The UK Climate Change Committee Illustrates How Not to Do Cost-Benefit Analysis of Climate Policies
April 8th, 2009Posted by: Roger Pielke, Jr.
The UK Department of Energy and Climate Change has quietly released a report providing a cost-benefit analysis (here in PDF) of the implementation of the UK Climate Change Act (which is the subject of a recent paper of mine). The report was signed off on by Ed Miliband, Uk Minister for Energy and Climate Change, who affirms:
I have read the Impact Assessment and I am satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impact of the leading options.
The cost-benefit analysis is a spectacularly good example of how CBA can be twisted to say just about anything (not a surprise to many, I’m sure). Taking the analysis at face value says that the benefits of the Climate Change Act to the UK taxpayer are about 0.06 Pounds ($0.08) for every Pound ($1.40) in cost. And this assumes that the entire world acts in concert with the UK. Otherwise, the benefits are even closer to zero.
Here is a summary of the analysis :
The “best estimate” of the costs of the Act is 379 billion Pounds ($531 billion). The “Central” estimate of benefits is that the Act will have benefits due to reductions in greenhouse gases of 988 billion Pounds ($1,383 billion), for a net benefit of 641 billion Pounds (including in this total are 32 billion pounds in air quality benefits). The Act then appears to be a winner, a no-brainer, as its net benefits approach $1 trillion dollars. What a deal!
That is, until you take a look at the details. The costs are calculated using the MARKAL model, and the report provides a dead end link to support its conclusion that the costs are found to be:
Under a range of scenarios the CCC found that the costs of the 2050 target were equal to a permanent reduction of 1-2% of GDP in 2050.
What does this cost equate to in terms of cost per ton of carbon dioxide? About $22 per ton. (Calculated assuming a 1.5% growth in UK emissions under BAU.) This is pretty low given that the marginal cost of abatement is estimated to be anywhere from $200 to $500 by the IPCC and IEA respectively, and even these large numbers have been challenged as being too optimistic (see, e.g., Pielke, Wigley, Green, 2008). But let’s go with the $22 per ton, as such numbers are a guess anyway.
It is the benefit side that is especially amazing. The report provides a formula for calculating benefits as follows (p. 33):
Avoided damages = UK emissions no action * BAU SCC – UK emissions 80% target * 450ppm SCC
What does this mean?
It means that the benefits are calculated as the difference between a business as usual “social cost of carbon” and the “social cost of carbon” under a 450 ppm stabilization trajectory. What is the “social cost of carbon”? This is the estimated cost of the impacts of carbon dioxide emissions to the world. The report suggests that this cost was in 2008 53.60 Pounds (~$75) per ton of carbon dioxide emitted above the targets set in the Climate Change Act, which grow to 123 Pounds (~$172) per ton by 2050. The approach to costing carbon means that in 2009 the UK is directly causing about 4.75 billion Pounds (~$6.7 billion) of damage to the world by its emissions that would have been avoided had the UK reduced its emissions by 87 million tons in line with the Climate Change Act targets (again assuming a BAU growth rate of 1.5%).
There are several important flaws in this reasoning. The report assumes that the costs of the Act are assumed to be borne by the UK, but the benefits are global, and then further assumes that the benefits should be calculated assuming that the world is on a 450 ppm emissions trajectory by 2050. But even assuming that the world is on a 450 ppm trajectory, the UK share of global benefits would be only 2.3% of the world total (assuming UK GDP growth to 2050 of 2.0% per year and global GDP growth of 3.0%, with benefits received proportional to GDP), or 22.7 billion Pounds ($31.8 billion).
Comparing UK benefits to UK costs gives a benefit-cost ratio for the UK taxpayer of 0.06, taking the reports cost estimates at face value. If the world is not on a 450 ppm trajectory the benefit-cost ratio is even lower, and easily could be zero, meaning no benefit to the UK or the world.
The report is amazing for the convoluted effort that it goes to in order to try to show a positive value to the Climate Change Act. However, a close look shows that even under the very dubious assumptions on both the cost and benefit sides of the analysis, the UK taxpayer receives almost no benefit for a remarkably large investment. The UK government must assume that no one will notice or care.
My own critique of the Climate Change Act can be found here in PDF.
April 9th, 2009 at 9:50 am
Hi Roger,
I haven’t followed the British Climate Change Act, but the “Climate Realists” blog says:
“What made the MPs’ lack of interest in the cost of this Act even more curious was that the Government’s own “impact assessment” showed that, whereas its benefits were estimated at £110 billion, its costs were £205 billion. The MPs thus happily voted for something that would be twice as costly as any benefitBut these figures were based on the Government’s original plan to cut CO2 emissions by only 60 per cent. A last-minute amendment had this to 80 per cent (a target which can only be achieved by closing down most of Britain’s economy), so our “climate change minister”, Ed Miliband, was obliged to produce new figures.”
“These he has now belatedly slipped out via the Department of Energy and Climate Change website – no thought of reporting them to Parliament – and truly mind-boggling they are. The cost of the Act has nearly doubled, to £404 billion, or £18.3 billion for every year between now and 2050. However, the supposed benefits are given, astonishingly, as £1,024 billion, an increase of 1,000 per cent.”
http://climaterealists.com/news.php?id=3169&linkbox=true
So per that blog, the UK was initially going to have a 60 percent reduction requirement by 2050. That was projected to cost £205 billion and return benefits of £110 billion. But then the 80 percent reduction would have costs of £404 billion (twice the costs) but benefits of £1,024 billion (roughly 10 times the benefits).
Obviously, the “Climate Realists” blog numbers are somewhat different from yours, but I thought it was pretty interesting to read about the iteration from the 60-percent-reduction legislation to the 80-percent-reduction legislation.
April 9th, 2009 at 4:57 pm
Roger, I have a few questions:
How can a cost benefit analysis be done on a regional policy that, even if they were able to reach the goal, is influence by worldwide activity ?
Also, aren’t the premise of such analysis flawed from the start, by imputing all the cost to a single climate forcing, when your father’s works show that climate change is influenced by other forcing like land use, which is probably a more important forcing?
April 10th, 2009 at 10:59 am
There is an article in the April 4-10 edition of the ECONOMIST titled “Greenstanding” about Britain and renewables. It gives a very down beat view. At the end it mentions ministers enthusiasm for nuclear.