Monckton: Is carbon dioxide mitigation cost-effective?

Lord Christopher Monckton compares the cost of action with the cost of inaction and finds that even assuming that the IPCC estimates are correct, that would be far more expensive to reduce CO2 than to pay to adapt to the potential damage. He compares 8 case studies of carbon trading schemes, as well as wind-farms, and even a bicycle-hire program, and finds that costs vary from $90 tr -$101,000 tr per degree forestalled.  By Garnaut’s own discount rates, the global abatement cost would be 2.3-4.5 times the inaction cost. — Jo Nova

Is CO2 mitigation cost-effective?

Christopher Monckton of Brenchley
[email protected]
Lecture to the Prague School of Economics
May 2011

Is CO2 mitigation cost effective? (PDF file, 12 pages)

Introduction

Hitherto, the economic literature has chiefly addressed the cost-effectiveness of climate mitigation globally. A simple yet comprehensive metric, derived from methods of the Intergovernmental Panel on Climate Change (IPCC, here taken as reliable), is intended to enable even non-specialist policy-makers to determine not only how much global warming any proposed CO2-reduction policy may be expected to forestall but also the policy’s mitigation cost-effectiveness and the abatement cost of forestalling a given quantum of future warming, on the assumption that the global cost-effectiveness of all mitigation strategies is equivalent to that of the policy.

Brief case studies illustrate how cost-benefit may be addressed by comparing the mitigation cost-effectiveness of competing CO2-reduction policies with one another, and by comparing their abatement costs with published estimates of the welfare loss arising from unmitigated climate change. As benchmarks, Stern (2006, p. vi), using the 0.1% discount rate that will be adopted here for illustration, estimates that 1% of 21st-century global GDP will suffice to forestall a projected 5 K global warming to 2100, against a global inaction cost of 5-20%, while Garnaut (2008, p. 253, fig. 11.2, & p. 270, table 11.3) puts Australia’s 21st-century mitigation and inaction costs at 3.2-4% and 6% respectively, against a projected 5.1 K unmitigated global warming to 2100. The economic literature puts the inaction cost at 1-4%.

Costs external to the policy itself and benefits external to mitigation of CO2 forcing are beyond the focus of this paper, but the metric may readily be adapted to encompass them.

Methods

(See the PDF for the full Methodology)

Illustrative case studies

In the brief illustrative case studies that follow, A2-scenario 21st-century transient warming is taken as 3.4 K arising in response to a forcing of 8 W m–2, so that the “near-invariant” (IPCC, 2001, ch. 6.1) transient-sensitivity parameter λtra is 3.4 / 8 = 0.425 K W–1 m2. Real GDP growth of 3%/year from $60 tr/year in 2010 (World Bank, 2011) is assumed in all cases. The 0.1% discount rate in Stern (2006) is applied, so that his estimated welfare loss of 5-20% of GDP arising in the absence of any mitigation may serve as a policy benchmark. The appropriateness of this rate is examined later. Some results are rounded.

Case study 1: US carbon-trading Bill

At $180 bn/year for 40 years, total $7.2 tr, discounted to $7 tr at net present value, the climate Bill (HR 2454, 2009, s. 311) would have forestalled 83% of US CO2 emissions by 2050. The US emits 17% of global CO2 (derived from Olivier & Peters, 2010, table A1). Thus p = 0.1411. From Table 1, business-as-usual CO2 concentration in 2050 would be 506 ppmv, falling to 489.632 ppmv (from Eq. 5) via the Bill. From Eq. (1), warming forestalled is 0.07 K; from Eq. (2), mitigation cost-effectiveness is $84 tr/K; from Eq. (3), the global abatement cost of all projected warming to 2050 is almost $100 tr, or more than 2% of global GDP to 2050, or (from Eq. 4), $14,000 per capita of global population.

Case study 2: Australia cuts emissions 25% in 10 years

Carbon Trading will cost $11.5 bn/year, plus $2.5 bn/year for innovation (Garnaut, 2011), plus $1.6 bn/year for administration (Wong, 2010, p. 5), all rising at 4%/year above GDP growth, or $231 bn by 2020 at n.p.v., to forestall 25% of current emissions, which are 1.2% of world emissions (derived from Boden et al., 2010ab). Thus p = 0.003. CO2 concentration would fall from a business-as-usual 412 to 411.934 ppmv by 2020. Warming forestalled is <0.0004 K; mitigation cost-effectiveness is $634 tr/K; global abatement cost of projected warming to 2020 is $151 trillion, or 21.3% of global GDP to 2020, or $21,000 per capita.

