ABSTRACT
I Introduction In his famous study about the history of economic theory, Philip Mirowski (1989) claims that economic theory has produced more heat than light when it uses thermodynamic analogies for understanding socio-economic phenomena. Irrespective of this specific blame, many scientists are convinced that economists have produced more heat than light in the field of climate policy. In contrast to this proposition, it is argued here that economics is necessary to shed light on the dark pathways of decarbonisation. Fortunately, the debate on the economics of decarbonisation has already caused a lot of heat. In this paper, we can therefore try to use heat for producing more light. The Fourth Assessment Report (AR4) of the Intergovernmental Panel on Climate Change (IPCC) as well as the Stern Review (Stern 2006) have argued that ambitious climate policy can be pursued at relatively low costs. A recent publication by Pielke et al. (2008) aims at demonstrating that the IPCC dramatically underestimates the mitigation gap. The mitigation gap is the difference between the emissions that would occur in absence of climate policy in the twenty-first century and the trajectory that needs to be taken to achieve climate stabilisation. Thus, the core statement of Working Group III in the Fourth Assessment Report of the IPCC (Barker et al. 2007) – namely that a drastic decarbonisation of the world economy is technically feasible and economically affordable – seems to begin to totter. Is the optimistic message that the IPCC announced in 2007 to the whole world after all unfounded? Is the challenge greater than assumed? Is climate policy now more expensive than alleged? The three volumes of the Fourth Assessment Report ‘Climate Change 2007’ of the IPCC have proven to be important in changing the perceptions of the international community all over the world about the hazards of climate change and the need for vigorous response strategies.2 Particularly, the scientific consensus reported in the AR4 received an unprecedented echo in the media and subsequently raised the public awareness concerning global change and its adverse impacts to an extent never seen before. As a result, the report triggered numerous initiatives to combat global climate change – most notably the declaration of the eight major economies (G8) at their summit in L’Aquila in 2009 (Major
Economies Forum 2009) with the recognition of the 2°C target and the call for a post-2012 climate agreement, the EU decision to reduce greenhouse gas (GHG) emissions by 20 per cent by 2020 (compared to the amount of GHG emitted in 1990), and the Sydney APEC Leaders’ Declaration on Climate Change, Energy Security and Clean Development in which the nations belonging to the AsiaPacific Economic Cooperation (including countries that have not ratified the Kyoto Protocol, like the US and Australia) reaffirm their commitment to work with all members of the international community for an enduring global solution to climate change (Asia-Pacific Economic Cooperation 2007). The stakes involved are high. Therefore, a down-to-earth verification of the facts is indeed needed. Hence, policy makers and economists needed to clarify how much CO2 has to be mitigated worldwide at what costs. If it turns out that science has underestimated the mitigation gap, climate policy will face greater challenges than in a world economy in which emissions would reduce even without climate policy. The economics of decarbonisation has attracted less attention by economists than other aspects of climate economics. In particular, after the publication of the Stern Review, several economists have argued (Dasgupta 2007; Nordhaus 2007) that the recommendations of the Stern Review are based on value judgements but not on different facts about climate damages or the costs of mitigation. Consequently, the role of discounting and uncertainty has played a dominant role in the debate (Stern 2008). However, an even more important subject has been widely neglected: the role of endogenous and induced technological change and its role in assessing mitigation strategies and costs. In Part II, the paper argues that the social costs of carbon cannot be calculated because of the inherent uncertainty about climate impacts. It is argued that marginal abatement costs are a much more appropriate guidance for climate policy. In Part III of the paper, we discuss how the IPCC has explored mitigation strategies. In Part IV, the concept of mitigation costs used by the IPCC is evaluated. In Part V, we argue that the static concept of marginal abatement costs is misleading despite its popularity in the policy arena. In contrast to this concept, we propose the development of hybrid models allowing for an assessment of long-term mitigation strategies and costs. Moreover, we present recent results about mitigation costs and strategies. It is also argued that the future work of IPCC could benefit a lot when it deals in a more productive way with multiple equilibria and ‘second best worlds’ where failures or the unavailability of individual technologies are considered. In Part VI, we provide an outlook on climate policy and the methodological effort to support it.
