Climate Change 2001:
Working Group III: Mitigation
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7.4.5 Estimating Future Costs and Sustainability Implications

Mitigation policies that are large in scale can have significant long-term implications on future climate change and thereby have implications for intergenerational equity. The issue is to model future changes in ecological systems and economic welfare associated with different levels of climate change caused by specific mitigation efforts.

Climate change offers an imposing set of complications for the policymaker–global scope, wide regional variations, the potential for irreversible damages or costs, multiple GHGs, a very long planning horizon, and long time lags between emissions today and future impacts on ecosystem services. For the economist, to assess how these distant climate-induced changes in ecosystem services might affect the economic wellbeing of citizens in the far distant future is no less imposing.

The challenge rests in capturing accurately three general issues: (1) how climate change might affect ecological systems; (2) how these altered ecosystems might affect the demand for different market and non-market goods and services; and (3) how this demand change affects the welfare of our descendants. The first two issues can only be dealt with by broad scenario analyses that consider alternative development patterns for ecological systems and the interactions with man-made systems. The third issue can be addressed by applying assumptions about the preferences of future generations, which, for example, can be assumed to reflect the preferences of present generations.

Those who undertake studies of welfare losses brought about by climate change often focus on an assessment of the potential welfare losses suffered by future citizens through climate change. Typically, such an assessment is based on measuring the demand curve for people alive today under today’s climate given the substitution possibilities implied by extant technologies and knowledge constraints that define today’s opportunity set. Essentially, these analysts ask, “If the climate of the future enveloped us today, what would be our welfare loss?”

The question often not asked is this: “Does the opportunity set of today’s citizens reflect, in any way, the opportunity faced by citizens in 2050 or 2100?” A welfare loss based on today’s opportunity set may or may not be related to the potential climate-related loss in wellbeing to the citizens of the far distant future. Climate change triggers direct changes in the opportunity set and relative prices, and indirect changes in the adaptation of technology and supply. This is critical. More opportunities in the future will reduce the welfare loss; fewer opportunities could inflate the loss. The opportunities will depend on a complex mix of available substitutes, complementary recreational and non-recreational activities, relative prices, transaction costs, and preferences. These substitutes will be determined by the various different types of capital stock that contribute to human wellbeing, including man-made capital, human capital, natural capital, and social capital, as emphasized by the sustainability literature. For a more elaborate discussion on these issues see Chapter 1.

It is difficult to account for the opportunity sets of citizens in the far distant future and to predict the preferences of future generations, which adds a significant uncertainty to estimates of future damages from climate change. Climate change might affect household resources, human resource investment prices and levels, endowments, preferences, labour market opportunities, and natural environment, all of which influence our descendant’s opportunity set–the basic materials needed for attainment in life. These risks indirectly modify our heirs’ life chances by reducing and reallocating household resources or by constraining their choices or both. Our descendants may shift resources towards a sick child and away from recreation. Their children might have to forego the life experience of fishing the same river as their ancestors. Faced with these consequences, individuals today might be willing to pay to prevent risks that restrict our heir’s opportunities. But this is a different question.

When considering future generations’ opportunities the impacts of today’s climate change investments on future generations’ opportunities should also be considered. Investments might, for example, enhance the capacity of future generations to adapt to climate change, but at the same time they potentially displace other investments that could create other opportunities for future generations.

Two things are likely to be different in the future–the climate and our heirs’ opportunities. Accounting for one change and not the other will not markedly advance our understanding of expected benefits. The question should be “How could these future effects be linked to existing models to value non-market effects?” For the most part, the valuation question is how to account for changes, both good and bad, of future opportunities. Accounting for these decisions probably requires a new model that focuses on the value of maintaining or enhancing the future’s opportunities so as to maximize their life chances, whatever their preferences might be.

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