Climate Change

The climate change impacts due to human activities are one of the major external costs categories. The problem of the human influence on climate have been analysed for many years by IPCC (Intergovernmental Panel on Climate Change), an international organism in charge since 1988 for the appraisal of the various environmental, social and economic aspects of climate change. The control of human emitted greenhouse gases has become a global engagement with the United Nation Framework Climate Change Convention (UNFCCC) agreed in Rio de Janeiro in 1992, and subsequently with the Kyoto Protocol approved by the Third Conference of the Parts in December 1997 and entered in force in January 2005. The Kyoto protocol legally binding emission targets are referred to the following green house gases:
- CO2, including minor carbon emissions due to carbon sinks (forest activities)
- CH4
- N2O
- HFC
- PFC
- SF6

Economic valuation of climate change impacts is periodically reviewed by IPCC, by considering the work of research institutes or scientific networks from all over the world. This type of research needs very complex models to be integrated, so damage valuation results could be very different depending on research hypothesis. In fact the extent of climate change net damages is influenced by a multitude of different factors that may intervene in a very broad time period (dozens or hundreds of years).

The impact pathways that are usually quantified in greenhouse gases external costs valuations are:
- health effects (heat waves, spread of infectious diseases…)
- effects on human activities linked to the sea level rise
- effects on agriculture
- effects on water resources

One of the main uncertainty factors of economic valuation is the difficulty to valuate with the present monetary unit of measure (willingness to pay of present generations) the projected effects on ecosystems that will be experienced by future generation (non living now). The concrete risk of not including the impacts on ecosystem in the economic valuation is to underestimate sustainability issues in our present decision making. The various uncertainties of the external costs valuation procedure are not only economical but linked to the complexity of the climate and environmental models that should be integrated on a very long time frame and on a global scale.

One fact to be underlined is that the external costs of CO2 are not represented by the market price of the emission credits. In fact, this last one is determined by the marginal cost of CO2 emission reductions (by using reduction measures in the capped markets and the flexibility mechanisms of the Kyoto protocol) and it is not linked to the expected damage of CO2 emissions. The use of an internal cost as a proxi to an external cost is particularly non sense in cost-benefit analysis of CO2 reduction measures.

© 2006 - Andrea Molocchi