The IPCC is wrong

The IPCC estimate of the net costs of aggressive mitigation is systematically too high.

IPCC WG III on mitigation of climate change had this to say on the costs of a forceful 2 degree C strategy (Summary for Policymakers, page 15, my italics, their godawful prose):

Scenarios in which all countries of the world begin mitigation immediately, there is a single global carbon price, and all key technologies are available, have been used as a cost-effective benchmark
for estimating macroeconomic mitigation costs … Under these assumptions, mitigation scenarios that reach atmospheric concentrations of about 450 ppm CO2eq by 2100 entail losses in global consumption – not including benefits of reduced climate change as well as co-benefits and adverse side-effects of mitigation (footnote 19) – of 1 % to 4 % (median: 1.7 %) in 2030, 2 % to 6 % (median: 3.4 %) in 2050, and 3 % to 11 % (median: 4.8 %) in 2100 relative to consumption in baseline scenarios that grows anywhere from 300 % to more than 900 % over the century. These numbers correspond to an annualized reduction of consumption growth by 0.04 to 0.14 (median: 0.06) percentage points over the century relative to annualized consumption growth in the baseline that is between 1.6 % and 3 % per year.

This has been summarised by retail commentators, including yours truly, as an estimate that “2 degree mitigation will cost 0.06% of GDP growth, or “nothing” within the margin of error.”

But it’s wrong. What is the point of an estimate of “macroeconomic mitigation costs” that excludes a substantial part of them, viz. the co-benefits and co-costs? One way forward is to try for a comprehensive estimate in welfare terms, including biodiversity, long-tailed risk of civilisational catastrophe, psychic burdens of anxiety, corrections for inequality, heightened risk of conflict, etc. This is pretty much impossible. Or you limit yourself to a GDP estimate, with its well-known flaws and the merits of familiarity – in which case you must put in all the GDP components. The whole point of mitigation is to prevent the damage from climate change. Not all of this is captured in GDP, but a lot of it is. Leaving out the avoided damage is a fatal flaw in the IPCC’s estimate of net costs. It’s much, much too high.

The WG’s excuse is given in the obscure footnote 19:

The total economic effect at different temperature levels would include mitigation costs, co-benefits of mitigation, adverse side-effects of mitigation, adaptation costs and climate damages. Mitigation cost and climate damage estimates at any given temperature level cannot be compared to evaluate the costs and benefits of mitigation. Rather, the consideration of economic costs and benefits of mitigation should include the reduction of climate damages relative to the case of unabated climate change.

dog-ate-homeworkThe way I read the last sentence is: the dog ate our homework. They had a shot at it, but gave up on integrating the co-benefits.

Can we have a quick-and-dirty try at this ourselves, misusing the IPCC’s own data? The analysis I found is in chapter 6 of the full report,  especially Table 6.7, pages 469ff. Unfortunately this is essentially qualitative. The experts forgot Robert Watson-Watt’s dictum for advising policymakers – “second best tomorrow” – and went for an impossible Theory of Everything, down to changes in land tenure.

We are on our own. I can’t suggest a credible GDP estimate of net costs, but think we should concentrate on three simpler questions.

1. Is there any significant chance that adverse effects of aggressive mitigation could outweigh the positives? The adverse effects seem to be either trivial amenity arguments (ugly wind turbines) or worst-case conjectures, such as pensioners freezing to death en masse because the electricity supply fails. The co-benefits are solid. Absent some serious scenario, I think we can rule this out.

2. Can we estimate the reduced damage from extreme weather? We do know that the damage is already very large, from the increased likelihood of storms, floods and droughts. It will get worse. So we have an unknown but large number. Help from commenters welcome.

3. Can we estimate the benefits of reduced air pollution from fossil fuels? Any effective mitigation programme will slash this, let’s say by 80%. UNEP estimates the cost of air pollution in OECD countries plus India and China at $3.5 trillion a year, in ill-health and lives lost.  Most of this is due to fossil fuels, though a significant amount comes from wood-burning stoves, which also emit CO2.

Should we really include the lives lost in a GDP estimate? Most economists would I think prefer GDP per head to plain GDP as the welfare indicator, rejecting the Vatican view of the more the merrier. So let’s be cautious, and shunt the value of life per se into the box of non-market values, along with polar bears and biodiversity. We can I think take $1 trillion p.a. as a very safe lower bound for the global GDP health savings from aggressive mitigation by 2050. World product in 2013 was $75 trn, according to the World Bank. Assume straight-line linear growth in abatement starting today, and the cumulative addition to world product by 2050 is $18.5 trn, or 25% of one year’s GDP.

