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The Economic Consequences of Climate Change

Executive summary

Chapter 1. Modelling the economic consequences of climate change Chapter 2. The damages from selected climate change impacts to 2060

Chapter 3. The bigger picture of climate change

Chapter 4. The benefits of policy action

Description of the modelling tools

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The Economic Consequences of Climate Change

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PREFACE

THE ECONOMIC CONSEQUENCES OF CLIMATE CHANGE © OECD 2015 As we approach the Conference of the Parties (COP21) in late 2015 in Paris, our leaders are facing a fundamental dilemma: to get to grips with the risks of climate change or see their ability to limit this threat slip from their hands. Today our understanding of the scale of the risks posed by climate change is much better developed and supported by seriously tested and globally accepted evidence. This report, provides detailed insights into the consequences of policy inaction for the global economy. Its main contribution, when compared to previous efforts in this area, is that it does so through a more detailed economic modelling framework that links climate change impacts to sectoral and regional economic activity. Trying to understand what climate change may mean for the future of our economies is daunting. It is not simply the case of comi ng up with a point estimate of what climate change might cost world Gross Domestic Product (GDP). What we need is a more nuanced understanding of how climate change impacts sectoral and regional economic activity, how these impacts propagate through our economic system, and what the downside risks are to long term economic growth. These insights, as provided by this report, will be invaluable in informing policy makers how to manage the significant and accumulating risk of serious climatic disruption. The simulations carried out for this study suggest that in the absence of further action to tackle climate change, the combined negative effect on global annual GDP could be between 1.0% 3.3% by 2060. As temperatures could continue to rise to a projected 4°C above pre-industrial levels by 2100, GDP may be hurt by between 2% and 10% by the end of the century relative to the no-damage baseline scenario. Most importantly, the net economic consequences would be negative in 23 of the 25 regions modelled in the analysis, and particularly severe in Africa and Asia, where the regional economies are vulnerable to a range of different climate impacts. The analysis in this report is not a prediction of what will happen, nor a synthesis of all the social costs of climate change. There is still a lot we cannot quantify, particularly with regard to the economic consequences of triggering important tipping points in the climate system which could be catastrophic for our economies. However, just like the build-up of risks before the financial crisis, uncertainty should not be an excuse for inaction. This report also demonstrates how early and ambitious action on adaptation and mitigation can significantly reduce these downside risks.

PREFACE

THE ECONOMIC CONSEQUENCES OF

CLIMATE CHANGE © OECD 2015

The OECD will continue to assist member and partner countries as both the challenges from climate change and the imperative to take stronger and more decisive action become more evident.

Angel Gurría

OECD Secretary-General

ACKNOWLEDGEMENTS

THE ECONOMIC CONSEQUENCES OF CLIMATE CHANGE © OECD 2015 This report was prepared by Rob Dellink and Elisa Lanzi of the OECD Environment

Directorate. Matthias Kimmel (OECD) provided

substantial inputs to the drafting, and Jean Chateau (OECD) contributed to the modelling of ENV-Linkages. Kelly de Bruin (CERE,

Sweden) was the lead modeller for the AD-D

ICE model simulations. Francesco Bosello and

Ramiro Parrado (CMCC, Italy) provided expert guidance on the incorporation of climate change impacts in economic models and delivered the input information for several climate change impacts included in the modelling, not least fisheries, sea level rise, diseases and tourism. Substantive inputs for specific elements of the analysis were received from Yasuaki Hijioka (NIES, Japan), Yasushi Honda (University of Tsukuba, Japan), Juan-Carlos Ciscar and Zoi Vrontisi (IPTS-JRC, EU), Hessel Winsemius (Deltares, The Netherlands), Philip Ward (VU Amsterdam, The Netherlands), Petr Havlík (IIASA, Austria) and Ian Sue Wing (Boston University, USA). These collaborators are not responsible for the final report. The OECD Environment Policy Committee (EPOC) was responsible for the oversight of the development of the report. In addition, the Working Party on Climate Change, Investment and Development (WPCID), Working Party 1 of the Economics Policy Committee (EPC-WP1) and the experts following the CIRCLE project reviewed earlier drafts. The project was managed by Shardul Agrawala, who also provided feedback on the modelling and earlier drafts. Marie-Jeanne Gaffard provided administrative and technical support; statistical and technical assistance was provided by François Chantret. Janine Treves and Katherine Kraig-Ernandes supported the publication process of the final manuscript. This final version also benefits from comments on an earlier draft by Nils-Axel Braathen, Simon Buckle, Anthony Cox, Guillaume Gruère, Ada Ignaciuk, Giuseppe Nicolletti, Andrew Prag, Simon Upton (all OECD), as well as Juan-Carlos Ciscar (JRC-IPTS, Spain), Sam Fankhauser (LSE-GRI, UK), Tom Hertel (Purdue University, USA), Anil Markandya (BC3, Spain), Paul Watkiss (UK) and one anonymous reviewer.

