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Marzio Galeotti(Università di Milano, FEEM, CMCC)

Fourth Annual Forum on Business Ethics and Corporate Social Responsibility“Restoring Responsibility: The Accountable Corporation”Milan September 13-14, 2007

The Cost of Climate Change:Sharing the Burden

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Outline

Keywords of this presentation

CC undisputed: it is under way

CC: the chain of effects

CC: causes, consequences, remedies

CC: the impacts

CC: crucial features – global externality, differentiated origins and

consequences in time and space, uncertainty

Mitigation

Sharing the Burden

The problem of participation: actors and role

Focus on Business

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Keywords

Keywords of this presentation

The keyword is *Differences* and variants (Differentiation, Differential,…)

Differences in CC as to:

– The causes

– The consequences

– The policies

– The actors

Hence: Sharing the Burden

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Climate Impacts/1

CC undisputed: it is under way

A selection of probable impacts: Temperature increase of the planet (since 1860: global-

average surface temperature has increased by 0.6°C) Increase in precipitation events Increase in frequency and intensity of extreme climate events Increase in risk of desertification Shrinkage of glaciers Sea-level rise (last 100 years: increase by ca. 10-25 cm)

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• The process is speeding up• The concern is growing

Global Warming: Climate Impacts/2

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Climate Cycle: The Chain of Effects

   GHGs

Concentrations

Thermo-dynamic

Response

GHGsEmission

s

Climate Change Impacts

Production

Processes

LULUCFMitigation Adaptation

 

Life style/Culture/Quality of Life/ Risk Management

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Carbon Dioxide (COCarbon Dioxide (CO22)) – Most prevalent GHG

Methane (CHMethane (CH44)) – Second most common, 21x the potency of CO2

Nitrous Oxide (NNitrous Oxide (N22O)O) – 310x the potency of CO2

Other GasesOther Gases – HFCs, PFCs, and SF6 = range 600 – 23900x potency of CO2

Transportation

Energy GenerationIndustrial Processes

Land Use: Agriculture & Forestry

Transport

The Causes: Emissions/1

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The Causes: Emissions/2

CFCHFC

Fluorinati

CO2 Global Emissions by sector

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CO2 Global Emissions by Fossil Fuel

Fonte: OECD/IEA World Energy Outlook 2006

The Causes: Emissions/3

Fonte: IEA World Energy Outlook 2006

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Energy-related CO2 Global Emissions by Region

The Causes: Emissions/4

Fonte: IEA World Energy Outlook 2006

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Changes in temperature, weather patterns and sea level rise

Agriculture: Changes in crop yields

Irrigation demands,Productivity

Forests: Change in Ecologies,

Geographic range of species, and

Health and productivity

Coastal Areas: Erosion and flooding

InundationChange in wetlands

Human Health: Weather related

mortality Infectious disease

Air quality - respiratory illness

Industry and Energy:

Changes in Energy demand

Product demand & Supply

The Impacts/1

Water Resources: Changes in water supply

and water qualityCompetition/Trans-border

Issues

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Key Sectoral Impacts(as a function of increasingglobal average temperature change)

IPCC 4AR 2007 WG2

(Impacts will vary by extent of adaptation, rate of temperature change, and socio-economic pathway)

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Key Regional Impacts(as a function of increasing global average temperature change)

Fonte: IPCC 4AR 2007 WG2

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Impact Assessment

Type of Damage INDICATOR EU USA FSU CHINANon

OECD OECD WorldAgriculture Welfare loss (%GDP) 0,21 0,16 0,24 2,1 0,28 0,17 0,23Forestry Area lost (Km2) 52 282 908 121 334 901 1235Fishery Reduced Catch (1000 t) 558 452 814 464 4326 2503 6829Energy Incr. El. Dem. (TWh) 54,2 92 54,6 17,1 142,7 211,2 353,9Water Reduced Avail. (Km3) 15,3 32,7 24,7 32,2 168,5 62,2 230,7Coastal Prot. Annual Cost (m$/yr) 133 176 51 24 514 493 1007Dryland loss Area lost (Km2) 1,6 10,7 23,9 0 99,5 40,4 139,9Wetland loss Area lost (Km2) 9,9 11,1 9,8 11,9 219,1 33,9 253Ecosystem loss Nr. of Habitats Lost 16 8 n.a. 4 53 53 106Health Nr. of Deaths (1000) 8,8 6,6 7,7 29,4 114,8 22,9 137,7Migration Nr. Of Migrants (1000) 229 100 153 583 2279 455 2734Hurricanes

Casualties Nr. of Deaths (1000) 0 72 44 779 7687 313 8000Damages m$ 0 115 1 13 124 506 630

Damages in physical units: 2.5° C temperature increase scenario

Source: adapted from IPCC, 1996 SAR

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Global Warming: Key Features/1

UNCERTAINTY: the knowledge of environmental and socio-economic dynamics, and of the feedback between the two is still affected by a large amount of uncertainty.

GEOGRAPHICAL SCALE: climate change is a global phenomenon affecting the whole world, at the same time environmental and socio-economic impulses and responses are highly differentiated across regions.

