Enetigl' Poli0 . ~'ol. 24. No. 9.

pp, 783 793 1996

Copyrighl ,. 1996 Elsevier Science lid Printed in Great Brilain. All rights rc,cr~cd 0301-421596 S15.00 + 0.00

ELSEVIER

P11:S0301-4215(96)00064-X

PAGE95
An updated valuation of the impacts of global warming
Erica L Plambeck and Chris Hope
Judge Institute of Management Studies, University of Cambridge, Cambridge, UK

A vital measure for global warming policy is the marginal impact of a tonne of carbon emitted to the atmosphere. In economic terms, this value corresponds to the carbon tax level needed to internalize the externalities associated with climate change. This study re-evaluates the marginal impact of CO 2 emissions in the light of new scientific and economic understanding of the cooling effects of sulphate aerosols and ozone depletion, the regional distribution of global warming damages, non-Unearity in damage as a function of temperature rise and the appropriate discount rate. Copyright 1996 Elsevier Science Ltd.
Keyword~: Global warming; Model; Valuation

Global wanning policy must balance the cost of reducing greenhouse gas emissions now against potential damage from future climatic change. A vital and ongoing debate involves valuing the impacts of carbon dioxide (CO2) emissions to the atmosphere (Nordhaus, 1991; Cline, 1992, Fankhauser, 1993, 1994b; Azar, 1994). One common measure is the marginal impact of a tonne of carbon emitted to the atmosphere. In economic terms, this value corresponds to the carbon tax level needed to internalize the externalities associated with climate change. However, the complexity of the global warming phenomenon and difficulties in representing the impacts of climate change by a single monetary value make the marginal impact per tonne carbon (tC) a highly uncertain value. The range of estimates is large; most values lie between US$5 and US$25/tC (Fankhauser and Pearce, 1993). Hope and Maul (1996) demonstrated that much of this disparity is explained by different assumptions about the effectiveness of adaptation to climate change, the background level of CO2 emissions, economic growth rates and the discount rate. Another key factor is the treatment of uncertainty. One of the two models used by Hope and Maul, PAGE, was developed for use by EU decision makers in 1991. Since then scientific knowledge of the global warming problem and methods for impact valuation have developed greatly. For example, the sulphate aerosols produced by fossil fuel burning have been found to have a significant 783

cooling effect. Chlorofluorocarbons, once thought to be the most potent greenhouse gases, are now believed to have only a slight effect because they destroy ozone, itself a strong greenhouse gas. Case studies in various regions in the world have improved our ability to measure damages from global warming, and suggest that damage is likely to be a non-linear function of temperature. The PAGE model was recently updated to reflect this information (Plambeck et al, 1995). In this paper we use the updated PAGE model, PAGE95, to examine the effect of new scientific and economic knowledge on the predicted marginal impact per tonne of carbon, and take another look at the role of assumptions about the discount rate, economic growth rate, and the effectiveness of adaptation to climate change. The PAGE95 model The PAGE (Policy Analysis for the Greenhouse Effect) integrated assessment model was developed in 1991 for use by European Union decision makers (Hope et al, 1993). An updated model version, PAGE95, accounts for recent developments in the science and economics of global warming (Plambeck et al, 1995). Global warming policy decision variables are the level of greenhouse gas emissions over time and the degree of adaptation to climate change. For a specified global warming policy, PAGE95 estimates the cost of enacting that policy as well as the resulting climate change impacts, the focus of this paper.

784

PAGE95: E L Plambeck and C Hope

PAGE95 contains equations that model: (1) Emissions of the primary greenhouse gases, CO 2 and methane. Chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs), decision variables in the original PAGE model, have a reduced role in PAGE95. Although future emissions are limited by international agreements to protect the ozone layer, existing atmospheric concentrations are not expected to decline significantly in the next century. Hence PAGE95 models (H)CFCs as a small addition to background radiative forcing: small due to the cooling effect of ozone depletion. (2) The greenhouse effect. Anthropogenic emissions of greenhouse gases exceed the rate of removal by chemical and biological processes and accumulate in the atmosphere. The greenhouse gases trap heat in the atmosphere so that less of the incoming solar radiation is re-radiated to space. This increases radiative forcing, the net flux of energy to earth. The earth's temperature rises very slowly as excess heat is transferred from the atmosphere to land and ocean. (3) Cooling from sulphate aerosols. Sulphate aerosols result from fossil fuel combustion and are commonly known as the cause of acid rain. They also backscatter incoming solar radiation and interfere with cloud formation, producing a reduction in radiative forcing. This counteracts the greenhouse effect. (4) Regional temperature effects. Unlike greenhouse gases which remain in the atmosphere for decades and are globally mixed, sulphate aerosols have a very short atmospheric lifetime (about six days) and so tend to remain in the source region. Therefore sulphate aerosol cooling is a regional phenomenon. For the eight world regions in PAGE95,1 temperature rise is computed from the difference between global warming and regional sulphate aerosol cooling. Sulphate cooling is greatest in the more industrialized regions, and tends to decrease over time due to sulphate controls to prevent acid rain and negative health effects. (5) Non-linearity in the damage caused by global warming. Climatic change impacts are a polynomial function of regional temperature increase above some tolerable level of temperature change, ( T - Tto/)", where n is an uncertain input parameter. (6) Regional economic growth. Impacts are evaluated in terms of an annual percentage loss of GDP in each region, for a maximum of two sectors- in this application defined as economic impacts and non-economic (environmental and social) impacts. (7) Adaptation to climate change. Investment in adaptive measures (eg the building of sea walls; development of drought resistant crops) can increase the tolerable level of temperature change (Trot) before economic losses

