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Topic 4.c: The Economics of Global Warming• Various studies have come out recently: we will look (briefly) at the conclusions of

the Stern Report.

• Stern was commissioned by the UK government to analyse costs and benefits of different abatement strategies.– Released in October 2006 What are the main findings in the Stern Report?

• If annual emissions stay constant (unlikely without policy), then:

– Stock of GHG could double (relative to 1850) by 2035.

• 77% - 99% chance this will 2° increase in average global temp.

– Stock of GHG could treble by 2100.

• At least 50% chance this will 5° increase in average global temp in the following decade.

– Effects of a 2° increase are probably large. Effects of 5° increase are hard to even imagine.

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Topic 4.c: The Economics of Global Warming

• If we continue with Business As Usual (BAU), effects of climate change will be potentially large and irreversible.

– Large benefits from abatement.

• Stern Report accounts for the possibility of so-called “abrupt climate change.”

– By some estimates, this could result in average decreases in GDP in the range of 5-10%.

– Some (poorer) countries may suffer losses > 10% of GDP.

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• Also accounts for various other costs of climate change that some studies overlook.

– “Non-market effects” (effects on environ, eg. extinctions).

• Can lead to cost estimates in the range of 5-11% of GDP (this is a controversial claim).

– Tries to account for feedback effects.

– Also looks at the idea of weighting effects on poorer countries more heavily than richer countries. An attempt to include distribution considerations.

• Bottom line: BAU in GHG emissions could reduce GDP per head by 5-20%, depending on assumptions made.

Topic 4.c: The Economics of Global Warming

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Topic 4.c: The Economics of Global Warming

• Stern also looks at a number of different abatement scenarios, all in terms of GHG concentration.

– Focus is on doubling of stock of GHGs (relative to 1850).

• Means atmospheric concentration of around 550 ppm.

• Different emissions paths are calculated, each of which achieves 550 ppm, but with different distribution of abatement across time.

• Costs of abating emissions to achieve 550ppm?

– Bottom line for Stern is that the average annual cost will be around 1% of GDP by 2050.

• Conclusion for Stern: Benefits of 550 ppm (avoided damages of 5% or so of GDP) > Costs of abatement (1% of GDP).

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Topic 4.c: The Economics of Global Warming

• Stern’s policy prescriptions focuses on three “essential elements”:

– Establishing a global price for carbon.

• Can be achieved via a carbon tax or through permits.

– Policies supporting R&D in abatement technology are key.

• Achieved in part through carbon pricing, but more is needed.

– Removal of “barriers to behavioural change.”

• For instance, the provision of reliable information to consumers, standards on consumer products etc.

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Topic 4.c: The Economics of Global Warming

• Other factors that are important in terms of policy:

– Adaptation to climate change.

– Fostering of international co-operation.

– Distributional effects (to ensure the developing world is on board).

• So far we have looked at global policy to mitigate the effects of climate change.

– Different mechanisms of the Kyoto Protocol (big picture).

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Topic 4.c: The Economics of Global Warming

• How is Canada planning on meeting its Kytoto obligations?

– Recall: Canada has agreed to reduce GHG emissions to 6% below 1990 levels, by 2012.

• A reduction of about 35% relative to 2004 emissions!

• Tricky to formulate a national plan due to the division of powers under the Canadian Constitution.

• Provinces (rather than the Federal governement) essentially have the power to make environmental policy.

• National/Federal plan to meet Kyoto targets in a state of flux.

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Total GHG Emissions, Canada 2005

26.70%

54.97%

7.12%

7.61%3.60%

ENERGY (TRANSPORTATION)

ENERGY (OTHER)

INDUSTRIAL PROCESSES

AGRICULTURE

WASTE

Source: National Inventory Review

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22%

13%

8%

6%7%2%

23%

11%

1%7%

Electricity and Heat Generation

Fossil Fuels

Manufacturing

Commercial & Institutional

Residential

Aviation

Road Transportation

Fugitive Sources

Other Stationary Sources

Other Transporation

Total Energy-related GHG Emissions in Canada 2005

(energy related emissions = 82% of total emissions)

Source: National Inventory Review

13Source: National Inventory Review

Total GHG Emissions in BC, 2005

39.26%

44.63%

4.76%

3.77%7.55% 0.03%

ENERGY (TRANSPORTATION)

ENERGY (OTHER)

INDUSTRIAL PROCESSES

AGRICULTURE

WASTE

OTHER

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3.52%

14.60%

11.02%

6.56%

8.18%3.31%

30.76%

11.99%

0.33%9.73% Electricity and Heat Generation

Fossil Fuels

Manufacturing

Commercial & Institutional

Residential

Aviation

Road Transportation

Fugitive Sources

Other Stationary Sources

Other Transporation

Total Energy-related GHG Emissions in BC, 2005(energy related emissions = 84% of total emissions)

Source: National Inventory Review

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Topic 4.c: The Economics of Global Warming

• National-level Canadian Policy.

• Original Clean Air Act tabled in October 2006.

– Contained no mention of Kyoto or Canada’s Kyoto obligations.

– No hard caps on GHG emissions reductions until ~ 2025.

– No emphasis on carbon trading as a way to meet goals.

– But somehow imagined GHG emissions would be reduced by 45-65% by 2050.

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Topic 4.c: The Economics of Global Warming

• Amended Clean Air and Climate Change Act (2007) – Requires hard caps on industry, beginning in 2008, aimed

to reduce GHG emissions to 6% below 1990.

– Penalties for emissions above target = $20/tonne.

– Commitment to global carbon trading.

– Also tries to address auto emissions

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Topic 4.c: The Economics of Global Warming

• BC Provincial policy:• In the provincial Budget of 2008 a Revenue-Neutral Carbon-

tax was introduced in British Columbia.• The carbon tax applies to virtually all fossil fuels in BC.• All carbon tax revenue - about $1.8 billion over three years -

will be returned to British Columbians through reductions to income and business taxes.

• The legislation requires the government to table annually, a plan to ensure the carbon tax remains revenue neutral.

• To help offset the cost of the carbon tax, lower income households receive a Climate Action Credit of $100 per adult and $30 per child per year. People were encouraged by the government to spend the credit on reducing their carbon footprint

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Topic 4.c: The Economics of Global Warming• Another important policy document that addresses climate

change action in BC is the Energy Plan released in 2007.• Some of the policies established are:

– Zero greenhouse gas emissions from coal fired electricity generation.

– All new electricity generation projects will have zero net greenhouse gas emissions.

– Zero net greenhouse gas emissions from existing thermal generation power plants by 2016.

– Set an ambitious target, to acquire 50 per cent of BC Hydro’s incremental resource needs through conservation by 2020.

– Implement energy efficient building standards by 2010.

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Topic 4.c: The Economics of Global Warming

– Establish a set purchase price for electricity generated from projects up to 10 megawatts.

– Establish a $25 million Innovative Clean Energy Fund. This was achieved through the ICE levy in every Hydro Bill.

– Eliminate all routine flaring at oil and gas producing wells and production facilites by 2016 with an interim goal to reduce flaring by 50 per cent by 2011.

– Requirement that 90% of energy comes from clean or renewable sources.

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Topic 4.c: The Economics of Global Warming

• Reducing GHG emissions from transportation will be important.– Recall that ~ 40% of BC’s emissions are from this sector.

• Proposed measures include:

– Development of fuel cell and hydrogen infrastructure.

– Expansion of tolls on major transport corridors.

– Various plans for public transit.

– New tailpipe emissions standards for new cars sold in BC.

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