy around carbon-free technologies are still in the range of one to three percent of world output (GDP) per year, even with the more stringent emissions reduction goals we are supporting. Scientific research continues to yield evidence that climate change is occurring faster, and its consequences could be more severe, than previously expected: the costs of climate inaction, or even of delay in mounting a large-scale response to the climate crisis, are getting worse and worse.

We cannot afford a little climate policy, half-measures that would leave us all vulnerable to the immense risks of an increasingly destructive climate. We need a big initiative, a comprehensive global deal on protecting the earth's climate by rapidly reducing emissions of greenhouse gases. Because the status quo is not sustainable, the most economical choice is to change, as quickly, cost-effectively, and comprehensively as possible. This study looks at both sides of the equation, beginning with the worsening news about climate risks (i.e., the costs of inaction), then turning to the costs of an adequate response.

A moving target
There are signs of progress in the arena of climate policy. An optimistic reading of European and proposed U.S. policies suggests that the world could be close to getting on track to contain the growing concentration of carbon dioxide (CO2) in the atmosphere at something close to 450 parts per million (ppm), heretofore considered a “safe” level. Unfortunately, the target for climate stabilization may be moving more quickly than progress on policy. Recent empirical evidence indicates climate change is taking place considerably faster than scientists had expected only a decade ago. Furthermore, paleoclimatic research indicates that earlier climate change episodes also took place rapidly. If rapid change is occurring, a considerably lower policy target than 450 ppm is justified. The 350 ppm CO2 goal is only starting to receive attention among policy makers or in the global political discussions over climate, although Rajendra Pachauri, the head of the Intergovernmental Panel on Climate Change (IPCC), and Nicholas Stern, author of the 2006 Stern Review, have recently endorsed the 350 ppm target. The chief climate scientist at NASA, James Hansen, argues that a reduction from the current level of carbon dioxide in the atmosphere, 385 ppm, to 350 ppm CO2 by 2100 will be essential to avoid dangerous anthropogenic climate change. The lag in the discussion is in part due to the lack of analyses in the economics literature of the costs and benefits of a 350 ppm CO2 stabilization trajectory. For this reason, Economics for Equity and the Environment Network (E3) initiated this study of the economics of the 350 ppm target.

Why 350?
There is a consensus among climate scientists that greenhouse gases are transforming our climate and that the potential damage to human communities and natural ecosystems is both far reaching and long lasting. In general terms, the nature of the appropriate response is obvious and widely endorsed: the prevention of “dangerous” levels of climate change. Translating this general mandate into specific action requires two important, and as yet unresolved, judgments: First, what is a safe amount of climate change? Second, what emission patterns over time are consistent with that safe level of change?

For years now, climate scientists have recommended keeping the global average temperature below a 2°C (3.6°F) change from 1990 as a way to reduce the risk of the most devastating climatic changes. Even in the short time since the 2007 publication of the IPCC’s Fourth Assessment Report (“AR4”), which reflected research published through 2006, new scientific findings have provided reasons to be even more cautious. In an important recent paper, Hansen and numerous co-authors reach two key conclusions: first, the global average temperature may be much more sensitive to greenhouse gases in the atmosphere than is commonly believed; second, to avoid dangerous climate change, we may need to reduce the concentration of CO2 in the atmosphere from today’s 385 ppm to 350 ppm CO2 by 2100, if not sooner.

What does it take to get to 350?
Hansen and his co-authors describe a detailed scenario for reducing greenhouse gas emissions with the goal of reaching 350 ppm CO2 by 2100:
• Coal burning is phased out or achieves 100 percent carbon capture by 2030.
• Oil and gas prices rise steadily as these finite resources approach exhaustion.
• A combination of ending deforestation and initiating large-scale reforestation causes significant negative emissions (that is, a withdrawal of CO2 from the atmosphere).

We compare that scenario with a less demanding but still ambitious trajectory which does not require the world to achieve negative net emissions; assuming a climate sensitivity of 6C, our scenario reaches 350 ppm CO2 by 2200. Both scenarios assume success, within this century, in the vast undertaking of conversion of the world energy system to carbon-free sources. This is the first and foremost challenge for climate policy, the essential hurdle that must be overcome. But it is not all that is needed, especially for the scenario that reaches 350 ppm CO2 by the end of this century.

Our scenario represents the most ambitious schedule we can imagine without relying on negative emissions: emissions are reduced to 54% of 1990 emissions by 2020 and 3% by 2050. The conversion to renewable energy systems would have to be complete and the world economy would have to be virtually free of carbon emissions by mid-century, a more demanding goal than any of the leading policy proposals under discussion today. How might it be possible to achieve negative emissions, that is, to remove carbon dioxide from the atmosphere? At present there are three widely discussed methods of carbon removal, of which the first two are currently available and the third is still under development.

First, reforestation (and prevention of deforestation) is a key component of the path that achieves 350 ppm CO2 by 2100. New international agreements, institutional structures, and financing arrangements would be needed to achieve the reduction in atmospheric CO2 concentration. Assuming success in creating the needed institutions, this is not the most expensive part of a 350 ppm scenario. Second is biochar: it is possible to convert plant material into charcoal, and then bury it in the soil; that process sequesters carbon, and may have beneficial effects on soil productivity and water retention. Biochar offers an interesting but perhaps limited option for carbon capture. Third, biomass could be burned with carbon capture and storage (CCS), a much-discussed possibility that needs further development. Biomass — including sugar cane, switchgrass, corn (maize), palm oil, and carbon-rich waste products from the paper and agricultural industries — can be burned in power plants to generate electricity and heat. The full life-cycle of biomass energy production with CCS would absorb atmospheric carbon into plants as they grow, burn the biomass to make energy, capture the resulting CO2 emissions, and store them underground.