occur and also reduce the intensity of both noneconomic and economic impacts. All aspects of the global warming problem are subject to profound uncertainty. To express the model results in terms of a single 'best guess' could be dangerously misleading. Instead, policy should be informed by a range of possible outcomes. Therefore PAGE95 represents more than 70 key input parameters by probability distributions. Random sampling is used to build up an approximate probability distribution for the model results. The comprehensive scope and probabilistic formulation of the model necessitate the simplest credible equations. These equations and the probability distributions for key input parameters are described in Plambeck et al (1995) and Plambeck and Hope (1995).

Calculating marginal impacts

The marginal impacts of a tonne of carbon emitted as CO 2 is computed by comparing the impacts of two policies which differ only by a 'pulse' of carbon emissions. The impact of one tonne of carbon is too small to be detected. Human emissions of CO 2 are small compared to natural cycles, so the pulse needs to be large in human terms to produce a measured effect. Even I billion tonnes (I GtC, about 15% of annual world emissions), cannot be detected, and 10 GtC is at the limit of resolutions of the PAGE95 model. For this study the policies are made to differ by a pulse of 100 GtC. The incremental impact of this pulse is then divided by 10 II to give the valuation of impacts per tC. This procedure is taken from Hope and Maul (1996). The structure of the PAGE95 model, designed to look at long-term policies, does not allow for an instantaneous pulse. Therefore the 100 GtC pulse is emitted over the 30year period from 1990-2020, peaking in 2000. Hope and Maul (1996) observe that, for a positive discount rate, this will produce a smaller impact valuation than an instantaneous pulse in the year 2000. For example, given an effective discount rate of 2%, the approximate levelizing factor is 0.77. However, the results in this paper are not modified by any levelizing factor. Spreading the pulse is reasonable given the long time scale for policy to affect CO 2 emissions (eg a carbon tax leading to the replacement of inefficient fuel burning equipment). Hope and Maul (1996) used the original PAGE model to estimate the marginal impact per tonne of carbon emissions at US$5, with a 90% range from US$2-7 per tC, based on the following assumptions: (1) A horizon of 2200 for calculating impacts to allow to the long time lags in the natural systems. The impacts were aggregated and discounted back to the base year, 1990, at 5% per year; this rate reflects the opportunity cost of capital. (2) Business as usual (BAU) emissions of CO 2, methane, CFCs and HCFCs based upon IPCC scenario IS92a up to 2100. The second policy (BAU + PULSE) added the

IChina and centrally planned Asia, India and South-east Asia, Latin America, Africa and the Middle East, Eastern Europe and the Former USSR, USA, EU and other OECD nations.

PAGE95: E L Plambeck and C Hope

785

pulse of 100 GtC of CO 2 emissions on to these BAU emissions, as shown in Figure 1. (3) Economic impacts were taken to be in the range of 0.25% to 1.6% of GDP per C per year, with a most likely value of 0.6%, for all world regions. Non-economic impacts were taken to be slightly lower than economic impacts to conform to the results found by Nordhaus in a poll of experts (Nordhaus, 1994). Both economic and non-economic impacts grew as a linear function of temperature. (4) Large amounts of adaptation in the developed world, such as the building of sea walls and the prevention of development in vulnerable areas, that eliminated economic impact altogether for the first 2C temperature rise, and reduced the remaining impacts by 90% after 50 years; in the developing world, adaptation reduced impacts by 50% after 50 years (CRU/ERL, 1992). In all regions, adaptation was less effective at reducing noneconomic impacts, bringing only 25% reduction. (5) A worldwide economic growth rate of 2% per year, implying that both the economic and non-economic impacts ofa 1C temperature rise also grew at 2% per year before adaptation. In a series of experiments in this paper, we examine the effect of successive updates to the PAGE model on the estimated marginal impact per tonne of carbon emissions. This process culminates in the PAGE95 current best assessment of marginal impact. Subsequent experiments with PAGE95 explore the sensitivity of that result to assumptions about the discount rate and the degree of adaptation to climatic change.
The PAGE95 updated climate model Ozone depletion The first experiment, CLIMATE, involves the PAGE95 updated climate model with cooling from ozone depletion and sulphate aerosols. All other aspects o f the PAGE model remain as in Hope and Maul (1996). For more than fifteen years it was thought that CFCs were the most potent greenhouse gases (Ramanathan, 1975). However, recent studies show that the radiative forcing effect of CFCs is counterbalanced by their destruction of stratospheric ozone, itself a greenhouse gas. For this reason CFCs have only a small net warming effect (Wigley and Raper, 1992). In PAGE95 net radiative forcing from all halocarbons, including CFCs, is taken to be 0.2 W/m 2 for the period 1990--2080 and zero thereafter based on the latest scientific data (Daniel et al, 1995). This change reduces the predicted level of global warming by as much as 10% by the year 2200. Sulphate aerosols The more dramatic update is regional cooling from sulphate aerosols. Current research indicates that anthropogenic aerosols in the troposphere, notably sulphate, have a significant cooling effect (Wigley, 1994; Charlson et al, 1992; Taylor and Penner, 1994). Aerosols are produced primarily by metal smelting and the combus-

