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Knowledge on the impact of climate change on our lives has been increasing -– more data will deepen our analysis and models. This podcast discusses some of the elements of human society and biological processes that are hard to model and their implications for climate change. Guest Prof. Charles Kolstad also suggests areas for further research. Prof. Kolstad was convening lead author for the 5th Assessment Report for the Intergovernmental Panel for Climate Change (IPCC), released in 2014 and lead author for the 3rd and 4th IPCC Assessment Reports. He is also a participant in the 2017 IPCC Scoping Meeting for the 6th Assessment Report.
This podcast series is produced by Fernando Di Laudo and Jonathan Davidar.
Roumeen Islam: This is the World Bank's infrastructure podcast. In today's episode, we discuss elements entering estimates of climate damage and what they mean for policy. Don't forget to listen to the summary of the main points at the end of the podcast.
A quarter of the world's population is already under high water stress. And this situation is only expected to get worse with the heating planet. Water levels are rising, and this will affect how people in densely populated areas in Asia, as well as other parts of the world live. In parts of Europe and elsewhere, the tourism industry will be affected. And agricultural production is expected to fall in diverse continents, such as Africa and Australia while they rise elsewhere. Tropical forests in East Amazonia and Latin America may be replaced by savanna. And of course, migration patterns would be affected by all this. Over the years, civilizations have used their ingenuity to adapt to a changing climate. And now, we must use our ingenuity to also mitigate our impact on the planet. This is a complicated endeavor. Let's find out how to approach it.
Good morning and welcome. I am Roumeen Islam, host of Tell Me How, and today's guest is Professor Charles Kolstad from Stanford University who's been a coordinating lead author for the Intergovernmental Panel on Climate Change (IPCC), a co-recipient of the 2007 Nobel Peace Prize. He's also a founding co-editor of the journal, The Review of Environmental Economics and Policy. He's also served as an advisor to the State of California on their greenhouse gas cap and trade program. Welcome Charlie.
Charles Kolstad: Thank you very much. Nice to be here.
Roumeen Islam: Lovely to have you here. So, Charlie, this is our second podcast dealing with climate policy, a very complex topic, and we look forward to learning from you. And my first question to you regards the different facets of science and economics that need to be tied together. To understand, to get some idea of the potential damages to human wellbeing as a result of higher greenhouse gas emissions. So, what are the different aspects one needs to address?
Charles Kolstad: That's a good question. Natural science is obviously fundamental to making decisions about climate change, no question. We need to understand how the physical world changes as greenhouse gas levels rise. And the consensus is that we understand that pretty well although uncertainties remain how a biologic system responds to a changed climate is important to people, and probably less well understood, an area ripe for further research. But that the big question marks are how will people be affected, positively or negatively? It's not always negative. How will they respond and adapt to a changed climate and how difficult it will be for people to reduce emissions of greenhouse gases, economic and social issues. Furthermore, how will these questions be answered by different peoples of the world ranging from the poorest to the richest and everyone in between.
Roumeen Islam: Yes. This is a very critical point that it's always very difficult to predict people's responses to any change, even to much less complex phenomena. So, I thought it would be important and interesting to talk a bit about the kinds of models used to estimate the economic damages resulting from climate change. And at the model that we use to look at the impact of alternative climate policies. And of course, I don't mean we're going to go into the nuts and bolts of it, but just to understand the main characteristics. I understand that these models are generally referred to as integrated assessment models, a big name. So, could you just explain this to us?
Charles Kolstad: Sure, of course, there are models that look a little pieces of a system, but the integrated assessment model you can tell by its name, is intended to integrate mostly the physical and natural sciences with the economics and social issues. So, they're typically used, IAM's, integrated assessment models, typically used to evaluate climate change, particularly climate change policy. And the word, as I was mentioning, refers to the fact that these models have a natural science component and an economic component. That's the integrated part of it. It reflects the fact that understanding about climate change is multidisciplinary.
Some of these models are relatively simple and some are very detailed. The simple models such as the dice model of Professor Nordhaus have the advantage of being broadly understandable. A disadvantage is the lack of precision. That's where the trade-off is. More detailed models try to delve more deeply into both atmospheric processes and sectors of the economy, energy sector being an important one. Some also have a great deal of geographic detail. However, these are often very complex models that are difficult for people other than the modelers themselves to understand everything that's going on. And to top it all off, the verdict is still out on whether the more detailed models are any more accurate than the simpler models.
In most models, key assumptions, such as population growth and the progress of carbon reducing innovation are exogenous outside the model and highly uncertain yet critically important to determine the mitigation costs and impacts. To illustrate in a paper idea with Professor Dave Kelly, some years ago, we showed that adding one additional purpose, the person to a population forecast that has three climate related effects: climate change damage, which is proportional to the population increases for that extra person; total greenhouse gas emissions, which are also per capita increase; and subsequent population size increases since there will ultimately be more parents.