TIME SCALE: climate change is a long-term phenomenon. Assessing impacts on environmental and socio-economic systems requires a long-run perspective.

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Global Warming: Key Features/2

EFFECTS INVOLVING INTERACTING SYSTEMScharacterized by:• Non linearity (in environmental and economic systems) • Discontinuity (“Jumps”, abrupt changes of state e.g. extreme

events, catastrophes, new technologies), • Irreversibility (non-return point e.g. species extinction, irreversible

investments high sunk costs)

WELFARE MEASUREMENT (ethical judgements):

• Interpersonal utility comparison (is it possible to compare and aggregate utility?)

• Inter-temporal utility comparison (is it legitimate to discount and what discount rate has to be used?)

• Choice of a metric (money, loss of human life, multi-criteria approach?)

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Uncertainties related to carbon cycle & climate system

The relation between stabilisation targets and resulting temperature increases for different climate sensitivities (Source: Azar & Rhode 1997)

uncertainty in climate sensitivity has a drastic impact on the expected temperature increase

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The importance of timing

The time scales involved to stabilise CO2 concentrations at any level between 450 and 1000 ppmv (Source: IPCC)

CO2 concentrations, temperature and sea level continue to increase long after emissions are reduced

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-5.3-7.3

-13.8

-40

-35

-30

-25

-20

-15

-10

-5

0

2000 2050 2100 2150 2200

% lo

ss in

GD

P p

er c

apita

High Climate, market impacts + risk of catastrophe + non-market impacts

Baseline Climate, market impacts + risk of catastrophe

High Climate, market impacts + risk of catastrophe

Stern Review: Damages

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Summarizing: a cascade of uncertaintySummarizing: a cascade of uncertainty

Uncertainty on Uncertainty on climate changeclimate change

Uncertainty on its Uncertainty on its “physical” impacts“physical” impacts

Uncertainty on social-Uncertainty on social-economic evaluationeconomic evaluation

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Global Warming: Key Features/3

GHGs emissions: externality + “public bad”

No super-national enforcing

authority exists

Countries are different

Environmental effectiveness => “large” participation

Free-riding incentive

Agreement based on “voluntary” participation => Benefits > Costs

to participants

Uneven distribution of costs and gains among would-be

participants

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Putting the Policy in Context: ”IPCC AR4 WGIII”

SHORT TERM ACTION

• In 2030 macro-economic costs for multi-gas mitigation, consistent with emissions trajectories towards stabilization between 445 and 710 ppm CO2-eq, estimated at between a 3% decrease of global GDP and a small increase, compared to the baseline. However, regional costs may differ significantly from global averages

LONG TERM ACTION

• In order to stabilize GHGs concentrations, emissions would need to peak and decline thereafter. The lower the stabilization level, the more quickly this peak and decline would need to occur. Mitigation efforts over the next two to three decades will have a large impact on opportunities to achieve lower stabilization levels

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Putting the Policy in Context: ”IPCC AR4 WGIII”

Costs in 2030 for Different Stabilization Trajectories

Estimated Costs and Potential for Mitigation

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What should we do: 2) According to the IPCC WG 3

• With current climate change mitigation policies and related sustainable development practices, global GHG emissions will continue to grow over the next few decades

• Both bottom-up and top-down studies indicate that there is substantial economic potential for the mitigation of global GHG emissions over the coming decades, that could offset the projected growth of global emissions or reduce emissions below current levels

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Summarising:

Scientific research emphasises need for action Support from the Precautionary Principle Complex issue and economic characteristics

highlight difficulty to cope with climate change

International cooperation: International environmental agreements

Need for voluntary initiatives - the role of the actors involved: consumers, business, governments

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Sharing the Burden

Effectiveness

Environment should be better off with than

without the policy

Efficiency

The policy should achieve its targets at the minimum cost possible

Equity

Costs should be shared “evenly”

Supposing we know the true value of the environment...

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Sharing the Burden: the Kyoto Answer/1

Binding Emission Reduction Targets for industrialised (Annex I) countries: 5.2% overall reduction of greenhouse gas emissions compared to their 1990 levels between 2008-2012.

Effectiveness

Flexibility/Cost Efficiency

Equity/Responsibility

55% ClauseAt least 55 Parties to the Convention, representing at least 55% of 1990 carbon dioxide emissions of AnnexI Parties, must have ratified.

No emission reduction requirements for developing countries

Where: ET, JI, CDM When: 2008-2012

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Sharing the Burden: the Kyoto Answer/2

2001 USA + Australia withdrawal

Notwithstanding flexibility the agreement is perceived as excessively costly = non profitable. Requiring “meaningful participation” of LDCs = requiring a transfer from LDCs. Non acceptable by LDCs

2004 Russia ratification. KP into force 16 Feb. 2005

Required reduction low and possibility to sell hot-air => agreement very profitable + no incentive to free ride

2002 EU, Japan, Canada ratification

Possibility to buy hot air lowers costs. Strong use of flex. mech.s

Developing Countries still to accept binding

targets

Effectiveness seriously threatened

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EU and Kyoto

… emissions must go to level 80 for Kyoto….