40-

30-

20-

.e

10-

BAU

2000

2050

2100

2150

2200

Figure ! Carbon emissions by policy and year

tion of biomass and fossil fuels. These activities produce gases containing sulphur, carbon and nitrogen which are converted to aerosols (small, solid particles from 10-3 to 102 p.m in radius) by chemical reactions in the atmosphere. The primary actor is SO 2 gas which is oxidized to produce sulphate (SO4++) aerosol, commonly known as a contributor to acid rain. Aerosols have been found to have a direct effect on climate by reflecting incoming sunlight, and an indirect effect involving cloud formation. Aerosols absorb and backscatter solar radiation. This is commonly referred to as the direct cooling effect. In the absence of clouds, radiative forcing decreases as a linear function of tropospheric aerosol concentration. In this paper, we take the magnitude of the direct cooling effect to be in the range from -0.3 to -0.9 W/m 2 in annual global mean forcing for present concentrations, based on Jones et al (1994), Charlson et al (1992), Kiehl and Brieglieb (1993) and Taylor and Penner (1994). This is not insignificant compared to the radiative forcing effect of anthropogenic greenhouse gases, estimated at 2 to 2.5 W / m 2 (Houghton et al, 1990). Aerosols also impact climate indirectly through cloud formation. Aerosols act as cloud condensing nuclei (CCN), increasing the overall volume of clouds. Clouds augment the albedo (reflectivity) of the atmosphere so that more incoming sunlight is reflected to space (Langner and Rohde, 1991). Secondly, by increasing the concentration of CCN, aerosols reduce mean cloud droplet size. This interferes with rainfall and changes the distribution of clouds and water vapour. As water vapour is the primary greenhouse gas this phenomenon will play a major role in climate change. The indirect effect of aerosols on radiative forcing is more difficult to quantify than the direct effect because the complex interactions between aerosols, CCN, and cloud properties are poorly understood. The indirect effect might even constitute a net increase in radiative forcing (Charlson

786

PAGE95: E L Plambeck and C Hope

80 l
50

/ / ",,,

u)

/
30 t / / 20_ /
10Developed countries
0
1 l" T T T I I

"" ", "'".

7
2110 2140 2170 2200

1990

2020

2050

2080

Figure 2 Annual emissions of sulphur by developed and developing countriesa aDevelopedcountries includes the lbllowing PAGE95regions: the European Union, USA, other OECD countries, Eastern Europe and the former USSR. Developing countries includes the following PAGE95regions:China and centrallyplanned Asia, India and South-eastAsia, Africa and the Middle Eastand LatinAmerica.
Source: Spiroet al (1992);WEC (1992); Ball and Dowlatabadi(1994).

et al, 1992). Using a version of the Hadley Centre GCM, Jones et al (1994) estimate that the global annual mean of

indirect radiative forcing is -1.3 W/m 2 for present concentrations. Based on these results, we take the indirect effect to be in the range from +0.2 to -2.4 W/m 2 of annual global mean forcing for present concentrations. Climate modellers are moving quickly to incorporate aerosols, 'the missing forcing factor', so that model results will reflect observed temperatures over the past century (Matthews, 1994). Aerosols can explain past overestimates of heating by global circulation models (GCMs) (Hadley, 1995). Aerosols can also account for the previously inexplicable decrease of temperature in the northern hemisphere (in which more than 90% of industrial SO 2 is emitted) that has not occurred in the southern hemisphere (Wigley, 1989). Unlike greenhouse gases such as CO 2, which remains in the atmosphere for centuries, aerosols are rapidly removed from the atmosphere through precipitation or dry deposition. The average lifetime is only six days (Charlson et al, 1992). As a result, the cooling effect of sulphate aerosols is concentrated in the source region. Greenhouse gases, which are uniformly mixed throughout the atmosphere, can be modelled as a simple additive component in mean global forcing, whereas modelling the effect of aerosols requires regional specificity. Therefore, PAGE95 computes regional temperature rise based on the change in radiative forcing from regional sulphur emissions. 2 Figure 2 shows the projected sulphur emissions over time that we use in this paper.

