“On the Shorter-Term Economic Motivation for Carbon Emissions Reductions”

“On the shorter-term economic motivation for carbon emissions reductions” AUTHORS Roy Hegner Heiko Paeth ARTICLE INFO Roy Hegner and Heiko Paeth (2013). On the shorter-term economic motivation for carbon emissions reductions. Environmental Economics, 4(3) RELEASED ON Wednesday, 09 October 2013 JOURNAL "Environmental Economics" FOUNDER LLC “Consulting Publishing Company “Business Perspectives” NUMBER OF REFERENCES NUMBER OF FIGURES NUMBER OF TABLES 0 0 0 © The author(s) 2021. This publication is an open access article. businessperspectives.org Environmental Economics, Volume 4, Issue 3, 2013 Roy Hegner (Germany), Heiko Paeth (Germany) On the shorter-term economic motivation for carbon emissions reductions Abstract It is often suggested that there is not least an economic interest in climate change mitigation because the negative implications from and the adaptation to longer-term climate change will easily exceed the costs of preventive measures in terms of carbon emissions reduction. This paper revises whether this hypothesis also holds over shorter time horizons, in particular the current decade, and for individual states. For most considered states it is found that the minimum of the national cost functions is associated with a slight reduction of carbon emissions. However, this reduction amounts to less than 1% of the total emissions expected until 2020 under a business-as-usual scenario. Unilateral advances in emissions reductions at the national scale hardly affect the optimal strategies and costs of other states. Some states are still profiting from a moderate extent of shorter-term climate changes and will not be motivated towards carbon emissions reductions, while other states already experience climate-related economic damage. Overall, the shorter-term economic motivation alone cannot be expected adequate to initiate the necessary and urgent measures in carbon emissions reduction required to achieve the +2°C goal in climate change mitigation. Keywords: climate mitigation, economics of climate change, cost functions. JEL Classification: Q50, Q54. Introduction will further boost the energy prices worldwide (Go- lombek et al., 2012). There is an increasing consensus among scientists and policymakers that the Earth’s climate system is In the light of these economic risks, it would be a currently changing and that this change is very like- logical consequence that mankind will use all ly due to human activity (IPCC, 2007a, Paeth et al., available means to avoid the negative implications 2008). It is also commonly accepted that the nega- of climate change. Undoubtedly, the reduction of tive implications for ecosystems and livelihood will carbon emissions represents the best option in cli- dominate the positive effects (IPCC, 2007b). The mate change mitigation (IPCC, 2007c) but also an consequences will be manifold, while some of them expensive way whose benefits will become dis- are still badly understood nor quantifiable (Heal, cernible not before several decades into the future 2009). While the macroeconomic systems may be (Johns et al., 2011). less vulnerable to climate change, individual sectors Thus, climate policy is part of a generation problem will be largely affected with severe implications for and still fails in the light of the ‘anarchy’, egoism labor markets in industrialized countries and even and purblindness of the international economic and hunger in developing countries (Smith, 1996). political systems (Thompson, 2006). Nonetheless, Among the most sensitive sectors agricultural pro- carbon emissions reduction is an official key topic duction and pasture have to be mentioned first, es- on the agenda of national and international political pecially in underdeveloped and overpopulated re- authorities (Heal, 2009). As a certain extent of glob- gions of the tropics and subtropics (Butt et al., 2005; Thomson et al., 2006). This will further hamper the al warming cannot be obviated anymore (Meehl et economic development of the poorest (Brown et al., al., 2005), our efforts now tend towards limiting the 2011), leading to political conflicts and societal amount of future warming to 2°C compared with instability (Hsiang et al., 2011), especially because pre-industrial conditions in order to prevent danger- water resources are running short in many regions of ous interference from climate change (Mastrandrea the globe (Guo et al., 2003). Anyway, the economic and Schneider, 2004; Hansen et al., 2006; Anderson loss due to climate change will also concern the 2011, May 2011; Pardaens et al., 2011). To obtain highly developed states of our planet, particularly this goal the paradigm shift in favor of climate through damage of infrastructure in the course of change mitigation must take place now