TABLE OF CONTENTS

THE ECONOMIC CONSEQUENCES OF CLIMATE CHANGE © OECD 2015

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

. . . . . . . . . . . . . . 17

1.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

1.2. Main consequences of climate change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

1.3. A framework to study climate change impacts on economic growth . . . . . . . . 25

1.4. Modelling of sectoral and regional climate impacts. . . . . . . . . . . . . . . . . . . . . . . 31

Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

. . . . . . . . . . . . 45

2.1. The no-damage “baseline" projection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

2.2. Central macroeconomic and regional projections of damages from selected

climate change impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

3.1. Costs of inaction beyond 2060 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

3.2. Other consequences of climate change: Mortality, floods, and tipping points . . . 84

Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

4.1. Policy making under uncertainty for inter-temporal issues . . . . . . . . . . . . . . . . 110

4.2. Economic trade-offs between adaptation, mitigation and climate damages . . . . 112

4.3. Sectoral and regional consequences of mitigation action. . . . . . . . . . . . . . . . . . 121

Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

1.1. Categories of climate impacts considered in this study . . . . . . . . . . . . . . . . . . . 21

1.2. Regions in ENV-Linkages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

1.3. Climate impact categories included in ENV-Linkages . . . . . . . . . . . . . . . . . . . . . 31

2.1. Economic growth over selected periods by region . . . . . . . . . . . . . . . . . . . . . . . . 48

2.2. Influence of alternative assumptions on energy impacts . . . . . . . . . . . . . . . . . . 63

2.3. Per capita consumption levels over selected periods by region . . . . . . . . . . . . . 64

TABLE OF CONTENTS

THE ECONOMIC CONSEQUENCES OF

CLIMATE CHANGE © OECD 2015

2.4. Impacts of climate change on yields in Sub-Saharan Africa. . . . . . . . . . . . . . . . 71

3.1. Climate-related potential urban flood damages by region . . . . . . . . . . . . . . . . . 91

3.2. Heat stress mortality by region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

3.3. Economic costs of premature deaths from heat stress in OECD countries

using VSL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

3.4. Willingness to pay for ecosystem service conservation by region . . . . . . . . . . . 97

4.1. Effects of different discount rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

A1.1. Sectoral aggregation of ENV-Linkages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

A1.2. Regional aggregation of ENV-Linkages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

1.1. Linking economic and climate change models. . . . . . . . . . . . . . . . . . . . . . . . . . . 30

1.2. Impacts of climate change on crop yields in the central projection . . . . . . . . . 33

2.1. Trend in population by region, no-damage baseline projection. . . . . . . . . . . . . 47

2.2. Trend in real GDP, no-damage baseline projection. . . . . . . . . . . . . . . . . . . . . . . . 48

2.3. Sectoral composition of GDP by region, no-damage baseline projection . . . . . 49

2.4. Primary energy production, no-damage baseline projection . . . . . . . . . . . . . . . 50

2.5. Evolution of greenhouse gas emissions, no-damage baseline projection. . . . . 51

2.6. Key climate indicators, no-damage baseline projection . . . . . . . . . . . . . . . . . . . 52

2.7. Global average temperature increase, no-damage baseline projection. . . . . . . 52

2.8. Regional damages from selected climate change impacts, central projection . . . 54

2.9. Attribution of damages to selected climate change impacts,

central projection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

2.10. Damages from selected climate change impacts, central projection . . . . . . . . 60

2.11. Sectoral composition of damages from selected climate change impacts,

central projection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

2.12. Sources of damages from selected climate change impacts by production

factor, central projection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

2.13. Domestic and global climate change damages from selected climate

change impacts, central projection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

2.14. Regional agricultural damages for alternative scenarios,

no CO 2

fertilisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

2.15. Global damages for alternative agricultural impact scenarios

(including CO 2

fertilisation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

2.16. Range of regional agricultural damages for alternative scenarios

(including CO 2

fertilisation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

3.1. Climate change damages from selected climate change impacts

in the very long run, central projection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

3.2. Climate change damages from selected climate change impacts

in the very long run, alternative damage function. . . . . . . . . . . . . . . . . . . . . . . . 81

3.3. Climate change damages from selected climate change impacts

in the very long run, alternative effects on growth . . . . . . . . . . . . . . . . . . . . . . . 84