These are derived from Spiro et al (1992), WEC (1992) and Ball and Dowlatabadi (1994). Figure 3 contrasts the temperature rise predicted by PAGE95 with the results from Hope and Maul (1996). For both policy scenarios the mean temperature rise predicted by PAGE95 is significantly lower than in PAGE (Hope and Maul, 1996). The difference is most important in the early years, when the sulphate cooling effect is greatest in proportion to greenhouse warming. Due to their short atmospheric lifetime, sulphate aerosols do not accumulate in the atmosphere over time as does CO2; sulphate aerosol cooling is roughly proportional to the rate of emission. Therefore the greenhouse effect will dominate in the long term unless sulphate aerosol emissions increase dramatically relative to the greenhouse gases. This is very unlikely. Fossil fuel combustion is the primary source of both sulphate aerosols and CO 2 emissions, so the two are closely linked. However, unlike CO 2, sulphates can be removed from the exhaust stream. Particularly in wealthy countries, concerns about acid rain and health effects have prompted investment in sulphur control technologies. Decision makers are very unlikely to choose to increase sulphate emissions in order to combat global warming. As Figure 2 shows, we assume that aggregate world sulphate aerosol emissions decrease after 2040, causing the level of net radiative forcing in the two models to converge. However, as a result of earth's thermal lag, temperatures in PAGE95 are still significantly lower through the year 2200.

2The direct cooling effect is modelled as a linear reduction in radiative lbrcing as a function of anthropogenic sulphur flux for each region. The indirect effect on radiative lbrcing is modelled as a logarithmic function of

the ratio of anthropogenic sulphur to the natural sulphur flux. Regional temperature rise is calculated from thc difference between positive radiative forcing from the greenhouse effect and negative radiative forcing from aerosols, allowing tbr thermal lag.

PAGE95: E L Plambeek and C Hope

787

7 ~ 6! i

............
........ .......... -

PAGE BAU + PULSE PAGE BAU PAGE95 BAU + PULSE PAGE95 BAU

~"" .~,~"""
, ,.,,.~.~J'~

S ~

3 -i 2 ..'S';;"

.. :.'.:."" ..'"'"

..-""

1~ 0 -~ . . . . i

. .';-""

-"

2000

2020

2040

2060

2080

2100

2120

2140

2160

2180

2200

Figure 3 Meantemperaturerise above the 1990 level in EU in CLIMATEexperiment by policyand yeara

apulse of 100 GtC emitted from 1990-2020.

Source: Hope and Maul (1996) and PAGE95 runs.

The experiment CLIMATE computes the marginal impact per tonne of carbon emissions using the PAGE95 update climate model with cooling from ozone depletion and sulphate aerosols. All other aspects of the PAGE model remain as in Hope and Maul (1996). Marginal impact results for the experiment CLIMATE appear in Table 1. 'Net present value of impacts' refers to the sum of economic and non-economic impacts through the year 2200, discounted and aggregated back to 1990. The columns 'minimum' and 'maximum' refer to the 5% and 95% point on the probability distribution of results. Recall that Hope and Maul (1996) estimated the marginal impact per tonne of carbon emissions at US$5, with a 90% range from US$2-7 per tC. The CLIMATE experiment suggests that the cooling effects of ozone depletion and sulphate aerosols decreases the estimated marginal impact per tonne of carbon by US$1-2. This result is not surprising. Natural and economic systems are thought to be robust; that is, impacts will not occur for sufficiently small or gradual increases in temperature. By depressing temperature, ozone depletion and sulphate aerosols are expected to reduce and delay the onset of impacts from the CO2 pulse.
Climate sensitivi~ to CO 2 concentration

greater than was previously expected. As discussed previously, sulphate aerosol cooling will not significantly counteract greenhouse warming in the long term. Hence recent scientific findings on cooling from sulphate aerosols may actually increase the estimate of marginal impact per tonne of carbon emissions. The second experiment, CLIMATE2, investigates this possibility by also varying a key input parameter in PAGE: the equilibrium warming caused by a doubling of atmospheric CO2 concentration (AT2co2). Previous experiments in Hope and Maul (1996) and CLIMATE used the IPCC 1992 estimate of ATzco2 in the range 1.5 to 4.0C, with most likely value 2.5C. This figure was derived from GCMs without sulphate aerosol cooling; an increased value is appropriate for use in the PAGE95 climate model with sulphate aerosols. In the experiment CLIMATE2 ATzco2 ranges from 1.5 to 6.0C, with most likely value 3.0C. This increase in AT2co2 is conservative. From the estimates of aerosol cooling in the forthcoming IPCC report, Raper et

Nevertheless, the true implications of the scientific findings on aerosol cooling may be counterintuitive. Climate sensitivity to increased atmospheric CO 2 concentration is usually estimated from GCMs calibrated to reproduce observed temperature trends over the past century. However, by leaving out a substantial cooling factor (sulphate aerosols) GCMs probably underestimated climate sensitivity to CO 2. Therefore greenhouse warming is likely to be

Table I Total and marginal impacts in C L I M A T E experiment (1990-2200) Minimum a Mean Maximum b Net present value of impacts BAU + 100 GtC emissions (US$ trillion) BAU emissions (US$ trillion) Marginal impacts (US$ per tC)

0.9 0.8 t

2.5 2.2 3

5.5 4.6 6

aMinimum = 5 percentage points on distribution of results. bMaximum = 95 percentage points on distribution of results.