EU emissions: historical trend (source: EEA)

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Kyoto Gap

Kyoto Gap (source: Point Carbon, 19 June 2006)

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Sharing the Burden: the European Recipe/1

The main recipe of the European C-E policy: “20-20-20” by 2020 (magic numbers)

As for CO2 emissions:

− 20% unilateral reduction for the whole of EU27 by 2020 relative to 1990 levels

– 30% reduction for the whole of EU27 by 2020 relative to 1990 levels provided that the other DCs do the same and fast growing LDCs participate according to their capacity

− 60% to 80% reduction for the whole of DCs by 2050 relative to 1990 levels

As for the rest:

− 20% minimum share of renewable energy by 2020 (of which: 10% biofuels)

− 20% increase in energy efficiency by 2020

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Sharing the Burden: An Assessment

Burden Sharing: while the discussion goes on…one preliminary study

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Summarising:

Scientific research emphasises need for action Support from the Precautionary Principle Complex issue and economic characteristics

highlight difficulty to cope with climate change

International cooperation: International environmental agreements

Need for voluntary initiatives - the role of the actors involved: consumers, business, governments

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The Role of Actors

The Role of Individuals

Energy Saving Production of Waste Wise Shopping Sensible Investors – Shareholders impose an

environmental discipline on corporations

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Summarising:

Dasgupta, Laplante, Wang, and Wheeler (2002) argue that higher income and education empower local communities to enforce higher environmental standards. It should also be noted that in developed countries pressure for environmental protection created by market agents is likely to be stronger. Thus, for instance, banks may refuse credit if worried about environmental liability; consumers may avoid products of firms known to be heavy polluters.

Evidence is building up showing, for instance, that multinationals are sensitive and positively react to the close scrutiny from consumers and environmental organizations (Dowell, Hart, and Yeung, 2000).

Finally, investors appear to play an important role in encouraging especially quoted companies to adopt clean production processes (Konar and Cohen, 1997; Lanoie, Laplante, and Roy, 1998). Similar effects of environmental news on stock prices have been identified in developing countries such as Argentina, Chile, Mexico, and the Philippines (Dasgupta, Laplante, and Mamigi, 2001).

By the same token, it is observed that low income communities frequently penalize dangeorus pollutants even when formal regulation is weak or absent. Evidence from Asia and Latin America documents that neighboring communities can strongly influence factories’ environmental performance (Pargal and Wheeler, 1996; Hettige, Huq, Pargal, and Wheeler, 1996). Thus, the role of regulation is important in low income countries, not only in rich ones.

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The Role of Actors

The Role of Governments

Pledge to reduce emissions – Demand for federal regulations

The Case of U.S. States: RGGI, WEI (California, Arizona, New Mexico, Oregon, Washington, Utah, Manotiba, British Columbia)

The Case of EU Member States (“20-20-20”)

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The Role of Actors

The Role of Business

Scientific Studies Environmental Dumping/Pollution Haven/Race to the Bottom Porter Hypothesis (implications for EU ETS) Regulation and Competitiveness

Current initiatives UN Global Compact WBCSD World Business Council for Sustainable Development Greening of business (The Economist May 31st, June 8th,

2007)

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The Role of Actors

The Role of Business

Demand for Government Regulation Inevitability of CC Need for certainty framework for planning capital

investment and R&D efforts Need to keep fossil fuels prices “high” to go green Counting on fiscal incentives Profit opportunities: financial markets, energy

markets (spillovers on society from employment creation and inventive activity)

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The Role of Actors

The Role of Business

However: not all initiatives, while certainly profit-driven, are genuinely environment-friendly.

The case of biofuels

Governments, NGOs, Consumer associations, public opinion has to watch

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References

Dasgupta, S., B. Laplante, H. Wang, and D. Wheeler (2002), “Confronting the Environmental Kuznets Curve”, Journal of Economic Perspectives, 16, 147-168.Dowell, G., S. Hart, and B. Yeung (2000), “Do Corporate Global Environmental Standards Create Dasgupta, S., B. Laplante, N. Mamigi (2001), “Pollution and Capital Markets in Developing Countries”, Journal of Environmental Economics and Management, 42, 310-335.or Destroy Market Value?”, Management Science, 46,1059-1074.Hettige, H., M. Huq, S. Pargal, and D. Wheeler (1996), “Determinants of Pollution Abatement in Developing Countries: Evidence from South and Southeast Asia”, World Development, 24, 1891-1904.Konar, S. and M. Cohen (1997), “Information as Regulation: The Effect of Community Right to Know Laws on Toxic Emissions”, Journal of Environmental Economics and Management, 32, 109-124.Lanoie, P., B. Laplante, and M. Roy (1998), “Can Capital Markets Create Incentive for Pollution Control?”, Ecological Economics, 26, 31-41.Pargal, S. and D. Wheeler (1996), “Informal Regulation of Industrial Pollution in Developing Countries: Evidence from Indonesia”, Journal of Political Economy, 104, 1314-1327.