Case study 3: UK Climate Change Act

The UK accounts for 1.5% of global CO2 emissions (derived from Olivier & Peters, 2010, table A1). At an officially-estimated cost of $1.2 tr by 2050, the Climate Change Act (2008, s. 1(1)), will cut 80% of UK emissions, which are 1.5% of world emissions. Thus p = 0.012. Business-as-usual CO2 concentration in 2050 is 506 ppmv, falling to 504.608 ppmv via the Act. Warming forestalled is 0.006 K; mitigation cost-effectiveness is $167 tr/K; and global abatement cost to 2020 is $193 tr, or 4% of global GDP to 2050, or $27,500 per capita.

Case study 4: EU carbon trading

EU carbon trading costs $92 bn/year (World Bank, 2009, p. 1), or $915 bn at net present value by 2020. The EU aims to halt 20% of its emissions, which are 13% of global emissions (from Boden et al., 2010ab). Thus p = 0.026. Business-as-usual CO2 concentration would be 412 ppmv by 2020, falling to 411.428 ppmv via the policy. Warming forestalled is 0.003 K; mitigation cost-effectiveness, excluding non-carbon-trading costs, is $282 tr/K; and the global abatement cost of $69 tr is 8% of GDP to 2020, or almost $10,000 per capita.

Case study 5: Thanet Wind Array

Subsidy to the world’s largest wind-farm, off the English coast, guaranteed at $100 mn annually for its 20-year life, is £1.96 bn at net present value. Rated output of the 100 turbines is 300 MW, but wind-farms yield only 24% of rated capacity (Young, 2011, p. 1), so total output, at 72 MW, is 1/600 of mean 43.2 GW UK electricity demand (Department for Energy and Climate Change, 2011). Electricity is 33% of UK CO2 emissions, which are 1.5% of global emissions, so p = 8.333 x 10–6. Business-as-usual CO2 concentration in 2030 would be 438 ppmv, falling to 437.9996 ppmv as a result of the subsidy. Warming forestalled is 0.000002 K; mitigation cost-effectiveness is almost $900 tr/K; and the global abatement cost of $461 tr is 28% of GDP to 2030, or $66,000 per capita.

Case study 6: Oldbury Primary School wind turbine

On 31 March 2010 Sandwell Council, England, answered a freedom-of-information request, disclosing that it had spent $9694 (£5875) on buying and installing a small wind-turbine like one at a primary school in Oldbury which had in a year generated 209 KWh – enough to power a single 100 W reading-lamp for <3 months. Assuming no maintenance costs, and discounting revenues of $0.18 (£11)/KWh for 20 years to net present value, net cost is $8943. p = 209 KWh / 365 days / 24 hrs / 43.2 GW x 0.33 x 0.015 = 2.76 x 10–12. CO2 concentration of 438 ppmv will fall to 437.9999999999 ppmv. Warming forestalled is 0.0000000000007 K; mitigation cost-effectiveness is $12,000 tr/K; and the global abatement cost, at >$6000 tr, is 400% of global GDP to 2030, or $900,000 per capita.

Case study 7: London bicycle-hire scheme

In 2010 the Mayor of London set up what he called a “Rolls-Royce” scheme at US$130 mn for 5000 bicycles (>$26,000 per bicycle). Transport represents 15.2% of UK emissions (from Office for National Statistics, 2010, table C). Cycling represents 3.1 bn of the 316.3 bn vehicle miles travelled on UK roads annually (Department for Transport, 2011). There are 23 mn bicycles in use in Britain (Cyclists’ Touring Club, 2011). Global emissions will be cut by 1.5% of 15.2% of 3.1/316.3 times 5000/23 mn. Thus p = 4.886 x 10–9. If the lifetime of bicycles and docking stations is 20 years, business-as-usual CO2 concentration of 438 ppmv will fall to 437.9999998 ppmv through the scheme. Warming forestalled is 0.000000001 K; mitigation cost-effectiveness exceeds $100,000 tr/K; and the global abatement cost of $52,000 tr exceeds 3000% of global GDP to 2030, representing almost $7.5 mn per capita.