So, you can see that the importance of even just adding one more person can change the analysis of climate change policy, which means it's critically important to get that right yet it's mostly exogenous in these models of climate change. The same logic applies to increases in per capita income keeping population at its baseline. Population growth, in fact, has been called the ultimate externality.
Roumeen Islam: Yeah. This point you make about population growth is indeed critical because this I hadn't actually thought about: the more people you have, the more people there are, the more carbon you emit, that everyone knows. But the fact that, even one extra person today can multiply into so many people in the future, that's obvious, but it's not something you generally think about when you are thinking about this. Thank you for that. Now, in what ways do you think the models might be further developed? Obviously, it'd be nice if we could predict population growth perfectly. Many countries also have population policies in place, but let's forget about population growth for a minute, but in what ways do you think the models might be further developed in terms of the research questions that are critical from an economic point of view?
Charles Kolstad: That's a good question. Obviously. Any piece of these models can typically be refined further with further research. But from an economic point of view, in my opinion, there are two areas which beg for additional research. One is in better estimating the economic impacts of changes in the climate. So, this is if the climate changes were impacted by that changed climate. I'm not talking about mitigation here. A lot of work's been done in agriculture, in part, I think because we all grew radishes or lettuce or something when we were children. So, we know there's a clear, intuitive connection between the weather and agricultural growth. There's also a lot of data. That work has probably gone the furthest, but it's far from complete because it relies on detailed data about farm productivity and weather. Coverage around the globe is patchy. Some countries have a lot of data and some, very little. What agriculture is decentralized, with farmers making the planting decisions, we learned from just looking at experience, how weather and climate changes affect productivity. Research on impacts and other sectors is much sparser since the mechanisms whereby weather and climate affect output are more subtle and poorly understood. So, there's a lot that could be talked about here, but that's a quick snapshot. Another area, which is poorly understood is how the economies will respond to policies intended to reduce greenhouse gases.
For instance, we don't have a good understanding of how economies might respond to, let's say, a carbon charge, $50 a ton carbon charge, just as an example. Will the extra burdens significantly disrupt societies and economies something like we've experienced with COVID which hit us unexpectedly? Or will real creativity, innovation, and adaptation kick in as people, individuals and companies adapt, reducing the size of the burden and move away from carbon emissions to save on climate chip charges? We really don't know the answer to that question.
Roumeen Islam: Okay. I want to go back to two things you just said. You said that there's data on agriculture, but the data are not evenly spread around the globe. So, am I correct in thinking that the data is probably sparser in poorer developing countries, right? You get a lot of the data on agriculture from richer countries?
Charles Kolstad: As a generalization, that's true. The US has a lot of data, a long tradition of data acquisition in agriculture. India does too. But generally, your statement is correct. Sometimes there's a lot of data on certain things, but key things are missing. We looked at Russia, a student and I several years ago. And they had a lot of data on the physical dimensions of agriculture, but they were missing key data on how farmers were changing practices and contributing to productivity. So, you sort of have to have a complete picture to be able to do anything with it. But to get back to your original question, certainly the poorer countries tend to be where there is less data.
Roumeen Islam: Yes. And in terms of adaptation as well, you've highlighted some things that are very difficult to estimate because, we really don't know even today how people respond to certain types of policy changes and that's why I know this whole behavioral economics thing has become very popular. I also think that, and I read somewhere, that the physical, the soil, for example, that also adapts over time. So, in terms, what’s soil quality to changing climate. So even that is difficult to predict. Now let's assume that we've got some good estimates of the economic damages, right? Then, there are many other sectors as well: tourism, manufacturing. I think tourism could also be quite badly affected by changes in climate.
Yes. So, once we have valued these damages for every year into the future, we still need to think about what it means for our current decisions or decisions today. So, we need to look at the present value of all these future damages. Could you talk a bit about this?
Charles Kolstad: Yeah, that's basically, if we have climate change where the cost and damages will be stretched over a very long period, a century or even more. How do you add them up so that you can deal with one figure for damage instead of lots and lots of numbers? Discounting is typically a way this is done simply just the exchange rate between 2021 and 2023. That's, that much is quite intuitive and quite understanding. The tough question is what should that exchange rate be? How should we discount a 20, 30-year-old in the same for other years?
Roumeen Islam: Charlie, just to make that clear, it means we're trying to think about how much future losses mean relative to current gains from continuing whatever we were doing in the same old way. How much do we value the future relative to the present?
