October 2005

"The Economics of Climate Change": A Report from Britain

A recent report released by the British House of Lords Select Committee on Economic Affairs warns that the economic basis of climate science and policy deserves a more detailed look. The report, entitled “The Economics of Climate Change,” questions the accuracy of long-range emissions projections and doubts that the costs of projected abatement of greenhouse gases have been fully recognized. The release of the report raises some important questions in the climate change debate. How objective and credible is the Intergovernmental Panel on Climate Change? Should finance ministries become more substantially involved in the climate policy process? These and other questions were considered at an October 6 AEI panel discussion.

Lord Lawson of Blaby
Former Chancellor of Exchequer

Lord Lawson described the committee’s evidence-based inquiry into policy issues of climate change and its examination of extensive scientific data. The committee acknowledged that it was clear that greenhouse gas and carbon dioxide emissions would increase the average global temperature over a period of years. However, the rate of greenhouse emissions and the differences between various greenhouse gas emission growth projections remains unclear. Further, little is known about the details of the cost-effectiveness of solutions to the threats posed by greenhouse gas emissions. The committee came to the unanimous decision that the economic ramifications of the various proposals for controlling climate change have not been sufficiently analyzed and launched an investigation into the economics of climate change.

Through its investigations, the committee became concerned about the objectivity of the Intergovernmental Panel on Climate Change (IPCC) and questioned the thoroughness of the 2001 IPCC climate change report. The IPCC refuses to entertain dissent and has not seriously considered many of the possible emissions scenarios in its projections. Lord Lawson emphasized the necessary balance between adaptation to climate changes and solutions designed to mitigate its effects. The lords claimed that adaptation, such as constructing flood defenses or conserving water, should be central in the IPCC report but are not. Adaptation has clear costs and immediate benefits; it is the natural response to climate change and allows time for new technology to develop. The IPCC report instead focuses almost exclusively on measures designed to mitigate emissions, such as the Kyoto Protocol, which, unlike adaptation, have unclear costs and distant results.

Lord Lawson discussed the Kyoto Protocol, saying its efforts at mitigation were the wrong approach. Supporters of Kyoto argue that it is a step in the right direction; Lawson, however, claimed that it was “doomed” and “totally unrealistic” since there is no motivator for nations to actually follow its mandates. The “free rider” problem in which the most zealous adherents lose out is impossible to solve at a global level.

Lawson concluded that the climate was too important a matter to be left to environmental departments alone and urged those present to involve the financial ministries of their governments in climate change efforts.

David Henderson
Former Chief Economist of the Organisation for Economic Co-operation and Development

David Henderson began with the background of the IPCC, which was created in 1988 by the United Nations Environmental Programme (UNEP) and the World Meteorological Organization (WMO). Since that time, it has released three massive reports covering every issue of climate change. Member governments accept those reports as the sole authoritative source of information and analysis on climate change, and consequently, the IPCC has become a monopoly.

Change to the IPCC is badly needed and the report released in July by the House of Lords could be a breakthrough. The lords’ report seriously questions the rigor and objectivity of the IPCC and could help direct the attention of the economic community towards issues of climate change. Mr. Henderson warned, however, that since the IPCC has a relative monopoly over climate change analysis, it will take pressure from member governments for the IPCC to make changes.

In order to influence change in the IPCC, Mr. Henderson urged challenging the forthcoming 2007 climate change report now. He called for books, short articles, the support of think tanks such as AEI, and lay critics across the world to make it impossible for the IPCC’s findings to go unchallenged. If a coordinated, wide-ranging critique of the 2007 report takes place, the House of Lords’ report will be a success.

Lee Lane
Climate Policy Center

Lee Lane praised the report from the House of Lords, saying he was extremely impressed, particularly with its balanced tone. He appreciated the call for further research and development to find climate change solutions, agreeing that research should be the center of climate policy.

Mr. Lane then went on to discuss two policy problems he found with the lords’ report. First, he thought the implications of the report’s claim that international enforcement of greenhouse emissions would fail were dangerous. The report argued that attention should be focused on developing technology since no agreement about greenhouse gas emissions could ever be enforceable. To fuel this technological research would require regulation, such as trade caps. Mr. Lane found this a dangerous recommendation because technology regulation could be an even less cost-effective solution than mitigation. Lord Lawson responded that the report did call for research but made no statement whatsoever regarding technology regulation.

Second, while Mr. Lane thought that the report’s recommendations for research were on target, he pointed out that it did not contain a sufficiently strategic plan. While international momentum is headed towards more research into ways to adapt to climate change or mitigate greenhouse emissions, resources and centralization remain very limited, and more needs to be done to make a research program effective. The design of the research and the structure of institutions supporting global climate change research require more clearly defined strategic goals. He concluded by urging further research by AEI and similar organizations.

AEI research assistant Lauren Campbell prepared this summary.