SHF2012丨Carlo Carraro

Good morning. First of all, let me thankProfessor Yang for this invitation to speak at the Shanghai Forum. Let me thankeverybody for their organization of the energy sessions and in particular thispart of the plenary sessions on climate change. Let me thank all colleagues whoare participating at the forum this morning and tomorrow. The topic we aretalking about it climate change. It’s suitable that we deal with thishorizontal issue, which builds relations on a range of issues, some of whichhave been discussed before by various speakers, such as economic development,and of course there is the question of the sustainability of this developmentand the global scale.

I’m going to talk about this issue by focussingon the policy we mentioned – the science one. I believe that this forumencompasses a lot on policy and economics. I also believe that this forum willhelp deliver new ideas and proposals to addressing the climate change problem.Let me start from the present situation. The present situation is notsatisfactory. There have been international climate forums such as the meetingat Washington,where there is always this idea that countries are committed to achievingcertain targets to control emissions in a way that global temperature will notbe increased by more than two degrees at the end of the century. This target,this agreement has changed many times, even at the so-called Durban platform, again reproduces the sameidea that the two degree target is the one that will be achieved by the end ofthe century.

I really doubt this is feasible. The reasoncan be seen in the slide here. This is the 2007 IPCC report, and results from anew report to be released in 2013 show conclusions that are very similar. Therate of 450 parts per million (greenhouse gases), with no indications that thiswill change in the following years, means that we probably get a temperatureraise of two degrees – in fact we will probably get a rise greater than that.That doesn’t mean that our policy is unimportant. A policy is required, but ofcourse it must prevent atmospheric concentrations from growing even larger, sothat it might threaten the three or even four degrees target. Probably thetarget of two degrees is gone, and we are heading towards a target of two and ahalf or three degrees.

The reasons – the slide provides some moreinformation on what I am saying – the present levels of greenhouse gasconcentrations are too high for us to keep within the two degree target withone exception, that being us being able to control stock emissions, not justthe flow. All our policies today in climate policy focus on the flow ofemissions in terms of how to control the amount of emissions every yearproduced by countries, whereas if technology were available to control stockemissions we could allow ourselves to overshoot targets and increase emissionsbeyond the two degree target or its consistent 450 ppm level, reducing theseemissions later, towards the end of the century, when technology is availableto control stock emissions, not just the flow.

But I will discuss this issue later. Thisis the situation. With this situation in mind let us discuss the threefollowing policies.  The mitigationpolicy, which the usual policy, i.e. that of controlling the flow of emissionsproduced by countries. The second one I call enhanced mitigation, thepossibility of controlling the stock of emissions, accumulated emissions overthe past two hundred years. Finally, of course, there is adaptation. Adaptationto climate change remains a possibility, really in particular because in anycase a temperature change of less than two degrees is really impossible. Someclimate change will occur anyway. We will have to adapt.

Let’s talk about mitigation. How effectivehas mitigation policy been in the past? How effective have countries been inreducing greenhouse gas emissions? Not really very effective. There remains nointernational agreement. The last one, the Durban platform promised to agree in 2015about something they would do in 2020, but these kinds of promises areobviously not really effective in reducing emissions. In order to controlgreenhouse gas emission, we need to quite drastically alter the energy mix inthe short term. Again this is not likely, for reasons of cost, economics, andalso technology. Some crucial technology, in particular nuclear and carboncapture sequestration technologies are probably not available as we woulddesire for some social and political reasons, as well as military. We needtechnology, and we know some technologies, but some of them cannot be fullyimplemented.

So, in this situation, in which we seeemissions will increase by a considerable amount, with world populationincreasing and economic development increasing, we are not able to deliverbehaviour, technologies and policies to control the flow of greenhouse gasemissions. Let me show you a diagram. The yellow, orange and red areas identifythe path of emissions in the coming years for China,Indiaand other developing countries, whereas the two green lines identify twopossible emission paths consistent with an increase in temperature of between 2and 2.5 degrees. As you see, the white area represents the amount of emissionswhich are left over to OECD countries. Of course, this is just a way of representing the situation, but in anyrate as you can see, the green lines cross the yellow orange and red areasbetween 2035 and 2040, which implies that by that time emissions in OECDcountries should reach zero.

Again, it is again very unlikely thateconomies in OECD countries will be able to change that much.

This is a way of showing that this reachingthis target is quite unlikely. This does not mean that a policy is notnecessary. Without any kind of policy, emissions would follow the black lineshown in the diagram, with an even greater increase in temperature. Somethingis certainly in need of being done. Here we can see the quantity of investmentsneeded to keep world temperature under control and within the two degreetarget. You can see that the investments are really huge. In order to changethe energy mix in ways that are necessary to reach our targets, really hugeinvestment is necessary. Even without the current economic crisis, the figuresare not the kind we are likely to see turning into investments in the comingdecades.

More information can be useful in seekingto understand what is happening. If we compute the economic incentivesnecessary to drive these kinds of investments into renewable energytechnologies, we can see that the implicit tax, the rise of permits and taxesin a global economy and emission permits, to be consistent with a two degreetarget, increases over time too much to be credible. If it were to be the case,the size of our emissions permit market would be even larger than the oilmarket. The situation is quite difficult to believe.

I am giving you all this information to saythat the two degree target is not what we should expect, that we need adifferent strategy, either more effective or more realistic, in order toachieve something that works with our economic systems. Of course, I do notwant to deliver a negative message. A lot has been done in terms of controllinggreenhouse emissions and at the city level, with city and agriculturalmanagement, investment and research being quite important to controllingclimate change. There have been in the past great improvements in energyefficiency. A lot has been done, but all this remains not enough if we focusonly on the flow of emissions.