Charles Kolstad: That's right. But as it pertains both to the damages from climate, the monetization of the damages from climate, which will stretch over many decades, as well as the costs, which are not just incurred now, but will also be spread out over time. We have to try to bring those back to comparable numbers in the current period to make a decision about it. So, if that's clear, I can talk a little bit more about where these things come from. So, with regard to climate change policy, government policies, we're talking about the social discount rate, society's discount rate, which may be quite different than the market interest rate, which many of us are very familiar with in our everyday lives. Some of us anyway, then use a bank. The bank will pay us interest if we deposit money. And if we borrow money from the bank, we will pay them interest.
But social discounting refers to the rate at which a government views cost or benefits occurring to today's citizens versus those incident on future citizens, it's a bit of a different issue. And the numbers you use are different. About a century ago, believe it or not, Professor Frank Ramsey suggested that there are three components to the social discount rate.
One is the government's time preference, how they care about a current citizen versus that same citizen displaced in time. Secondly concerned about equity, how much more society cares about a Euro going to a poor citizen versus a rich citizen. That one is not something you usually deal with when you're an individual dealing with your personal discount.
And thirdly, the productivity of the economy is the economic pie for society getting bigger or smaller over time. Unlike a market discount rate, the social discount rate involves ethical questions. You can't just look up in the newspaper, like again for a market rate, to find out what the current social rate is.
There are also issues of risk, which differ between the government and individuals. So, the government's discount rate, social discount rate, is quite different than the interest rate can be anyway. And for climate change analysis, it's the social discount rate we typically want to use. In the case of climate change, we often think of the social discount rate as being lower than the market rate. One explanation is that ethical arguments would suggest that a government, which is presumed to live in perpetuity, although many of us have experiences that suggest that maybe questions should care just as much for the citizens living today as for citizens living a hundred years from now - not have no real preference for today's citizens.
So that would make their time preference zero which is lower than for private individuals. This is a complicated issue, which we could discuss at great length. I would refer interest interested readers to the discussion and chapter three of the 2014 IPCC AR5 working group three report. There's a link to it on my webpage.
Roumeen Islam: So, IPCC. Could you spell that up? Yes. I think IPCC is Intergovernmental Panel on Climate Change. And if you just Google IPCC AR5 five, you'll go to a Swiss webpage which is where they're located. All right. So, let me switch gears a little bit now. There's a lot of discussion on Abatement costs and how these may vary substantially across countries. Now, what are these costs and why do they vary?
Charles Kolstad: Abatement cost is one of the simplest concepts in climate change. Sometimes the word abatement is what confuses people. It refers to the cost of reducing which is another word for abating emissions of greenhouse gases. This could simply be the cost of installing equipment in your home to use less carbon-based fuels for heating and cooling, something as simple as that, or it could be more complicated in the sense of shifting your consumption of goods and services away from those which are associated with higher levels of emissions, for instance, using a smaller, more efficient car - there many examples. For manufacturers, it could be choosing production processes, which are less carbon intensive. In all of these cases they'll likely be an additional cost associated with operating in a less carbon intensive fashion. To make things complicated, innovation can make a big difference. We've seen the cost of solar and wind generate electricity drop dramatically in recent years around the world. Batteries critical for future electricity reliability are on a similarly optimistic trajectory.
Roumeen Islam: So that means the abatement costs are declining is what you're saying.
Charles Kolstad: For batteries, their cost is declining and they're critical to making solar more widely available.
Roumeen Islam: Yeah. I'm going to ask you a question that I have asked a previous speaker on our podcast series. If estimates of the social cost of carbon vary so widely, what should we do? And if we do something, which estimates should be used?
Charles Kolstad: There are a number of estimates of the social cost of carbon as you correctly point out though some of these are the result of political calculations or opinions, more than on actual unbiased analysis. But it's still a tough number to come up with. But to be specific, the US Government is using something about $50 per ton of CO2 as the global social cost of carbon. During the Trump administration, which is in the past, they reduce this to $3, reflecting a focus on US impacts only. It's back up to $50 now. Some have suggested it be several hundred dollars and some have suggested low numbers and some estimates are country specific. And it is true the damage from a ton of CO2 can vary dramatically from one country to another. For instance, some Arctic regions may in fact, benefit from warming. I go with this, the careful analysis myself or the US Government, as demanding a global cost underscore global, because if you emit a ton of CO2 into the atmosphere, the effects of it are everywhere, not just to you as the emitter though recognizing there's considerable uncertainty, particularly on the upside, and could be as high as a hundred dollars or more. And it wouldn't surprise me at all. Over time, I expect the precision of these calculations to be revised and perfected. I would note that other countries such as Canada and Peru, and probably others that I'm not aware of, are following a similar path with the social cost of carbon. On the global side, what's it good for? The global social cost of carbon is particularly useful for integrating carbon considerations in other regulations, including emission regulations and energy efficiency regulations, which many countries have. It is less appropriate for big picture negotiations among major countries such as we will see in November when the IPCC members, the conference of the parties, meets in Glasgow for its annual discussion of policy actions that the world can take.