Source: PAGE95 runs.

788

PAGE95:E L Plambeck and C Hope

12 10

95% point: BAU + PULSE

sssjs SSS~S
?

. ~ . - f

6% point: B A U ~

-2 2000

2 0 2 0 2 0 4 0 2 0 6 0 2 0 8 0 2 1 0 0 2 1 2 0 2 1 4 0 2 1 6 0 2 1 8 0 2200

Figure 4 90% range and mean temperature rise above the 1990 level in the EU in the CLIMATE2 experiment by policy and yeara apulse of 100 GtC emittedfrom 1990-2020.
Source: PAGE95 runs.

of aerosol cooling in the forthcoming IPCC report, Raper et al (1995) conclude that the value of AT2co2 must be at least 4.5C to explain the observed temperature rise of 0.5C over the past century. West et al (1995) recommend a range of 2.0 to 5.5C, with a best estimate of 3.5C for AT2co2. Figure 4 shows the 90% range and mean temperature rise predicted by PAGE95 with increased climate sensitivity for each policy. Note that the level of temperature increase is highly uncertain, and that the range of possible values is large compared to the difference between policies. The marginal impact results for experiment CLIMATE2 appear in Table 2. Increased climate sensitivity to atmospheric CO 2 yields an estimated marginal impact of US$5 per tC, in agreement with Hope and Maul (1996) and 25% higher than in the previous experiment CLIMATE. We observe that cooling from ozone depletion and sulphate aerosols reduces the estimated marginal impact per tonne of carbon, but only if the temperature sensitivity to atmospheric CO 2 is not adjusted. Clearly, the marginal impact valuation per tonne of carbon may rise if, as suggested by Raper et al (1995) climate sensitivity is even greater than assumed in CLIMATE2. Expansion of the 90% range for the marginal impact per tonne of carbon, from US$2-7 per tC in Hope and Maul (1996) to US$2-12 per tC illustrates a very important point about recent scientific findings on aerosol cooling. The climate system is even more complex than was previously thought. Modellers must assess the strength of two competing phenomena, greenhouse wanning and aerosol cooling, from the historical temperature record. Therefore, although

the mean results have not changed, we can be far less certain of our calculations. The marginal impacts caused by a tonne of carbon emissions may be significantly larger than erstwhile predictions.

Regional differences in the impacts of climate change

In the third experiment, IMPACTS, PAGE95 is run as in CLIMATE2 with the addition of an updated valuation of the regional impacts of global wanning. Much of the research on valuing the impacts of climate change has focused on the USA and other OECD countries, eg EPA (1989) and CRU/ERL (1992). However, the level o f damages from global warming is expected to vary widely among geographical regions. Different areas may be more or less vulnerable to climatic change. For example, heat stress and drought are expected to be most extreme in the interior of continents, while island nations and low lying coastal areas

Table 2 Total and marginal impacts in CLIMATE2 experiment

(1990-2200)
Minimum a Mean Maximum b

Net present value of impacts BAU + 100 GtC emissions (US$ trillion) BAU emissions (US$ trillion) Marginal impacts (US$ per tC)

1. [ 0.9 2

3.7 3.2 5

8.4 7.2 12

aMinimum = 5 percentage points on distribution of results. bMaximum = 95 percentage points on distribution of results.

Source: PAGE95 runs.

PAGE95: E L Plambeck and C Hope

Table 3 Regional impact factors (as compared to the EU) for experiment IMPACTS Regions
USA OECD except USA and EU Former USSR and Eastern Europe China and centrally planned Asia India and South-east Asia Africa and the Middle East Latin America

789

Regional impact factors Minimum

0.75 0.75 ~).30 1.00 1.00 1.00 1.00

Most likely
1.20 2.20 0.00 4.00 6.60 4.50 3.30

Maximum
1.40 2.60 0.30 4.80 7.90 5.40 4.00

Source: Tol ( 1995); Fankhauser ( 1994b): CRU/ERL (1992).