and not in a more intense and more frequent extreme events few decades (Meinshausen et al., 2009), especially (Bouwer, 2011) with implications for the insurance since early measures in emissions reduction will industry (Changnon, 2003; Murnane, 2004). In addi- save money (Gerlagh and van der Zwaan, 2004). tion, the energy production sector will be subject to In summary, we are nowadays in a difficult and infrastructural damage and exploitation risks which trendsetting situation where a tangible emission policy at international level is urgently required but the intrinsic motivation for climate change mitiga- Roy Hegner, Heiko Paeth, 2013. tion is still quite low on the part of most decision 41 Environmental Economics, Volume 4, Issue 3, 2013 makers in policy and economy. In view of this di- change. Thus, an analysis of the short-term econom- lemma it would be an excellent argument to demon- ic viability of emissions reductions seems necessary strate that the economic risks arising from climate because emissions reductions prove especially bene- change clearly outperform the costs for carbon ficial, if the declining of (global) CO2 emissions emissions reduction. An early attempt in this direc- starts the earliest possible (Weyant et al., 2006; tion was made by Fankhauser (1995) and, more Hansen et al., 2006; Stern, 2006). The current dec- recently, the report by Stern (2006) has attracted ade 2011-2020 has been chosen as a case study much attention. Indeed, both authors support the which is more dedicated to the evaluation of our argument mentioned above but failed to initiate a scientific hypotheses than to practical action guide- general rethinking and, in particular, concrete ac- lines. The method could be applied to any subse- tions bythe persons in charge. Apart from some quent period, once updated accurate estimates of questionable assumptions and errors in reasoning, cost and damage functions are available. one explanation for this failure is that longer-term Our calculations are based on estimates of climate- and partly quite vague benefits from carbon emis- related damage functions and marginal abatement sions reductions, as predicted by Stern (2006), are (costs) curves from the literature which are applied bought dearly by present-day efforts and costs dur- to nine states selected thoroughly in order to be rep- ing a time when the negative consequences of cli- resentative of the World’s population, economy, mate change are still not sufficiently perceptible for socio-economic development and vulnerability to many people. In addition, the assessment by Stern global warming. These are the USA, Germany, Ja- (2006) is confined to the global and continental pan, Russia, Brazil, China, India, Nigeria and Ban- scale, whereas it is more likely that efficient meas- gladesh, standing for 53.3% of the global population, ures in climate change mitigation will emerge at the almost two-thirds of the total carbon emissions and scale of national initiatives and decision processes an important share of the World’s total economic (Kruger et al., 2007; Sharma et al., 2012). performance (cf. Table 1 in Appendix). In addition to Here, we offer a regionally more differentiated view the computation of national cost functions and related on the basis of selected countries. Due to the inertia economically optimized carbon emissions reductions of the atmosphere climate related damage is generally over the next ten years we investigate the impact of expected to be higher in the long rather than the short unilateral national efforts in climate change mitigation run. Therefore, it is assumed that from an economic on the best strategies of other states and evaluate na- point of view there is little incentive for short-term tional and transnational options in emission policy. emissions reductions as long as no additional supra- The next section describes the derivation of the na- national environmental strategy, such as an emissions tional cost functions indicating the economic dam- trading scheme, is set up (del Río González, 2008). age from climate change. Section 2 is dedicated to the This paper aims at giving support to this hypothesis mitigation cost functions, and section 3 deals with the by considering country-specific climate-related dam- composed total cost functions which are minimized age functions and respective abatement cost curves. to determine the optimal emissions reductions from As such, the short-term approach is useful to identify an economic point of view. Results are discussed and those regions or countries where substantial emis- conclusions are drawn in the final section. sions reductions can be realized most cost- efficiently and on a rather short time horizon. 1. Costs of damage Our approach is focused on the decade

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