Results

Government estimates of abatement cost (cases 1-3) exceed by a factor 2-4 the 1% of GDP Stern considers achievable, but are similar to those in Garnaut (2008) and in the peer-reviewed literature. However, the costs of specific measures prove considerably higher than government estimates, which seem optimistic. The global abatement cost of measures equivalent to EU carbon trading, for instance, is almost 10% of global GDP, while that of policies equivalent to subsidizing the world’s largest wind farm is 28% of GDP, substantially in excess of Stern’s estimated maximum inaction cost.

Table 1 gives decadal values of Cy from 2010-2100 on the IPCC’s A2 emissions scenario, whose central projection is that the anthropogenic fraction of CO2 concentration will grow exponentially from 390 ppmv in 2010 to C2100 = 836 ppmv by 2100.

Table 3 compares the results of the case studies with the estimates of 21st-century global abatement and inaction costs given in Stern (2006):

Table 3. Results of the case studies, compared with estimates of global abatement and inaction costs (italicized) in Stern (2006).
Some estimates from the peer-reviewed economic journals are as follows, broadly suggesting that the global inaction cost will be 2-5% of GDP:

• 1.0 K warming will cost 2.5% of GDP (Tol, 2002).
• 2.5 K warming will cost 0.9% (Nordhaus, 2006), 1.4% (Fankhauser, 1995), 1.5% (Nordhaus & Boyer, 2000), 1.7% (Nordhaus & Yang, 1996), 1.9% (Tol, 1995), 2.5% (Plamberk & Hope, 1996), or 0.0-0.1% of GDP (from market impacts only: Mendelsohn et al., 2000).
• 3 K warming will cost 1.3-4.8% of GDP (Nordhaus, 1994ab).

There are three main reasons for the differences between the peer-reviewed literature and the Stern report.

First, Stern adopts extreme a very high central estimate of the warming to be expected by 2100: 5 K compared with the IPCC’s 3.4 K. The adoption by Stern of a central climate-sensitivity estimate half as much again as that of the IPCC provides a margin of caution, allowing its use as a starting point for determining global inaction costs on the basis of various other discount rates that occur in the literature.

Secondly, Stern adopts extreme estimates of various specific welfare losses (such as that from malaria, which will in fact be near-zero in response to global warming). Again, if we merely adopt his analysis ad argumentum, any analysis that we base upon it will err on the side of caution.

Thirdly, Stern adopts a 0.1% pure rate-of-time preference. The inter-temporal discount rate is, as we shall see, the prime determinant of variations between published cost-benefit estimates.

By how much, then, should future costs and benefits be discounted to net present value to take account of the uncertainties inherent in any long-term investment appraisal, and particularly inherent in an appraisal of the effect of a given policy on the future behavior of the non-linear, chaotic climate object?

Stern’s 0.1% discount rate is based – according to a document linked from HM Treasury’s website – on a misunderstanding by him of the literature on the economic treatment of inter-generational equity. Certainly, Stern’s near-zero rate is a long way below HM Treasury’s standard 3.5% discount rate.

Even the use of Stern’s minimalist discount rate shows that the global abatement cost – i.e., the cost of forestalling all global warming between now and 2020 if all measures to mitigate global warming from all anthropogenic causes were as cost-effective as Dr. Garnaut’s proposal – will exceed Stern’s own estimated maximum cost of climate-related damage arising from worldwide inaction.

At Garnaut’s own discount rates, the global abatement cost would be 2.3-4.5 times the inaction cost. At the Treasury’s 3.5% discount rate, the global abatement cost would be almost 6.5 times the inaction cost. At President Klaus’ recommended 5% discount rate, the cost of doing what Dr. Garnaut proposes would be an order of magnitude above the maximum cost of doing nothing.

Conclusions

The case studies indicate that government estimates of overall abatement cost are likely to be optimistic. Mitigation policies cheap enough to be affordable will be ineffective, while policies costly enough to be effective will be unaffordable. It is unlikely that any policy to forestall global warming by taxing, trading, regulating, reducing, or replacing greenhouse-gas emissions will prove cost-effective solely on grounds of the welfare benefit foreseeable from global-warming mitigation. High abatement costs, and the negligible returns in warming forestalled, imply that focused adaptation to the consequences of such future warming as may occur will prove to be some orders of magnitude more cost-effective than any attempted mitigation. If so, since the opportunity cost of diverting trillions of dollars to mitigation is heavy, the question arises whether mitigation should be attempted at all.

Read the full PDF (it’s much longer) to see equations, caveats, and references, or click on the image at the top.