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A “Portfolio” Approach to Climate Change

The world has tried with little success to cut carbon emissions under the Kyoto Protocol. The enormous effort expended to bring the Protocol into force nonetheless indicates how much work will be required to produce the next treaty, due to be agreed in Copenhagen in December 2009. Campaigners will push for tough and far-reaching policies, but strong resistance will continue from countries concerned about their economic vitality.

The new negotiations will have one advantage over the earlier efforts, because governments now understand the need for a portfolio of adaptation, mitigation, and research efforts. New research that my colleagues and I undertook for the Copenhagen Consensus Center in Denmark explores the effectiveness of different responses to this global challenge, but it strongly supports the portfolio approach for several reasons.

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First, we now know that adaptation will be essential, because temperatures will rise by another 0.6°C by 2100 even if greenhouse gas emissions are eliminated tomorrow. We also know that the impact of climate change will not be evenly distributed across the globe.

In some areas, modestly warmer temperatures could produce higher crop yields if associated changes in precipitation patterns are not adverse and/or irrigation remains viable. Even with 0.6°C warming, however, Africa and South Asia will experience almost immediate reductions in the viability of many crops and, eventually, increased vulnerability to infectious disease. These impacts will clearly hit the planet’s worst-off inhabitants hardest: the “bottom billion” who already bear the heaviest burden of disease, poverty, conflict and malnutrition. 

Ensuring that adaptive capacity is expanded and exploited where it is most needed is thus a key challenge. Long-term development may give countries more capacity to soften the impact of climate change on the environment and citizens’ health, but in the meantime the planet’s poorest people will need help from the rich.

Our analysis investigated, for example, the merits of more targeted policies for the near term: purchasing mosquito-resistant bed nets and oral re-hydration malaria therapy for children in the poorest nations affected by climate change. The goal was to deal aggressively and proactively with some of the marginal health impacts of global warming. Benefits would appear almost immediately, but would dissipate over time as economies developed. Even as development improves conditions, however, reducing carbon emissions would become increasingly important over the longer term as the impact of climate change become more severe.

Since the effects of climate change have been observed in many areas around the world, thinking about mitigation makes sense everywhere. But we found that mitigation alone did not meet a standard cost-benefit test. We allowed specified annual costs of climate policy to grow in proportion with global GDP through 2100 from an initial annual benchmark of $18 billion. The discounted cost of the resulting stream of fixed annual costs totaled $800 billion, but damages avoided by this approach amounted to a discounted value of only $685 billion.

The Copenhagen Consensus study also examined a portfolio option of the sort heralded by the United Nations’ Intergovernmental Panel on Climate Change. We allocated $50 billion to research into greener technology, so that only $750 billion could be absorbed by the economic cost of adaptation and mitigation. The gap between the cost of carbon-free and carbon-emitting technology fell, and the taxes designed to mitigate emissions became more effective. As a result, the research and development program essentially paid for itself, and total discounted benefits for the $800 billion investment climbed to more than $2.1 trillion. 

Ensuring that research and development is part of the world’s climate change response portfolio would make mitigation efforts more efficient and significantly enhance their ability to reduce carbon emissions over the next century.

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But these favorable net benefits reflect very conservative assumptions regarding the timing of emissions reductions and when the developing world would “come onboard.” Optimizing investment in the portfolio over time would, for example, increase the discounted benefits by more than a factor of three. Expected benefits would increase further if we included the chance that potentially higher climate sensitivities would exacerbate damages, even though doing so would require including similarly plausible lower climate sensitivities, which would push in the opposite direction.

Fighting climate change can be a sound investment, even though neither mitigation nor adaptation alone will be enough to “solve” the problem. To make a real difference, especially in the near term, the world must combine mitigation and adaptation with increased research and development into carbon-saving and sequestering technology, which in turn requires designing and exploiting market-based incentives.