The science, economics and policy aspects of global warming has become one of the most exciting and challenging tasks facing the natural and social sciences in the last decade of the twentieth century. Till even the Eighties, only a handful of people outside the geoscientific world bothered to even to cast a momentary glance on the potential or implications of global warming. The fuels of economic growth - oil, coal and gas - were natural riches and the cause of energy shocks. Climate change was not yet a concept.

The last decade has changed all that. From the prospects of ozone-depleting chemicals to the threat of deforestation and species depletion have become subjects of heated debate. The most heated of these heated debates have been on the issue of climate change. The intellectual and policy challenges have mobilised researchers and environmental activists to investigate every conceivable aspect of the problem. Although economics has made a belated entry into the scope of the debate, many researchers are today actively involved in most industrialised nations doing precisely that.

Like most issues concerning global environmental governance, that of climate change is truly international in dimension. The fifth meeting of the Conference of Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) has just concluded in Bonn, Germany. The FCCC was adopted in May 1992 and opened for signature at the United Nations Conference on Environment and Development (better known as Earth Summit-I) in June that year. The FCCC entered into force in March 1994, 90 days after it received the 50^th ratification. So far, 180 countries have ratified the Convention.

The process began in 1988 when the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) established the Intergovernmental Panel on Climate Change (IPCC). All countries that are members of either the United Nations or the WMO are automatically members of the IPCC. The IPCC had three working groups - on climate science; on impacts, adaptations, and mitigation; and on economic and social aspects of climate change. Every member country of IPCC is also a member of each of these working groups. The IPCC was to assess the scientific literature related to climate change.

The IPCC reports are written by scientific experts. The only restriction is that each writing team must include at least one expert from a developing country or a country with an economy in transition. For the adoption of a report, the working group must first approve, word-by-word, the "summary for policymakers". Negotiating a unanimous word-by-word approval of Working Group III's "summary for policymakers" by more than 100 countries operating in six languages, needless to say, took up a lot of time. All three volumes of the second assessment report were accepted by the IPCC plenary at Rome in December 1994. The three volumes were published the following year.

The 1995 reports are widely recognised to be uniquely valuable reviews of current knowledge about climate change. The voluminous reports were stitched together by a large team of experts in different fields and reviewed vast quantities of studies conducted over the years. Many of the results and interpretations were questioned. The validity of the conclusions, particularly about the scientific consensus, triggered off heated debate in scientific circles. Though, on the face of it, there was indeed some consensus, there was no guarantee of scientific or predictive accuracy. Economics and Policy Issues in Climate Change, based on this debate, takes an insightful look at the findings of the economic report.

In August 1996, the NBER-Yale Center on International Environmental Issues, funded by the National Science Foundation, organised as workshop at Snowmass, Colorado, United States, to analyse in depth the economic and policy issues involved in the governmental consensus laid out in the working group report. Many scholars who were not involved in the IPCC report were asked to analyse the economic and policy issues involved. Each author prepared a review of a particular aspect of the report that appear in this book. Lead authors and prominent scholars of the relevant chapters of the IPCC report respond to the analyses. That is fodder enough for interesting and stimulating debate.

The first set of papers review major analytical areas that are crucial for assessing the economic and social aspects of climate change. The second set examines specific topics necessary for the understanding of policies to cope with climate change.

 

Abridged from the introductory section on scientific background on abatement costs:

Three central economic questions reviewed in this book involve the costs of slowing climate change, the damages from not slowing climate change, and a new analytical approach - called integrated assessment - that brings the different pieces of the problem together.

The first set of issues involves the costs of slowing climate change. According to current understanding, climate change can be slowed by reducing the growth of atmospheric global greenhouse gas (GHG) concentrations through conventional means, such as reducing CO2 emissions, or by taking more unconventional steps, such as planting trees or undertaking geoengineering experiments. The IPCC and this book focus largely on the conventional approach.

Two major points emerge from the papers presented in this section. Firstly, the IPCC and the studies conducted by the reviewer agree that the costs of current climate change proposals are extremely large in the context of current economic and environmental policies. For example, to stabilise emissions at 1990 levels over the next 50 years would require a few percent of world output. If the world output grows at 3 per cent over this period, this would be a cumulative expenditure level to the order of $100 trillion. Such a plan would be larger than all the rest of today's world environmental programmes.

The second point raised that these estimates are subject to large uncertainties which arose partly because of intrinsic difficulties, such as uncertainty about the evolution of population and technology, and partly because of unresolved modelling issues, such as the presence of organisational or individual lack of three alternative approaches to modelling - the economic, engineering, and socio-psychological. These different conceptions give radically different interpretations of history and prognoses for the prospects of energy saving in the future.

Although most proposed mechanisms to reduce emissions involve some kind of regulatory mechanism, they have quite different impacts upon government revenues. Those plans that are favoured by economists include carbon taxes and auctioned emission quotas - both of which raise revenues, in some cases substantial revenues. For instance, the 1997 US government analysis of its own proposal indicated that it could easily raise $100-300 billion in revenues if the emissions limitations were sold rather than allocated. The fiscal impact was to come in two steps. Firstly, conventional economic analysis indicates that, because of higher prices and consequent lower real wages and lower real incomes that would result from emissions limitations,. the deadweight loss involved in paying for existing government programmes would increase. Secondly, if these revenues were returned to consumers (or recycled) by lowering other distortionary taxes, some and perhaps all of these distortionary impacts might be eliminated.

The idea of "green taxes" (carbon-tax-cum-rebate plan) was turned out to be full of holes. Proponents of the hypothesis had overlooked the first of the two fiscal impacts --that the price-raising effects of the emissions limitations would themselves increase the deadweight loss of existing taxes. Fiscal experts now agree that - absent particular features of energy taxes - the fiscal effect of substituting carbon taxes for other distortionary taxes is roughly neutral.

Hence, any plan that includes emissions limitations without raising revenues (that is, one that restricts emissions and raises energy prices with the revenues flowing to, say, grandfathered interest groups) would have distortionary effects. Indeed, some calculations indicate that an optimised emissions strategy, which assumes fiscal neutrality have negative net impacts when the fiscal impacts are included. This example shows that considerations generally thought to be secondary can easily become of primary importance if the architecture of the plan is not carefully designed.