Climate Change and Global Equity ANTHEM ENVIRONMENT AND SUSTAINABILITY General Editor Lawrence Susskind – Massachusetts Institute of Technology (MIT), USA Our new Anthem Environment and Sustainability book publishing programme seeks to push the frontiers of scholarship while simultaneously offering prescriptive and programmatic advice to policymakers and practitioners around the world. In this programme, we publish research monographs, professional and major reference works, upper-level textbooks and general interest titles. Another related project to the Anthem Environment and Sustainability programme is Anthem EnviroExperts Review. Through this online micro-reviews site, Anthem Press seeks to build a community of practice involving scientists, policy analysts and activists that is committed to creating a clearer and deeper understanding of how ecological systems – at every level – operate, and how they have been damaged by unsustainable development. On this site we publish short reviews of important books or reports in the environmental field, broadly defined. ANTHEM FRONTIERS OF GLOBAL POLITICAL ECONOMY Series Editors Kevin Gallagher – Boston University, USA Jayati Ghosh – Jawaharlal Nehru University, India Editorial Board Stephanie Blankenburg – School of Oriental and African Studies (SOAS), UK Ha-Joon Chang – University of Cambridge, UK Wan-Wen Chu – RCHSS, Academia Sinica, Taiwan Léonce Ndikumana – University of Massachusetts-Amherst, USA Alica Puyana Mutis – Facultad Latinoamericana de Ciencias Sociales (FLASCO-México), Mexico Matías Vernengo – Banco Central de la República Argentina, Argentina Robert Wade – London School of Economics and Political Science (LSE), UK Yu Yongding – Chinese Academy of Social Sciences (CASS), China The Anthem Frontiers of Global Political Economy series seeks to trigger and attract new thinking in global political economy, with particular reference to the prospects of emerging markets and developing countries. Written by renowned scholars from different parts of the world, books in this series provide historical, analytical and empirical perspectives on national economic strategies and processes, the implications of global and regional economic integration, the changing nature of the development project, and the diverse global-to-local forces that drive change. Scholars featured in the series extend earlier economic insights to provide fresh interpretations that allow new understandings of contemporary economic processes. Climate Change and Global Equity Frank Ackerman and Elizabeth A. Stanton Anthem Press An imprint of Wimbledon Publishing Company www.anthempress.com This edition first published in UK and USA 2014 by ANTHEM PRESS 75–76 Blackfriars Road, London SE1 8HA, UK or PO Box 9779, London SW19 7ZG, UK and 244 Madison Ave #116, New York, NY 10016, USA Copyright © 2014 Frank Ackerman and Elizabeth A. Stanton The moral right of the authors has been asserted. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Ackerman, Frank, author. Climate change and global equity / Frank Ackerman and Elizabeth A. Stanton. pages cm. – (Anthem environment and sustainability) (Anthem frontiers of global political economy) Includes bibliographical references. ISBN 978-1-78308-020-5 (hardcover : alk. paper) – ISBN 1-78308-020-5 (hardcover : alk. paper) 1. Climatic changes–Economic aspects. 2. Climatic changes–Political aspects. I. Stanton, Elizabeth A., author. II. Title. QC903.A144 2014 363.738’74–dc23 2014011576 ISBN-13: 978 1 78308 020 5 (Hbk) ISBN-10: 1 78308 020 5 (Hbk) Cover photo: “Houses and Factories” c. 1941, courtesy of the US Library of Congress, Farm Security Administration/Office of War Information collection This title is also available as an ebook. TABLE OF CONTENTS Introduction vii Publication History xi Part I: Perspectives on Climate and Equity Chapter 1. Climate Economics in Four Easy Pieces 3 Chapter 2. Carbon Markets Are Not Enough 13 Chapter 3. Modeling Pessimism: Does Climate Stabilization Require a Failure of Development? 21 Chapter 4. The Tragedy of Maldistribution: Climate, Sustainability and Equity 37 Part II: Analyses of Climate Damages Chapter 5. Climate Impacts on Agriculture: A Challenge to Complacency? 57 Chapter 6. Did the Stern Review Underestimate US and Global Climate Change? 67 Chapter 7. Can Climate Change Save Lives? A Comment on “Economy-Wide Estimates of the Implications of Climate Change: Human Health” 79 Part III: Theory and Methods of Integrated Assessment Chapter 8. Inside the Integrated Assessment Models: Four Issues in Climate Economics 93 Chapter 9. Limitations of Integrated Assessment Models of Climate Change 115 vi CLIMATE CHANGE AND GLOBAL EQUITY Chapter 10. Negishi Welfare Weights in Integrated Assessment Models: The Mathematics of Global Inequality 133 Part IV: Applications of Integrated Assessment Models Chapter 11. Climate Risks and Carbon Prices: Revising the Social Cost of Carbon 151 Chapter 12. Epstein–Zin Utility in DICE: Is Risk Aversion Irrelevant to Climate Policy? 169 Chapter 13. Fat Tails, Exponents, Extreme Uncertainty: Simulating Catastrophe in DICE 183 Chapter 14. Climate Damages in the FUND Model: A Disaggregated Analysis 203 Chapter 15. Climate Policy and Development: An Economic Analysis 217 Appendix. Supplementary Data for Chapter 3 231 Notes 235 References 249 INTRODUCTION Technical solutions to the threat of climate change are not difficult to imagine. Existing technologies could eliminate most or all greenhouse gas emissions from electricity generation, transportation, and other carbon-intensive activities. Progress in this direction would undoubtedly spur the development of even better and cheaper techniques for reducing emissions in the future. Yet ambitious measures to reduce carbon emissions are all too rare in reality. The obstacles to climate protection are primarily economic and political, rather than technological. Powerful interests strongly prefer the status quo to massive investment in emission reductions. Debates over equitable sharing of the costs of climate protection, both internationally and intranationally, have stymied many efforts to move forward on this urgent issue. This book presents our research related to these themes, addressing the joint problems of climate and global equity. The articles included here, almost all from peer-reviewed journals, argue that the impacts of inaction on climate change will be far worse than the costs of ambitious climate policies, and that progress toward global equity is indispensable to the attempt to stabilize the climate. The book is divided into four sections. The first presents our general economic perspectives on climate and equity. “Climate Economics in Four Easy Pieces” is a short summary of