Let us talk about the second possiblestrategy, that of reducing the stock of emissions. Technologies in this fieldare really at the beginning – we need more research and greater efforts still –but certainly some attempts are promising, though they cannot deliver the largescale of emission reductions in terms of stock that we will need. The threeoptions we know are as follows – afforestation, use of bio-energy and the use ofbiomass. These are the three main options - let me discuss what they wouldimply. The diagram shows the amount of bio-energy that would be necessary if wewere to achieve our 2 degree target. I mentioned the 450 ppm scenario. What’sthe problem? In order to produce this kind of bio-energy, we need a lot ofland. You can see here that for every thousand hectares arable land availabletoday we would need to add another one thousand hectares of land in order toenable us to remove greenhouse gas emissions in a fashion that is consistentwith our present targets.

We cannot of course almost double theamount of arable land just to achieve our target. Of course there are otherelements in this problem – we can increase efficiency and increase ourinnovations that deliver these kinds of reductions. Or we can provide priceincentives to help us. But all of this seems not likely.

What is left? Adaptation. Certainly some ofthese things are unavoidable and countries will have no choice but to adapt toclimate change. What are the features of this policy? Much less in terms of financialincentives. Mitigation policies are certainly affected less by financialincentives, and in many ways it is less costly because one can implement localchange without large-scale global investments. Is it effective? No, if appliedas a unilateral policy or as one that is implemented without mitigation. Thisdiagram shows the residual emissions left even after adaptation alone,mitigation alone, or both. The green line shows the optimal policy, with bothpolicies implemented – mitigation plus adaptation is certainly more efficientin reducing the total damages affecting socio-economic systems at the end ofthe century.

What are the conclusions? In terms of costsand benefits, I think that all analyses and studies conclude that the costs ofreducing greenhouse gas emissions are certainly smaller than the benefitsdelivered by controlling this emission. These benefits are of different kinds –there are not only the benefits of controlling temperature, there are manyother side effects that can be controlled by reducing emissions. I think thereis consensus on the cost as exceeding the benefits, in particular if one countsthe risk associated with climate change – the long term risks and thepossibility of reaching tipping points.

This is a preliminary conclusion: first, weneed a policy. The benefits of this policy will be larger than the cost.Current policy is costing quite a lot in terms of investments, here we can seea slide showing the costs of mitigating and reducing emissions – the flow ofemissions – in order to achieve the ‘2 degree target’. You can see here theestimate at the total of $430 billion. This is an estimate of the cost ofadapting to climate change. It is much less costly, but there is the questionof timing – adaptation policies are paid at the end of the century, whereasmitigating policies are paid at one time. There is quite a difference, althoughthe amount of materials involved in adaptation is large. The resources are alsolarge that we could devote to innovation the controlling of greenhouse gases. Again,these are not impossible numbers. In the case of innovation for example, theshare of research in the energy sector today is 0.02% of global GDP. In theearly 80s, it was 0.08% of global GDP. If we go back the eighties and use thesame proportion of resources devoted to innovation, then that would be enoughto be able to reduce emissions in our economic systems.

The total amount is $650 billion. Thisestimate gives you a flavour of the kind of numbers that are necessary in orderto implement the numbers I am describing. It is not impossible – if youconsider the figures we spent in research years, 2008 – 12, during thefinancial crisis, I think we can see that the effort involved in climate changeis not an impossible effort. Though it remains elusive.

In terms of policies, what are ourconclusions? I believe that in terms of policies it is not feasible to imposetoday a demanding policy that can reduce emissions in the short term. In myview, progressive policies present a better strategy, in which countries focuson better policies, in particular policies to reduce the stock of emissions, inwhich countries progressively and cooperatively work to reduce greenhouse gasemissions, in order to achieve something close to the two degree target. Thetwo degree target should not be a mantra, it should be a guide and drive forthe behaviour which is going to be persistent through time. This is somethingthat Europe is doing, being the only region in the world where a consistentpolicy has been implemented for about ten years, whereas other countries andregions either have not done this or are just starting with this kind ofpolicy. As you can see, what Europe has doneis something quite simple for an economist. Firstly they priced the cost ofgreenhouse gas emissions by pricing carbon and correcting the negativeexternalities produced by greenhouse gas emissions. This is not all – they havealso provided important incentives to the supply of renewables and importantincentives to increase energy efficiency. Basic tools, basic strategies thatprobably should be implemented in all countries. There is the start of policiesin the East, with both Chinaand Koreaagreeing policies and investments in order to reduce economic development.Innovation, as I have said, is another important strategy, and it is supportedby the European Union.

What are the future challenges? Thechallenges are of course about energy. We need a better energy policy. Therecent meeting in Washingtonfocussed quite a lot on this issue. It is important, even though it does notaffect climate change. We recently concluded that the amount of emissions thatwould be reduced across the globe if those two billion people, almost threebillion or who do not have access to energy, or whose access is very poor, wereable to have access to energy, how much emissions would increase. The answer isnot more than 10%. Again, getting a renewable energy policy is not really anissue, it is the benefits of this policy that are important. So – cleanerenergy, more investment into renewables, a more equitable distribution ofenergy. All this requires a consensus and a cooperative effort. This will takesome years to come. The research we are doing in countries and our cooperativeefforts and our discussions like those coming from this Forum will help us andbe very important in forging our policies for climate change.