In other words, the health co-benefits of mitigation absolutely swamp the 3.4%-of-a-year’s-GDP estimate of the energy-system costs, which just looks like a rounding error.

The IPCC should have concluded:

Aggressive mitigation starting now is the best bargain the human race has ever seen.

Endnote 1
Niggle, niggle: you could point out that the air pollution can be reduced by measures that don’t do anything for the climate, say by replacing wood cooking fires by diesel-powered electricity. True, but are these measures at all sensible or likely? OECD countries have spent fortunes reducing the air pollution from vehicles, and in London it still kills 4,000 a year. Progress on air pollution is far more likely if, as in China, it is also a climate change measure. We should measure policy against the real world, not an implausible Plan B.

Endnote 2
The cost estimates of WG III optimistically assume that “all key technologies are available”, including carbon capture for coal power stations, which is looking more hopeless by the day. On the other hand, their numbers for wind and solar energy are already too high. Compare the LCOEs in WG 3’s Annex III to Lazard’s latest survey of US energy costs (September 2014), all prices in $ US per mwh:

Onshore wind
IPCC, 10% WACC         min 51 / median 84 / max 160
Lazard, 9.6% WACC    min 37 /                    / max 81

Utility solar
IPCC, 10% WACC         min 84 / median 160 / max 210
Lazard, 9.6% WACC    min 72 /                      / max 86

US prices are keener than in many countries, but not China and India. It is virtually certain that prices of wind and solar will continue to fall relative to coal in most countries, so the net cost of the energy transition in electricity will become negative. The WACC is also becoming unrealistically high for investments that are now perceived as very low risk.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

11 thoughts on “The IPCC is wrong”

  1. James

    Are you assuming that cuts in global GDP cannot possibly increase anxiety, inequality and risk of conflict?

  2. The only cuts in global GDP on the table are those that the denialist cabal and the fossil lobbies are striving to inflict on us. I suggest we take the >$15 trillion gain in consumption that mitigation offers. The incidental reductions in anxiety, risk of conflict and probably inequality (by replacing resource extraction rents by constant-returns-to-scale manufactures) will be agreeable bonuses.

  3. The only cuts in global GDP on the table are those that the denialist cabal and the fossil lobbies are striving to inflict on us.

    In your post you say there are cuts in GDP involved. which is why I asked.

  4. If you go by the flawed WG III estimate, the median "cut" is 3.4% of one year's GDP, or €2.5 trillion, or 0.06% off the "baseline growth rate of between 1.6 % and 3 % per year". 1.6% means a total cumulative GDP increase to 2050 of $1,030 trn; taking 3%, it's €2,337 trn. The difference is clearly too small to have by itself any predictable or measurable effects on the non-GDP welfare components, and would anyway be lost in the measurement noise. That’s why I described the estimate as equivalent to “nothing” for practical purposes.

    On the other hand, the large and bankable GDP health gains excluded from the IPCC estimate are themselves reinforced by predictable reductions in the psychic costs of illness and premature death. Respiratory diseases take their time before killing you.

    I won't argue for a reduction in risk of conflict from the health improvements; however this is much more likely to come from the extreme weather side. Inequality is more of a measurement issue – the declining marginal utility of money means that for a reasonable welfare indicator we should massively upweight the world's poor and downweight the rich and powerful, such as Americans. At which point ethics drives us out of the realm of practical politics.

  5. The difference is clearly too small to have by itself any predictable or measurable effects on the non-GDP welfare components, and would anyway be lost in the measurement noise

    No doubt true in the aggregate, but no doubt untrue country by country. Neither the proportion nor the amount of economic damage is going to be invariant across countries, and countries are not equally able to absorb their share of the €2.5 trillion. I therefore wouldn't dismiss out of hand the possibility of significant suffering.

    1. $2.5 trillion over 35 years is an absolutely insignificant sum on the world scale, mere noise in a $3.8 to $5.2 quadrillion total. Divide it up by countries, and it's still insignificant. Some countries will no doubt suffer economic damage from a determined energy transition: the oil and coal exporters, Australia, Saudi Arabia, Venezuela, the Gulf states, Russia. There aren't any really poor oil exporters. Coal miners everywhere will lose their jobs. These are very small effects compared to the reduction in the BAU damage from storms, droughts and floods, disproportionately affecting the poor, and the gains in public health: millions of lives saved.

      Get over it, Keith. There will be no aggregate economic losses from the transition, rather a very large gain. Quite enough to compensate all the losers, if our politics were so inclined. I've always supported a strong programme for Appalachian regeneration; late in the day, Obama came up with a weak one.

