An economist's point of view

The following article is the third part of a series of four. The fourth and last article assesses the meager results of the recent Copenhagen Conference and tries to forecast the way forward.

Cut emissions by half!

A widely-held consensus regards a global temperature increase of +2 degree C compared to 1990 (or +3 degree C compared to 1850) as a maximum value tolerable.

To achieve this goal with a probability of around 75% average annual global emissions over the next 40 years (2010 - 2050) must be not more than half of the current annual global emission level, standing at around 40Gt.

The emission reduction rule "down by half over the period of 40 years!" means that it is not enough to end up at an annual emission level of 20Gt in 2050. Instead, the annual value of 20Gt must be achieved as an average over the period. We shall see below that this is much more challenging.

Chart 4 shows possible reduction paths (A, B, C) from 2010 to 2050. All paths start at the current annual global emission level of 40Gt. Path A employs a steady annual reduction. It fulfills the 50% reduction target over the period, but ends up in 2050 with zero CO2 emissions - which does not look very realistic.

Path B also fulfills the 50% reduction target, and it ends up with a positive emission, which seems to be much more realistic. What is less probable with path B, however, is the early strong reduction which is required to fulfill the target and to end up with a permitted, though low, amount of emissions.

Looking at path C, there are only low reductions at the beginning, which, however, gain speed later. In 2050 there is a positive amount of emissions.

Thus, path C looks much more realistic than A and B. But the problem is that path C does not fulfill the reduction target of 50% over the period - which means that the maximum +2 degree C target might not be met.

Climate change and related evils

Most people want to preserve the environment and the climate not for the sake of a stable climate as such, but for inhibiting the negative effects a climate change - with sea level rise, heat waves, floodings and droughts - would inflict upon human living conditions.

Such possible negative effects are, for example: spread of diseases, more malnutrition and hunger, loss of human (and wildlife) habitat, more global migration, reduced chances to catch up with the rich countries - in one word: global increase of widespread poverty.

It is clear that fighting climate change should have advantageous effects on the mentioned human living conditions.

But the question economists ask is: How efficient are anti-climate change actions in fighting the named problems? Isn't that an inefficient indirect way?

Wouldn't it be better to address the named problems - all of them already existing - directly and with more vigour?

How should the world spend the limited resources available to tackle the named problems? More on anti-climate change efforts or more on actions directly tackling the problems? A very difficult question.

However, the reader should not fall into the trap to say: let's give priority to both - direct actions and fighting climate change. This will turn out to be an illusion because resources are limited.

Costs to contain climate change

Cost estimates to achieve the aim of a maximum +2 degree C lie in the range of 1 to 2 % of global GDP. This is a sum of currently around US$700 to US$1400 billion which has to be spent annually for at least 40 years.

This amount compares favorably to a famous calculation of the costs of future climate change damages if no action is taken: 5 - 10% of global GDP annually.

This calculation which has become very influential was provided by Nicholas Stern, the former chief economist of the World Bank and now climate change consultant to the British Government and, apparently, to many more governments.

Decisive: the discount rate

The costs of climate change (and the benefits from avoiding the damages) occur mainly in the future, partly in a rather distant future, while the costs of fighting climate change have to be borne now and in the near future.

If costs and benefits occur in different years they cannot be compared directly. The technique to make them comparable is discounting. The decisive question is: which discount rate to use? The smaller the discount rate, the larger the present value of a damage occurring in the future. The larger the discount rate, the smaller the present value of the future damage.

For calculating the costs and benefits of large public projects like power stations, dams or roads usually a discount rate of around 5% is applied.

But Stern takes 0.1% (!) for his calculations. A low discount rate makes future damages to the environment look more threatening. And it makes immediate and drastic anti-climate change action look more beneficial.

The difficult question now is: is it justifiable - or even morally demanded - and is it realistic to apply an unusually low discount rate to future environmental damages?

What is your discount rate?

What discount rate do you personally apply in long-term financial decisions? Most people save some money for a good education of their children and perhaps something for making a bequest to them.

But they do not save for their children's children or even for their great-grandchildren. They think it is the children's responsibility to do so.

This means, in practice, they apply a discount rate of around 5%. In contrast, saving for your grandchildren and your great-grandchildren - a rare behavior - means to apply a very low discount rate, for example 0.1% - as Stern does.

Costs of climate change in Africa

Figures for the costs of climate change in Africa cover a wide range, from 1% to 10% of African GDP, depending on the climate change scenario and the resulting temperature increase. For Namibia, there are estimates from 1% to 6% of GDP.

Adaptation costs in Africa are usually regarded to be in the range of 1% to 3% of GDP. Africa's participation in global mitigation efforts would lead to costs of a similar range.

Thus, adaptation plus mitigation costs in Africa might be between 2% and 6% of GDP annually, or US$25 bio to US$75 bio.

How does this compare to the current annual level of development aid to Africa? Total official net development aid to Africa stands at around US$50 bio (2008), which also is the mean value of the abovementioned range of adaptation and mitigation costs.

If the developed countries are to take over these costs, without cutting into existing aid, international aid flows to Africa roughly had to be doubled.

Given that aid currently makes up around 0.35% of donors' GDP, while their self-proclaimed target is 0.7%, doubling of aid should not be impossible - but may take quite some time to get realized.

However, there are two major problems on the recipient side. One is that the existing and limited absorption capacity for additional funds may become overstretched. The other is that the much discussed aid dependency syndrome may be aggravated.

Dr Rigmar Osterkamp is at UNAM, Faculty of Economics and Management Science, Economics Department.