Connecting Climate Science and Economics, Part 3

In this post I am going to give a summary of the third part of Climate Economics: The State of the Art by Frank Ackerman and Elizabeth Stanton of the Stockholm Environment Institute, concerning recent research in the economics of mitigation and adaptation. Part 1, with a discussion of newest results from the climate science, can be found here. Part 2, summarizing the report’s findings about the economics of climate change, here.

In my last post I summarized Ackerman and Stanton’s review of recent developments in the economics of climate change. It suggests that many of the currently applied approaches may bear probably unsolvable problems due to inherent uncertainties and equity concerns. However, Part 2 of my summary was concerned with the possibilities to model climate change and its impacts on human systems and the economy. No matter what conclusions one draws from this analysis, there remains a further area of concern – one that is likely even more important. In the following I am going to provide a summary of Ackerman and Stanton’s findings about the economics of mitigation of and adaptation to climate change.

The authors begin with reviewing the “2°C guardrail”, a broadly embraced global temperature stabilization goal that is believed to provide a safeguard from most disturbing consequences of climate change and was articulated, among others, in the Copenhagen Accord. They emphasize that there are voices (especially from the Alliance of Small Island States and their supporters) who call for a lower stabilization goal – mostly 1.5°C – as a truly precautionary approach. Furthermore, there is an important parallel to the discussion of recent findings in climate science (see Part 1) – since we don’t know the exact climate sensitivity, various mitigation paths must be considered that possibly lead to the achievement of the 2°C-goal.

The main determinant of feasible greenhouse gas concentration stabilization paths are the mitigation technologies. Ackerman and Stanton differentiate here between three categories: technologies that a) reduce emissions, remove greenhouse gases from the atmosphere, or reduce radiative forcing.

Among the strategies aiming at reducing greenhouse gas emissions the most important in almost all scenarios is energy efficiency. This is a source of at least two economic controversies: the question of negative-cost abatement and the so-called rebound effect.

Many climate change mitigation scenarios assume low- or even negative-cost abatement possibilities – mainly in form of energy efficiency measures. This runs counter to the principles of conventional economic theory (according to it, if there were such possibilities, they would already have been embraced by firms and households). Nonetheless, the authors of Climate Economics: The State of the Art name many explanations for why negative-cost abatement may be possible (examples are misplaced incentives, incomplete markets, lack of information, institutional and organizational constraints etc.).

The rebound effect is an old concept, going back to William Jevons, a 19th century economist. It is often claimed that energy efficiency improvements are always being “undone” due to increases in energy use (since higher energy efficiency means lower energy costs). However, Ackerman and Stanton cite empirical results indicating that, while such an effect is indeed observable in reality, it seldom leads to losses of more than 30% of the initial efficiency gain, and mostly lies well below that level.

The other part of emissions reducing strategies is the employment of modern technologies in energy generation: notably renewable energies, nuclear power and carbon capture and sequestration (CCS). Gere the main challenge for economic modelling appears to be to endogenize technological change, i.e. to model the influence of public policies (investment in R&D, subsidies, taxes and other incentives directed at spurring the development and deployment of climate-friendly technologies) on the rate of technological change. To date, most common practice is to ad hoc assume some kind of a decreasing technology-cost-curve. There is a lot of research indicating that it is indeed possible to influence the rate and direction of technological change through proper public policy. These results must be incorporated in mitigation models. Also, the authors call for improvements in the modelling of future oil prices (which is a highly difficult task, since there are multiple sources of uncertainty regarding oil prices – from geophysical, e.g. the size of reserves, to political, e.g. the politics of OPEC), since they have an important influence on the (relative) prices of clean energies, and thus on their costs.

Removal of greenhouse gases from the atmosphere is the second important mitigation strategy. I already discussed issues related to afforestation and reduced deforestation in Part 1. Further proposals include enhancing sequestration (particularly through mixing charcoal into soils and thus storing carbon that would otherwise be released due to natural degradation processes). Also, ocean fertilization (to improve the reproduction of carbon sequestering algae) has been discussed, but it seems to be too risky and not effective enough to be employed at a significant scale.

Reduction of radiative forcing can be theoretically achieved in many ways. However, reducing black carbon emissions appears to be the only sensible strategy, since most of the others (mostly belonging to the so-called geo-engineering approach) tend to mitigate only temperature increases, but not other adverse consequences of climate change.

While mitigation has been extensively discussed in the economic literature, analyses of adaptation costs and its interrelations with mitigation are rare – mainly due to the highly regional character of adaptation measures. However, a few general points can be made:

  • adaptation costs are climate change costs and should therefore be explicitly included in integrated assessment modelling;
  • on the other hand, adaptation measures can seldom be clearly distinguished from other development measures and may have positive effects on development (double-counting should be avoided);
  • estimates of global adaptation costs vary by orders of magnitude, mainly due to the apparent difficulties in their definition.

It may be concluded from Ackerman and Stanton’s Climate Economics: The State of the Art that much has still to be done in the field of climate economics – especially with regard to the economic modelling of mitigation and adaptation efforts. Generally, an advice may be drawn from the review that the economic analysis of climate change must take into account the most recent findings from climate science. And,

[i]n the end, analyzing climate change is not an academic exercise. The climate crisis is an existential threat to human society: It poses unprecedented challenges and demands extraordinary levels of cooperation, skill, and resource mobilization to craft and enact policies that will create a sustainable future. Getting climate economics right is not about publishing the cleverest article of the year but rather about helping solve the dilemma of the century. The tasks ahead are daunting, and failure, unfortunately, is quite possible. Better approaches to climate economics will allow economists to be part of the solution rather than part of the problem.


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