      1. Thanks for acknowledging the reality of the costs — this is a win for some and a loss for others, which is precisely why it is so contentious. More instability in Iraq and Nigeria for example clearly doesn't matter to the aggregate, but it matters a lot if you are trying to raise a family in one of those countries. For what it's worth, if you want to persuade those who will suffer that this change is worth it, you might acknowledge up front that their lives have value. Because everyone knows all dramatic policy changes have some costs, they will be inherently suspicious when one is presented as a free lunch.

        1. Because everyone knows all dramatic policy changes have some costs, they will be inherently suspicious when one is presented as a free lunch.

          Nobody talks about mitigating climate change without talking about the costs, and James doesn't do so here. Noticing that a choice is, on net, beneficial to the world is not the same thing as proposing a "free lunch" — not, at least, as that term is conventionally understood.

          Governments, individuals, corporations, vertebrates, single-celled organisms, etc., all incur costs – they make investments – with the intent of getting more out than they put in – and they routinely succeed. This is not somehow suspicious or dubious – not a "free lunch," if that term is to have any meaning at all. It's basic to the way the world works.

          1. To be fair to Keith, I did use the "free lunch" term in the title of an earlier post, in the specific context of the global climate negotiations, and to contrast with the now obsolete "free rider" meme. It does take vivid language to break an ingrained cognitive habit. I didn't use it here, in a post trying to dig deeper into the question of net costs.

            I've written more about coal miners (here, here, here) than anybody else at the RBC, with sympathy I hope – my first wife's grandfather, Bill Morris, was a survivor of the Creswell colliery disaster in 1950 and a hero who led his work gang to safety from a mile underground in pitch darkness. The human costs of coal mining will mount up till it stops.

  6. I don't see why there should be more instability in Iraq and Nigeria from a shift away from oil. They have suffered the well-known "curse of natural resources": because these are so concentrated, they lead directly to rent-seeking and corruption, and sometimes wars (Eastern Congo). An extreme, but hardly exceptional, example, is Angola, whose government threatened to withdraw the concessions of oil companies when they proposed to include in their annual reports statements of the amounts paid to individual countries. Extraordinarily little of Angola's oil wealth has trickled down to its ordinary citizens.

    There are, as a general rule, no pure Pareto improvement policies, that make some better off and none worse off. The standard view of economists, and it looks right to me, is that you should pursue economically efficient policies, and use the gains to compensate the hardest-hit losers, approximating the Pareto rule. What is the ethical case for maintaining an extremely inefficient policy and treating it as the baseline, from which departures have to be justified? This is, remember, a policy that is avoidably killing tens of thousands of people today and ruining the prospects for my grandchildren. I am rather surprised that as a physician you seem to give greater weight to tenuously hypothetical losers than to the millions whose health is quite certainly being ruined today, in Delhi, Rio, New York and Beijing, by air pollution from fossil fuels. I did not mention the tens of millions of Bangladeshis who may well be forced to leave low-lying farmland at risk from sea-level rise and more violent storm surges: a prospect that carries risks of loss of life on a genocidal scale.

    1. For Iraq, which I know well, the instability would come from an almost complete collapse of GDP – the oil funds their food and clean water supply. Without that you have a desert country will little food and water but plenty of guns and bombs. Not a recipe for stability, even though I agree the state would be less corrupt (presuming they had a state).

      My friend you misread me in thinking I give greater weight to the losers or that I don’t think climate change is very much worth trying to stop (Read ahead in the queue to my next post, which I wrote before I read yours). I was reacting to your post seeming to imply that there weren’t any costs (or at least, none worth speaking of) because in the aggregate, the costs were small. This is the same line taken when politicians say “Yes, this policy will cause everyone in this community to lose their job, but GDP will go up so on balance you have nothing to worry about”. We don’t get to live in the aggregate, we have to leave somewhere. Likewise, when you wrote we must price the welfare benefit of the climate change prevention (and I agree), but because you didn’t argue that we must also price the welfare harms of the solution I felt you were queering the pitch…surely we have to use the same accounting methods on both sides.
      Both of us descend from coal miners, so this isn’t a contest over who cares about them more, I am sure we both do. It’s as much how we make it clear that their lives are not a rounding error that can safely be ignored. Presented that way creates massive resistance to the policies we need to implement to stop us from cooking the planet. It also I said causes suspicion in fence sitters, who suspect there are some eggs to be broken for this omelet that are not being fully described.

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