a framework for analysis, incorporating four fundamental principles that should shape the field: the importance of future generations, the central role of the risks of catastrophic outcomes, the impossibility of monetization of all important impacts (and hence the impossibility of traditional cost–benefit analysis), and the reasons why damage costs are worse than protection costs. “Carbon Markets Are Not Enough” argues that, especially for developing countries, carbon prices must be combined with extensive nonprice policies in order to create equitable, development-oriented climate policies. “Modeling Pessimism” suggests that many climate scenarios assume slow growth for low-income countries, a cynical assumption which has the effect of reducing projected global emissions. It outlines the policy adjustments that would be needed for emission reduction viii CLIMATE CHANGE AND GLOBAL EQUITY in an equitable world, where many developing countries achieve high rates of growth. “The Tragedy of Maldistribution” proposes a new approach to the question of equity, treating it as a public good that is an important component of sustainability. In our recent review of the state of climate economics (Ackerman and Stanton 2012a), we identified the measurement of climate damages as one of the greatest weaknesses in current economic analyses of climate change. The second section of this book includes three articles addressing questions regarding climate damages. “Climate Impacts on Agriculture” examines an area where recent research challenges more complacent earlier conclusions and implies that there will be greater and more abrupt decreases in crop yields as the world warms and precipitation patterns change. “Did the Stern Review Underestimate US and Global Climate Damages?” coauthored by Chris Hope, the economic modeler for the Stern Review, reexamines the model runs and assumptions used by Nicholas Stern in his path-breaking analysis, finding good reasons to believe that climate damages will be even worse than implied by the Stern Review. “Can Climate Change Save Lives?” is a short critique of a published analysis by other economists, in which they suggest that the first stages of global warming could save vast numbers of lives; as we explain, that conclusion rests on a series of errors. The third and fourth sections of the book turn to integrated assessment models (IAMs), which have become central to climate economics. IAMs model the interacting processes of long-run economic growth and climate change, aiming to capture the complex feedbacks between these processes. The third section examines the framework and theory of IAMs. “Inside the Integrated Assessment Models” is a review article assessing key aspects of 30 different IAMs found in recent literature, identifying wide differences in assumptions and results. “Limitations of Integrated Assessment Models of Climate Change” examines the economic theory underlying IAMs, finding that they rely on questionable approaches, minimize catastrophic risks and impacts on future generations, and do not provide reasonable policy guidance. “Negishi Welfare Weights in Integrated Assessment Models” highlights a technical procedure, used in solving many IAMs, that has the effect of freezing the current global distribution of income, ensuring that the models’ solutions do not include significant movements toward international equity. The fourth section of the book includes five articles on IAMs in practice, four based on well-known IAMs and a final one on our own efforts to create a better IAM. While there are numerous IAMs in economics literature, policy debate has often focused more narrowly on a handful of the best- known and simplest models. Both the periodic reviews of economic literature by the Intergovernmental Panel on Climate Change (IPCC) and the US INTRODUCTION ix government’s calculation of a “social cost of carbon” (i.e., the value of the incremental damages caused by an additional unit of greenhouse gas emissions) for use in policy assessment have relied on IAMs that appear to have been chosen for familiarity or ease of use. In particular, the DICE model, developed and publicly released by William Nordhaus, has become a de facto open-access standard for research purposes. Like many other researchers, we have experimented with modifications to DICE; the bare-bones simplicity of the model, representing the entire global processes of economic growth and climate change in a system of only 19 equations, essentially guarantees that important features have been omitted. “Climate Risks and Carbon Prices” develops sensitivity analyses of the US government’s 2010 estimate of the social cost of carbon – the marginal damage caused by an additional ton of carbon dioxide emissions. Their estimate was a precise and small numerical value of $21 per ton. Using the DICE model, we demonstrate that important uncertainties about future damages, the discount rate, and the expected pace of climate change make this estimate highly questionable, with risks of values more than an order of magnitude higher. (The 2013 update to the US estimate raised the value somewhat, but did not change the methodology of calculation, and did not approach the higher values discussed in our article.) “Epstein–Zin Utility in DICE” introduces an important theoretical innovation from finance literature, allowing separate treatment of time preference and risk aversion; conventional approaches in both climate economics and finance conflate these two distinct factors, with paradoxical results. With this innovation, DICE recommends much faster abatement of emissions, but remains all but unable to model the effects of risk aversion. “Fat Tails, Exponents, Extreme Uncertainty” is an attempt to provide an explicit treatment of catastrophic risks in DICE; modifications to both the climate sensitivity parameter (governing the pace of climate change) and the shape of the damage function are required to make DICE predict catastrophic outcomes. “Climate Damages in the FUND Model” addresses another one of the most-discussed IAMs. A complex model with many more “moving parts” than DICE, FUND often estimates lower climate damages and social cost of carbon values than other models. This article explores the calculation of damages in FUND, identifying serious problems of data and logic in its treatment of agriculture. Finally, “Climate Policy and Development” reports on our own IAM, the Climate and Regional Economics of Development (CRED) model. CRED was designed to model substantial transfers of resources between world regions, simultaneously pursuing the goals of global equity and climate protection; each scenario reports both climate and equity outcomes. Under some, but not