Costs of emission reduction
At one extreme, some business lobbies have argued that even the moderate reductions called for in recent U.S. legislation would be crippling to the economy. At the other extreme, some environmental advocacy groups have argued that an extensive agenda of reductions could save money overall by reducing fuel costs. Between these two extremes, there is a large body of research projecting that recent U.S. legislative proposals would have very little economic impact, and that the much more ambitious emission reductions required to reach 350 ppm might have moderate net costs. Four European research groups have modeled global scenarios that lead to 350 ppm CO2; one finds that in a world with unemployed labor and other resources, the stimulus from new climate investments might accelerate economic growth. The other three groups find net annual costs that are generally between 1 percent and 3 percent of world output; their work highlights the importance of assumptions about the development of new technologies, which will be crucial over a time span of one or more centuries.

Suppose that the cost of climate protection turns out to be 2.5 percent of global GDP, toward the high end of the global scenarios just discussed. In an economy that is growing at 2.5 percent per year, a rate that is common for developed countries, spending 2.5 percent of GDP on climate protection each year would be equivalent to skipping one year’s growth, and then resuming. Average incomes would take 29 years to double from today’s level, compared to 28 years in the absence of climate costs.

Consider another comparison: military spending is greater than 2.5 percent of GDP in 68 countries around the world; it is greater than 4 percent of GDP in both the United States and China. It is difficult, therefore, to believe that we are unable to remove this amount from current consumption in order to defend against a remote but dangerous threat to our way of life. On the strength of a different narrative about potential dangers we already do so, year after year.

Conclusions and policy recommendations
The most important conclusion involves what we did not find. There are no reasonable studies that say that a 350 ppm stabilization target will destroy the economy; there are no studies that claim that it is desirable to wait before taking action on climate protection. On the contrary, there is strong, widespread endorsement for policies to promote energy conservation, development of new energy technologies, and price incentives and other economic measures that will redirect the world economy onto a low-carbon path to sustainability.

Disagreements emerge at the level of more specific estimates and recommendations. Is a potential cost of 1 to 3% of world GDP a large or a small number? The answer depends on how seriously you take the risks of climate change. Think of climate risk in terms of insurance. The reason people buy fire insurance is not because they are certain that their house will burn down; rather, it is because they cannot be sufficiently certain that it will not burn down. Likewise, the projections of dangerous climate risk if the world exceeds 350 ppm CO2 in the long run are not certainties; they are, on the contrary, necessarily uncertain. If the worst happens, our grandchildren will inherit a degraded Earth that will not support anything like the life that we have enjoyed. On the other hand, if we prepare for the worst but it does not happen, we will have invested more than, in perfect hindsight, was necessary in clean energy, conservation, and carbon-free technologies. How would we feel about discovering we had done too much about climate change, compared to discovering we had done too little? This analogy to insurance is important but inexact. There is a challenging, long-term problem of technology and public policy to be solved.

The constraints on allowable CO2 emissions, for stabilization at a level as low as 350 ppm, are painfully tight. A realistic policy scenario, therefore, is almost certain to not only call for maximum progress in pursuing energy efficiency and promoting renewable energy, but also for measures that remove carbon from the atmosphere. Many of the technologies that will be needed do not yet exist in mass-produced, commercially available forms, if at all. Yet the development of new technology is itself heavily influenced by public policy. The difference between optimists and pessimists is in large part about images of future technology. What are the limits to what we can achieve through energy efficiency, solar power, carbon capture and storage, and other new technologies? At the time of World War I, who could have anticipated mobile phones, laptop computers, and the internet? 

Optimistic projections assume high prices for fossil fuels, which make all abatement investments look better. It is a mistake, however, to rely on market prices for fossil fuels to reduce emissions, rather than introducing a carbon price through a tax or a trading system. High oil prices enrich the owners of fossil fuels, and create incentives for environmentally destructive production of energy from oil shale, oil sands, and increasingly deep, dangerous offshore drilling. In contrast, a high price created through policy provides incentives for consumers to conserve, but not for producers to engage in costly, damaging production. A tax or cap-and-trade system transfers revenues to the government, which can use them for environmental investments, other public purposes, or refunds to citizens.

The world is taking important initial steps toward addressing the climate crisis, with increasingly widespread discussion of the need to avoid 2°C of warming. According to recent scientific research, staying safely below that temperature limit likely requires stabilization at about 350 ppm of CO2. Such a target requires a large-scale, continuing effort throughout this century, development of major new technologies and appropriate price mechanisms. Predicting the future is challenging, because it has not yet happened; predicting a century of technological and economic change is inescapably fraught with uncertainty. Nonetheless, the best available estimates imply that we can, indeed, afford the economics of 350. What we cannot afford is too little climate policy, too late.


The above is a synopsis. Download the full report as a PDF here:
www.e3network.org/papers/Economics_of_350.pdf

 

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