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The last push for Copenhagen: do integrated assessment models help?

There is growing debate around climate change issues as we reach the final countdown to Copenhagen. A growing number of politicians, including Andrew Mitchell MP, UK Shadow Secretary of State for International Development, are setting out their policies on climate change in advance of this crucial summit.

The Copenhagen negotiations on climate change policies will depend on what ‘numbers’ policy makers have on mitigation costs. These numbers are normally drawn from economists’ studies that use complex methodologies: integrated assessment models (IAMs). These sophisticated tools are based on theoretical grounds and boost understanding of the transmission channels linking economic activity to rising pollution (see Cantore 2009 for a discussion about the use of IAMs to inform the global warming debate). IAMs examine hypothetical scenarios and imagine future international environmental policies. Their contribution is essential as they clarify features of the relationships between the economy and the environment. They outline the most cost effective policies and anticipate responses to future dangers. But, despite their value, there is a major worry: do all these IAMs provide a coherent policy view?

Let me look at three authoritative policy papers on mitigation costs: the Stern Review (2006), the recent contribution by Richard Tol (2009) and that by the Climate Group at the office of Tony Blair (2009) – three very different scenarios about future international climate change agreements. In Chapter 10, the Stern Review describes mitigation costs for a world with a 550 ppm CO2e atmospheric carbon concentration constraint. Tol analyses mitigation costs for different levels of internationally coordinated carbon tax policies. The Climate Group sets up scenarios with different future global emissions reduction policies and world regional targets. The key messages vary.

The Stern review finds that mitigation costs could be positive or negative, but either way, strong and timely action is needed (Chapter 10, pg 39): ‘Overall, the expected annual cost of achieving emissions reductions, consistent with an emissions trajectory leading to stabilisation at around 500-550ppm CO2e, is likely to be around 1% of GDP by 2050, with a range of +/- 3%’ and (pg ii of the Executive Summary): ‘From all of these perspectives, the evidence gathered by the Review leads to a simple conclusion: the benefits of strong, early action considerably outweigh the costs’.

The Tol paper (p. 26) says that costs are significant but not excessive and in any case they are not such high to justify early action: ‘Even the most drastic policy considered – a worldwide carbon tax of $250/tC in 2010 rising with the rate of discount to over $20000/tC in 2100 – leads to a reduction of income of only 13% in 2100 (while income increases more that sevenfold in the no policy scenario)’ and at pg 29: ‘spending a lot of money on carbon dioxide emission reduction in the near term in the OECD does not pay off’.

The Climate Group provides an interesting story line by stressing that mitigation policies could generate GDP raises (p. 13): ‘Traditional macroeconomic modelling of climate mitigation has tended to show GDP being reduced as the coverage of the climate-mitigation regime is extended. This is in contrast to the results set out in this report, which show that GDP increases. The most important reason for this difference is that the traditional, equilibrium studies assume that policies, whether global, national or regional, reduce market activity as measured in the models by GDP...The approach used here is more neutral, recognising that we are, in fact, shifting the economy from one development path or trajectory – with existing observed market failures and inefficiencies – to another, thereby allowing GDP to rise or fall, depending on circumstances.’ However in accordance with the Stern Review the Climate Group calls for early action (p.1): ‘This is not to say that forging a global deal, and then implementing it, will be easy. But what we can say is that world leaders can have the confidence to know that reaching a successful conclusion in Copenhagen this December is both achievable and consistent with their measures to promote economic recovery. In fact, crafted right, an ambitious global deal can be a key part of this recovery. There is no reason to delay’.

From a policy perspective, the main question is: which numbers will be on the table in Copenhagen? What will be the consequences of conclusions that differ so markedly?

The differences arising from IAMs are crucial, as their results could determine policies for countries that are bearing the brunt of climate change, namely developing countries. Tol`s paper presents results on the cost-benefit ratio of policies at global level, the Climate Group finds that mitigation policies would enhance GDP for China and India but does not provide data for all developing countries, while Chapter 10 of the Stern Review is dedicated to the costs of mitigation policies, pointing out that ‘An annual cost rising to 1% of GDP by 2050 poses little threat to standards of living, given that the economic output in the OCED countries is likely to rise in real terms by over 200% and in developing regions as a whole by 400% or more’ but does not specify the likely winners and losers of mitigation policies in specific regions. A recent paper from myself, Leo Peskett and Dirk Willem te Velde investigates the effects of mitigation policies by IAMs in developing countries and in particular, the impact of the RICE98 model for Africa. Of course results depend on the model assumptions and calibration and on the authors’ point of view, but it could be useful to start a discussion about the implications of mitigation and climate finance for developing countries and try to harmonise different findings and perspectives.

We need a stronger effort to unify the efforts and views of economists, but is it much too late?