such as Bangladesh will suffer most from sea level rise. Impacts are expected to be relatively large in the less developed countries due to the relative importance of climate dependent sectors such as agriculture. Furthermore, loss of life is likely to be proportionally greater in developing countries because of poor nutrition and health infrastructure. With limited financial reserves, developing countries have less capacity for adaptation. According to Fankhauser (1994c) damage to developing countries will be 50% higher than the OECD average. However, not all agree. Manne et al (1995) observe that willingness to pay to avoid noneconomic (ecological and social) damages from global warming increases with income. Therefore the valuation of non-economic damages should be higher in the developed countries. Most attempts to quantify damage have focused on the benchmark of a doubling of atmospheric CO 2 concentration and the associated temperature rise of 2.5C. PAGE95 has two uncertain input parameters representing the percentage GDP loss per 2.5C in the economic and non-economic sectors. These values are estimated for the focus region, the EU. In terms of the percentage GDP lost per 2.5C, noneconomic impacts will range from 0.3 to 3.5 with most likely value 0.7; economic impacts will range from 0.3 to 1.5 with most likely value 0.6. Economic and non-economic impacts in the other regions are computed as a multiple o f the EU values. For example, present GDP lost per 2.5C in India and South-east Asia is between 1 and 7.9 times the value for the EU, with most likely value 6.6. In some cases, benefits are expected to occur as a result of warming (eg agriculture in the former USSR). This is represented by a negative value for GDP loss (see Table 3). This valuation of impacts derives from Tol (1995), Fankhauser (1994b) and CRU/ERL (1992). The results of the experiment IMPACTS appear in Table 4. Updating the regional damage estimates yields a slight reduction in the estimated range of marginal impacts. However, the mean marginal impact increases to US$8 per tC in IMPACTS as compared to US$5 per tC in the experiment CLIMATE2, primarily due to large damages in the less developed countries.

Table 4 Total and marginal impacts in IMPACTS experiment (1990-2200) Minimum a Mean Maximum b
Net present value of impacts BAU + 100 GtC emissions (US$ trillion) BAU emissions (US$ trillion) Marginal impacts (US$ per tC)

2.8 2.5 3

6.8 6.0 8

14.2 13.0 12

aMinimum = 5 percentage points on distribution of results. bMaximum = 95 percentage points on distribution of results.

Source: PAGE95 runs.

Table 5 Total and marginal impacts in NON-LINEAR experiment (1990-2200) Minimum a Mean Maximum b
Net present value of impacts BAU + 100 GtC emissions (US$ trillion) BAU emissions (US$ trillion) Marginal impacts (US$ per tC)

1.8 1.2 6

6.7 5.9 8

16.7 14.9 18

aMinimum = 5 percentage points on distribution of results. bMaximum = 95 percentage points on distribution of results.

Source: PAGE95 runs.

Non-lineari O, in climatic impacts

We observed previously that most attempts to quantify the impacts of climate change focus on a benchmark warming of 2.5C, yet this benchmark is likely to be surpassed

within the next century. A current issue in policy analysis is how to extrapolate in order to predict damages before and after the benchmark of 2.5C. Impact are usually assumed to be a polynomial function of temperature rise with power between 1 and 3 (Nordhaus, 1993a, 1993b; Peck and Teisberg, 1993a, 1993b). A poll of experts suggest a power of 1.3 as the most likely value (Fankhauser, 1994b). In the fifth experiment, NON-LINEAR, both economic and noneconomic impacts grow non-linearly with temperature rise (recall that a linear model was used in the previous experiments). The impact function is a polynomial function of temperature rise above the tolerable level ( T - Ttd)", where n is an uncertain input parameter with minimum 1, maximum 3 and most likely value 1.3. The impact function is calibrated to give the same results as a linear function for a 2.5C temperature rise. The results for the experiment NON-LINEAR appear in Table 5. For the range of emissions we examine, non-linearity in the impact function does not change the estimated mean marginal impact of a tonne of carbon emissions. As shown in Figure 5, for temperature rise above the tolerable

790 PAGE95:E L Plambeck and C Hope

4.0
/t //

Cubic function

3.0
/ o n E3 C9 / i/ 11 II

2.0

Linear function

1.0

0 0
2 3 4

C Figure 5 Impacts by temperature rise and form of damage function a aTolerable temperature rise before impacts occur is 2C.

tion falls below the linear function. However, for large temperature rise the non-linear damage function dominates. In short, non-linearity in the damage function decreases damages in the early years but increases damages later on. In the experiment NON-LINEAR the net effect is slight. However, the introduction of an additional uncertain parameter to represent the curvature of the damage function yields an increase in the range of estimated marginal impacts. Regional economic growth and time-variable discounting Previous experiments assumed a uniform, worldwide economic growth of 2% per year and a discount rate of 5%. The fifth experiment, REGIONAL, is distinguished from NON-LINEAR by the use of time- and region-specific values for the economic growth rate taken from EMF (1994). These values appear in Table 6. Furthermore, the discount rate is time variable and linked to economic growth (see Table 7). In economic growth theory the discount rate r(t) is given by Ramsey's rule: r(t) = y.g(t) + p where y is the negative of the elasticity of marginal utility of consumption, p the pure rate of time preference, and g(t) is the per capita relative growth rate of consumption. The term y. g(t) is positive under the standard conditions that the economy grows, and that marginal utility is positive but its derivative negative (Azar, 1994, p 1256). The value y is usually set to one, corresponding to a logarithmic utility function. The per capita relative growth rate of consumption may be computed as:

d(C/P) g(t)= dt / (C/P) where C(t) is the global consumption, and P(t) the world population at time t. For experimental purposes in this study, g(t) is assumed to be equivalent to the worldwide per capita economic growth rate (ie consumption accounts for a fixed percentage of total production). A time variable discount rate should be used in climate change analysis because economic and population growth rates, and hence the value g(t), are highly variable in the long term. In particular, economic growth rates will be affected by abatement policies and warming impacts. Nevertheless, to date most global warming analyses have used a fixed discount rate, the level of which strongly conditions the results (see Haraden, 1993; Fankhauser, 1994a). The use of variable discounting based on economic and population growth rates still requires a difficult decision on the pure rate of time preference, p. The appropriate pure time preference for the study of global warming is hotly disputed. According to Azar (1994) and Cline (1992) the use of a positive pure time preference, p, is unethical because it implies that the utility of the current generation is worth more than that of future generations. However, only a positive rate is consistent with savings and interest rate data (Fankhauser, 1994b). Many global warming optimization models (Nordhaus, 1992, 1993a, 1993b; Peck and Teisberg, 1992, 1993a, 1993b; Manne et al, 1993) use a 3% rate of pure time preference, and that value is also assumed in the experiment REGIONAL. The results of the experiment REGIONAL appear in Table 8. These figures represent the PAGE95 current best estimate for marginal impacts. The extremely large increase

PAGE95: E L Plambeck and C Hope

Table 6 Regional annual economic growth rates Years 1990--2000 2000-2020 2020-2040 2040-2060 2060-2080 2080-2100 2100-2125 2125-2150 2150-2200 EU, USA 2.5 2.3 1.5 1.7 1.2 1.1 1. I 0.8 0.8 Other OECD 2.7 2.3 1.5 1.7 1.2 I. I I.I 0.8 0.8 Former USSR, Eastern Europe -1.5 4.3 3.6 2.7 2.0 2.0 1.0 1.0 0.8 Centrally planned Asia, China 4.0 3.5 3.3 3. t 3.0 3.0 2.0 2.0 1.0

791

India, South-east Asia, Africa 3.8 42 3.6 3. I 2.8 2.8 2.0 2.0 1.0

Source: EMF (1994).

Table 7 Time variable discount rate Year

1990-2000 2000-2020 2020-2040 2040-2060 2060-2080 2080-2150 2150-2200

r(t)
3.93 4.59 4.56 4.58 4.70 4.94 3.90

Source: World per capita growth rate + 3% time preference (EMF, 1994).

Table 8 Total and marginal impacts in REGIONAL experiment (1990-2200) Minimum a Mean Maximum b Net present value of impacts BAU + 100 GtC emissions (US$ trillion) BAU emissions (US$ trillion) Marginal impacts (US$ per tC)

in the valuation of marginal impact, from a mean value of US$8 per tC in NONLINEAR to a mean value of US$21 per tC in REGIONAL occurs because both economic growth and damages tend to be concentrated in the developing countries. The next two experiments, PTP2 and PTP0, are equivalent to REGIONAL except for the use of a pure rate of time preference p = 2% and p = 0%, respectively. The results of the experiments PTP2 and PTP0 appear in Tables 9 and 10. The mean value of impacts rises to US$46 and US$440, respectively. Clearly, the marginal impact per tonne of carbon emissions is highly sensitive to the choice of a pure rate of time preference. This is due to the long-term nature of the global warming problem. A pulse of CO 2 emissions affects the climate for many decades if not centuries.

5.0 4.0 10

19.8 17.7 21

45.5 40.7 48

Adaptation to climate change

The final experiment NO-ADAPT is the same as REGIONAL except that no adaptation is used to reduce the impacts of climate change. Results for experiment NOADAPT appear in Table 11. Without adaptation the estimated marginal impact per tonne of carbon is US$32 per tC, an increase ofUS$11 per tC compared to the experiment REGIONAL which assumed aggressive adaptation. Frequently in the literature impact valuations are made without stating assumptions on the degree of adaptation to climate change. The experiment NO-ADAPT demonstrates the need to clarify assumptions about adaptation in future work. Note that marginal impact estimates in this study do not consider the cost of adaptive measures. This is justified because aggressive adaptation has been shown to be optimal for both policy scenarios considered in the study (Hope

aMinimum = 5 percentage points on distribution of results. bMaximum = 95 percentage points on distribution of results.

Source: PAGE95 runs.

Table 9 Total and marginal impacts in PTP2 experiment (1990-2200) Minimum a Mean Maximum b
Net present value of impacts BAU + 100 GtC emissions (US$ trillion) BAU emissions (US$ trillion) Marginal impacts (US$ per tC)

19.0 17.0 20

58.1 53.5 46

103.5 94.1 94

aMinimum = 5 percentage points on distribution of results. bMaximum = 95 percentage points on distribution of results.

Source: PAGE95 runs.