3.4. Climate change impacts on livestock production in 2050 . . . . . . . . . . . . . . . . . . 87

3.5. Urban climate change damages from floods by 2080. . . . . . . . . . . . . . . . . . . . . . 90

3.6. Climate change adds pressure to biodiversity loss. . . . . . . . . . . . . . . . . . . . . . . . 96

3.7. Regional tipping points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

3.8. Hazard rate of catastrophic events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

TABLE OF CONTENTS

THE ECONOMIC CONSEQUENCES OF CLIMATE CHANGE © OECD 2015 statLinks http://dx.doi.org http://twitter.com/OECD_Pubs http://www.facebook.com/OECDPublications http://www.youtube.com/oecdilibrary http://www.oecd.org/oecddirect/ OECD

Alerts

4.1. Percentage of damages from selected climate change impacts addressed

by adaptation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

4.2. Climate change damages from selected climate change impacts

for different adaptation scenarios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

4.3. Global emission reduction rates for least-cost mitigation scenario. . . . . . . . . . 116

4.4. Climate change damages from selected climate change impacts

for different mitigation scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

4.5. Components of climate change costs from selected climate change

impacts for different adaptation and mitigation scenarios. . . . . . . . . . . . . . . . . 118

4.6. Climate change damages from selected climate change impacts

for the least-cost mitigation scenario. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

4.7. Temperature increases with optimal mitigation, different discount rates. . . . 120

4.8. Regional damages from selected climate change impacts with

and without mitigation policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

4.9. Changes in structure of the global economy from damages from selected

climate change impacts and mitigation policy . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

A1.1. Production structure of a generic sector in ENV-Linkages. . . . . . . . . . . . . . . . . . 130

ACRONYMS AND ABBREVIATIONS

THE ECONOMIC CONSEQUENCES OF

CLIMATE CHANGE © OECD 2015

Constant elasticity of substitution

Computable general equilibrium

Carbon dioxide

Equilibrium climate sensitivity

European Union

Pound Sterling

Gross domestic product

Greenhouse gas

Gigatonnes

Integrated assessment model

Intergovernmental Panel on Climate Change

National Institute for Environmental Studies

Organisation of Economic and Co-operation and Development

Parts per million

Purchasing power parities

Pure Rate of Time Preference

Representative concentration pathway

Special Report on Emissions Scenarios

Total factor productivity

Tons of oil equivalent

United Kingdom

United Nations

United States

United States dollars

Value of a life year

Value of a statistical life

Willingness to pay

The Economic Consequences of Climate Change

© OECD 2015

This report provides a detailed global quantitative assessment of the direct and indirect economic consequences of climate change (i.e. climate damages) for a selected number of impacts: changes in crop yields, loss of land and capital due to sea level rise, changes in fisheries catches, capital damages from hurricanes, labour productivity changes and changes in healthcare expenditures from diseases and heat stress, changes in tourism flows, and changes in energy demand for cooling and heating. Other major impacts of climate change are investigated outside the modelling framework. Most existing studies of climate damages have a stylised, aggregated representation of the economy. This report uses a detailed multi-sectoral, multi-regional dynamic general equilibrium modelling framework (the OECD ENV-Linkages model) to link climate change impacts to specific aspects of economic activity, such as labour productivity, the supply of production factors such as capital, and chan ges in the structure of demand. This detailed analysis is used to assess damages until 2060, and is complemented by a more stylised analysis of post-2060 damages (using the AD-DICE integrated assessment model). This report presents only one possible economic scenario and it cannot capture all impacts of climate change. It is not a prediction of what will happen, nor a synthesis of the full consequences of climate change. It sheds light, however, on how the selected impacts affect the composition of Gross Domestic Product (GDP) over time and how sectoral consequences spill over to other sectors and regions. The modelling is based on existing estimates of how selected climate impacts affect the drivers of economic growth of major world regions at the macroeconomic and sectoral level. This so-called production function approach allows for a detailed assessment of a subset of the direct and indirect consequences of climate change for the economy for a selected number of climate change impacts. The analysis assumes no mitigation actions are taken beyond those that are already adopted, and only market-driven adaptation measures are considered. The projections do not capture all considerable uncertainties and risks from climate change that could potentially lead to much larger damages (especially in the long-run), or result in smaller economic consequences th an in the central projection. Some major uncertainties stem from assumptions on economic growth, demographics, the response of the climate system to increasing greenhouse gas (GHG) concentrations, projections of regional climate, and the valuation of climate change impacts. Large downside risks of climate change are associated with uncertainty about the response of the climate system to temperature increases beyond 2°C, irreversible tipping points, and the non-market impacts of climate change. Of these sources of uncertainties, the range of GDP consequences provided below reflects only the uncertainties relative to the response of the climate system to increasing GHG concentrations.

EXECUTIVE SUMMARY

THE ECONOMIC CONSEQUENCES OF

CLIMATE CHANGE © OECD 2015

The ENV-Linkages model simulations suggest that market damages from the selected set of impacts are projected to gradually increase over time and rise faster than global economic activity. , with a central projection of 2%. This rangequotesdbs_dbs14.pdfusesText_20