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The world’s current trajectory of greenhouse gas emissions poses significant threats to economic development as well as environmental sustainability. Projected increases in global temperatures and other changes, if not arrested, could pose serious challenges to maintaining critical ecosystems, coping with extreme events, and safeguarding health. An unprecedented cut in global emissions would be required to mitigate these risks, however, and accomplishing that would necessitate international agreement on implementation of some costly changes in energy and other sectors that has so far remained elusive.

In a recent Policy Research Talk, Michael Toman, research manager in the World Bank’s research department, discussed the challenge of controlling climate change, weaving together the latest scientific and economic evidence on the topic. The Policy Research Talks are a monthly event held by the research department to foster a dialogue between World Bank researchers and operational colleagues.

Toman described the task of mitigating global climate change as a ‘wicked problem’. “Climate change is an issue that presents great scientific and economic complexity, some very deep uncertainties, profound ethical issues, and even lack of agreement on what the problem is,” said Toman. “Economists will generally think about the trade-offs involved. Ecologists will talk about the idea that we’re driving towards the edge of a cliff. I think both views are right. The question is, how do you reconcile these two – if you can?”   

According to the Report from the Intergovernmental Panel on Climate Change (IPCC), between 1970 and 2010 greenhouse gas emissions increased steadily, at an average rate of 1.3 percent per year. During that timeframe, regional patterns of emissions shifted significantly, with upper middle-income countries increasing their emissions threefold as their economies advanced. The IPCC review indicates that continuing on a trajectory without significantly increased efforts to reduce emissions growth would lead to an increase in global average temperature of between 3.7 and 4.8°C by the end of the century compared to pre-industrial conditions. While this change seems small, it is enough to cause major and disruptive environmental effects that will hurt economic development and human well-being. 

Many scientists and policy advocates have called for deep cuts in emissions levels (not just growth rates) over the next few decades that would hold the likely increase in global temperature closer to 2°C.  Moving from a 4°C to a 2°C trajectory would require unprecedented mitigation efforts: annual greenhouse gas emissions would need to be at least halved by 2050, even as many developing countries’ energy needs remain woefully underserved.

“Clearly there is a need to contain global emissions. But we also know that developing countries will require increased use of energy in order to grow and improve their living standards,” according to World Bank Research Director Asli Demirguc-Kunt, who hosted the event. “So, what’s the cost of containing emissions? Who should pay for them? And how should these costs be shared when the benefits are global and are to be realized in the longer term?” 

Toman explained that the costs associated with achieving greenhouse gas emission targets will hinge on three factors: the ambitiousness of the targets; the timing of implementation of mitigation efforts (delays will raise the costs); and the availability of low-carbon technology.  Even with further increases in availability of cost-competitive renewable, nuclear, and other forms of low-carbon energy, a reduction in emissions sufficient to achieve a 2°C scenario could lead to future aggregate consumption rates several percentage points lower than would otherwise occur. In absolute terms, the costs compounded over the course of a century would be significant—though not ruinous, as some critics claim.

To achieve significant reductions in greenhouse gas emissions, putting a price on carbon—as called for during the recent UN Climate Leadership Summit (and advocated for several decades by economists)—is an essential pillar. A price on carbon will spur innovation and create incentives for emissions cuts where (and when) they are most cost effective.

But carbon pricing is not enough. Complementary policies need to be enacted in areas ranging from land use, to trade policies that reduce barriers to low-carbon technology diffusion, to investments in R&D for lowering the cost of low-carbon technology. One area offering win-win opportunities is reform of fossil fuel consumption subsidies, which totaled an estimated $540 billion globally in 2013, according to the International Energy Agency. However, the politics of energy subsidy reform remain daunting. 

To achieve much deeper emissions cuts will require an unprecedented level of international cooperation in sharing the nearer-term costs of transition to an environmentally sustainable longer-term future. Because of short policy horizons, political risk aversion, and an incentive to leave the costlier actions to other countries, such international cooperation has remained elusive. It remains to be seen, Toman noted, if current negotiations will lead to significant improvements.

Toman stated that mitigation efforts remain largely an issue for upper and upper-middle income countries—which account for the great majority of global emissions. He also discussed policy options for lower-income countries, where raising basic living standards remains a primary concern. High on the list are policies to reform energy subsidies—notwithstanding the political challenges—and increase energy efficiency. Preventing the release of carbon through appropriate forest protection policies can also pay large dividends. Efforts are needed as well to limit “lock-in” of patterns of high carbon use—urbanization, in particular, is an area where poor zoning and other land use decisions now make it much more expensive to move to a lower carbon growth path later. While the focus of the Policy Research Talk was on controlling climate change, Toman pointed out that further investment to reduce the impacts of climate change is a priority for developing countries and the World Bank Group.

Marianne Fay, Chief Economist of the Climate Change Group at the World Bank and discussant at the talk, reiterated the necessity to decarbonize to make any progress on climate change: “The policy question is not whether we decarbonize. The question is do we want to stabilize the climate, and, if so, at what level?” She emphasized the need for a package of policies to tackle greenhouse gas emissions. Performance standards—as a complement to carbon pricing—offer a number of advantages: they are a familiar policy instrument in many countries, create credibility for investors, push the cost of mitigation into the medium term, and also create a vested interest in decarbonization. And while the exact benefits of any policy are uncertain, Fay urged the audience to embrace uncertainty: the consequences of inaction are no less uncertain and potentially very costly.