Table 10 Total and marginal impacts in PTP0 experiment ( 19911-2200) Minimum a Mean Maximum b
Net present value of" impacts BAU + 100 GtC emissions (US$ trillion) BAU emissions (US$ trillion) Marginal impacts (US$ per tC)

Table 11 Total and marginal impacts in NO-ADAPT experiment (1990-2200) Minimum a Mean Maximum b
Net present value of impacts BAU + 100 GtC emissions (US$ trillion) BAU emissions (US$ trillion) Marginal impacts (US$ per tC)

237.0 198.0 390

965.0 921.0 440

2156.0 2058.0 980

10.0 78 22

31 I 27.9 32

69.6 64.0 56

aMinimum = 5 percentage points on distribution of results. bMaximum = 95 percentage points on distribution of results. Source: PAGE95 runs.

aMinimum = 5 percentage points on distribution of results. bMaximum = 95 percentage points on distribution of results,

Source: PAGE95 runs.

792 PAGE95:E L Plambeck and C Hope

et al, 1993). The cost of adaptation is slight compared to potential impacts from climate change. Furthermore, different policy levers are needed to influence adaptation and greenhouse gas abatement, so the incremental costs of adaptation and greenhouse gas emissions should be considered separately.

Discussions and conclusions

Our current best estimate of marginal impacts from PAGE95 is US$21 per tC, with a 90% uncertainty range of US$10-48 per tC. To put this measure into context, US$21 per tC corresponds roughly to a petroleum tax of US$2 per barrel, or a petrol tax of US 1.2 per litre. Our estimate of the marginal impact of a tonne of carbon is based on the following key assumptions and inputs. (1) An updated climate model with cooling from sulphate aerosols and ozone depletion, and increased climate sensitivity to atmospheric CO 2 concentration. Impacts grow as a non-linear function of temperature. (2) Non-economic impacts are slightly greater than economic impacts and also more uncertain. Expressed as a percentage GDP loss, both economic and non-economic damages are largest in the developing countries. Economic growth is region and time-specific. Since both climatic change impacts and economic growth tend to be concentrated in the developing countries, this increases the estimated marginal impact per tC. (3) Large amounts of adaptation to climate change, such as the building of sea walls and the prevention of development in vulnerable areas, particularly in the developed world. (4) A time variable discount rate computed as the sum of world per capita economic growth and a pure rate of time preference of 3%. The 'best' marginal impact estimate is most sensitive to assumptions about adaptation, non-linearity, and the discount rate. In the case of zero adaptation to climate change, marginal impacts rise by 50% to US$32 per tC. An important interaction effect was observed between the degree o f adaptation and non-linearity in damages as a function of temperature rise above some tolerable level. Recall that the net effect of non-linearity in the damage function is slight under aggressive adaptation because the decrease in predicted damages early in the time horizon is balanced by the increase in predicted damages later on. This trade-off is highly sensitive to the tolerable level of temperature increases before damages occur, which in turn depends on the degree of adaptation. For example, in the absence o f adaptation the tolerable level of temperature increase is assumed to be zero, as compared to 2C for the developing countries under aggressive adaptation. Non-linearity in the damage function makes a substantial contribution to the difference in marginal impacts under aggressive and zero adaptation. In a similar manner, nonlinearity in the damage function increases the importance of the discount rate.

The most influential assumption examined in this study is the discount rate. Reducing the pure rate of time preference component of the discount rate from 3% to 2% doubles the mean marginal impact to US$46 per tC. If the zero rate of pure time preference is chosen to satisfy intergenerational equity then the mean marginal impact increases by an order of magnitude to US$440 per tC. In addition to the issue of intergenerational equity, the existence of secondary benefits to CO 2 abatement suggests that our best marginal impact estimate of US$21 per tC may be conservative, even though it is at the upper end of the range of estimates in the literature (US$5-25 per tc) (Fankhauser and Pearce, 1993). Fossil fuels are the primary source, not only of CO 2, but of other air pollutants - CO, SO x, NOx, particulates and volatile organic compounds. Therefore a carbon tax to reduce fossil fuel use will incur secondary benefits in improved air quality and reduced acid rain. Furthermore, recycling the carbon tax revenues to reduce other distortionary taxes such as VAT or payroll taxes will stimulate employment and generally increase the social welfare (Barker et al, 1993). Finally, the 90% range for the marginal impact per tonne of carbon emissions found in this study, US$10-48 per tC, is very large in comparison to the uncertain range of US$2-7 estimated in Hope and Maul (1996) or the accepted range of values in the literature, US$5-25 per tC. New scientific and economic knowledge, in particular about sulphate aerosols and non-linearity in damages as a function of temperature rise, suggests that climate--human interactions are even more complex and difficult to predict than was previously thought. This increase in uncertainty is reflected in the results of our study. In conclusion, in reading any study on the valuation of global warming impacts, policy makers are advised to carefully consider the treatment of uncertainty as well as assumptions about adaptation to climate change, non-linearity in damage as a function of temperature rise, secondary benefits to CO 2 abatement, and the discount rate. We have shown that these assumptions, often hidden in the small print or not reported at all, have a profound effect upon the marginal impact calculations.

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