Roumeen Islam: So, then what should countries do, what should the global community aim for, given the differing views on the climate agenda, so broadly speaking?
Charles Kolstad: This has been a tough issue. They've come together every year since the mid-1990s, trying to figure out what to do. I think the Paris agreement from, I think 2016, was one of the biggest successes, although it's by no means solving the problem, but it's the biggest success in confronting the issue head on. Instead of trying to get all 180 countries of the world together to agree on doing something jointly, the decision was made to simply ask individual countries, what can you contribute to the globe? What are you able practically, politically, economically to do? You tell us? And make it something and you can actually stick to, and they did that. And the Paris agreement essentially codified those into the nationally determined contributions to emissions reductions. And that's also part of that to come back every five years just to update things. Some countries went big, some not so big, but every country tried. There is one other global action that can be taken that's occasionally raises its head: China and the US reach agreement, just the two countries during the Obama administration. That other action is that instead of trying to get all countries of the world to agree on something, we could then focus on a major subgroup, for instance, four or five countries instead of 180. All of these are a mixture of politics, domestic politics, international politics, economics, and lots of other things that make any action at all very difficult.
Roumeen Islam: Now let's switch from mitigation. I know that the past group is about both mitigation and adaptation, but I'd like to deal with adaptation a bit in my last question to you which is a completely different ball game from mitigation. So, how should countries really be thinking about this split between adaptation mitigation policies? You've got a fixed budget. You've got, a strategy. A government trying to think about, a climate strategy, how should they be thinking about this?
Charles Kolstad: Adaptation is definitely important. And I would add something that is not always appreciated that it's easier than mitigation. For relatively rich countries, adaptation decisions can be completely internal to the country. No international coordination is needed. In fact, in rich countries, many adaptations decisions do not even involve the government. When a farmer decides to plant a more drought resistant seed, that's adaptation. Yet it's a farmer's decision. That's in contrast to mitigation, where only some of the benefits accrue to the country doing the mitigation, and mitigation is a government decision. So, you have to coordinate it with other countries to get the best results.
Nevertheless, for getting back to adaptation for poorer countries, financial constraints make financial assistance important for adaptation to be fully realized. Now you asked about the split between mitigation and adaptation. For relatively rich countries, the big climate challenge is how to reduce emissions from older buildings, factories, and consumer products. And there's a lot of things that were built decades, even centuries ago, that need to be modernized. Adaptation is important, but perhaps secondary to mitigation in rich countries. For a poor country with more modest legacy emissions from old factories and buildings, things like that, adapting to climate change may be the most important focus though care must be taken as the development process, proceeds to not invest excessively in carbon intensive activity.
Roumeen Islam: Yes. And of course, there are in fact, poorer countries where carbon emissions are already quite high. So of course, they also need to be thinking about that, but in a somewhat different framework, is what you were saying.
Charles Kolstad: Yeah, countries of the world are obviously not in one of two categories. We have the poorest countries, and we have the richest countries, and we have lots in between. China used to be in the poorer category, but not anymore. It's in between, and it's obviously a major source for emissions. The economic development of a country appears to follow a country moving from a purely agrarian agriculture-oriented country, where the emissions are pretty modest through heavy industrialization, and finally to moving to services and the industrialization process, can be most emission intensive. So that was a generalization, putting everybody in two categories. But the lesson is still there, I think.
Roumeen Islam: Yes, definitely. They are. Thank you. Is there anything else you'd like to add before we end?
Charles Kolstad: No, it's been a real pleasure talking with you and I think these issues are of great relevance today in the world. And I'm really pleased that they're rising globally in importance, everywhere I look, so it's terrific to talk to you.
Roumeen Islam: Thank you. It was wonderful talking to you and we really learned a lot. Thanks very much. Thank you.
Listeners, we continue to learn about climate change through this podcast series. So, what did we learn? Firstly, models estimating damages from climate change try to integrate natural science, biological, and economic phenomena, a very complex affair. Secondly, some important economic phenomena are taken to be exogenous such as population growth and innovation, both of which are critically important for the effects we predict on the planet. As these changes, so will our policy responses. Thirdly, adaptation to changing climate is difficult to model whether behavioral, biological, or physical. Finally, while all countries need to move towards lower emission pathways, the balance of adaptation and mitigation measures, and the nature of mitigation measures themselves will vary depending on country circumstance.
Thank you and bye for now. You can find more information about the podcast on www.worldbank.org/tell-me-how. If you've got questions or comments, we'd love to hear from you. You can also find us on all popular podcasting platforms. This episode was recorded in August 2021.
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