The cost of climate change: Equity weighting

In 1997, DFID's White Paper on International Development entitled Eliminating World Poverty: A Challenge for the 21st Century (HMSO 1997) pointed out that the means of subsistence for many of the world’s poor, is a cornerstone of the new policy which recognises that the “lasting eradication of poverty requires environmentally sustainable solutions” (p 18). The agenda was set for policy emphasis on shifting away from direct intervention towards, capacity building, partnerships and projects that assist the poor to manage their resource base and derive livelihoods that are sustainable. Emphasis is to be placed on grass-roots approaches to understanding local solutions for local problems working in partnership with NGOs and policymakers. There must be local ‘ownership’ of, and commitment to, programmes of external assistance for development and, to meet this end, a strengthening of national capacity to develop and implement policy interventions to eradicate poverty while at the same time encouraging ‘socially and environmentally responsible behaviour’.

There must be full participation of the communities concerned, particularly women and indigenous groups who are over-represented among the poor. Emphasis should be placed on those policies which reduce poverty, promote economic growth and conserve the environment for example, in the promotion of sustainable agriculture. Finally, pro-poor, proenvironment policies and programmes must be based on poverty and environmental assessments.

Equity weighting

Climate change is a problem that must be tackled from the global perspective due to the significant global implications of domestic action. Historically, developed countries’ industrial activities were initial cause of harmful emissions - while developing countries are competing to go along the same path at the peril of the life on planet. In this context the next generation will bear subsequent costs disproportionately. The excuse that developed world is responsible for the majority of the damage inflicted doesn’t justify further damage by the rest of the world. The rational for policies such as equity weighting requires collective consciousness on the consequences of business as usual.

Equity weighting goes some way to incorporating the full impact of our emissions on others into our policy making, which is in line with the polluter pays principle. Indeed it can be argued that, as united global action will be needed to address the climate change issue, not incorporating equity weighting risks significantly undervaluing the damages of climate change. The effect of equity weighting is that it allows welfare equivalents to be compared since a dollar to a poor man is worth more than a dollar to a rich man. Therefore, it accounts for the fact that if a poor person were to be given an amount of money, then she would value that money far more than if it were given to a person who already was very rich. There is also the issue of relative vulnerability to climate change which is related to changes in economic development in a number of ways. The majority of damages occur in regions that have per capita incomes that are below the world average. Such a result is consistent with the results of other studies.

The valuation of non-market impacts increases with per capita income. The importance of agriculture falls as per capita incomes rise, as do the incidence of malaria and the inclination to migrate. Generally therefore, it may be assumed that the social costs of carbon emissions will increase over time as a result of a combination of increasing incomes over time, and of the increasing concentration of carbon in the atmosphere. In order to draw an assessment model to calculate the cost of climate change a diverse body of information relating to economic growth assumptions, carbon emission forecasts, abatement cost estimates and global warming damage functions, and damages of increase in temperature are needed to be incorporated into one model. The social costs considered vary between the studies but generally refer to the physical impacts of climate change. For example, the impacts on agriculture, ecosystem impacts, increased mortality effects, the effects of a sea level rise, extreme weather effects, species loss and health effects such as malaria etc

The studies reviewed consent on an estimate of marginal damage figure of approximately £70/tC (2000 prices) for carbon emissions in 2000. This increases by approximately £1/tC per year in real terms for each subsequent year to account for the increasing damage costs over time.

The social cost of a tonne of carbon emissions will vary over time. It will depend on the concentration of greenhouse gases in the atmosphere, both at the time of emission and, for the length of time the carbon remains in the atmosphere.

Consequently the social cost of carbon can only be considered to be a constant when the concentration of greenhouse gases in the atmosphere stabilises. The parameter values used in deriving this estimate seem to be among those enjoying the greatest support in the literature. This figure is subject to significant levels of uncertainty. Furthermore, this figure excludes any consideration of the probability of .climate catastrophes. (i.e. melting of the West Antarctic ice sheet) and socially dependent impacts of climate change that could increase damages considerably.

These sources of uncertainty can be subdivided into those of a scientific nature, and those associated with economic valuation. Perhaps the most controversial issue to have arisen in the context of estimating the social cost of carbon has been how to aggregate the valuation of impacts across geographical regions that exhibit huge disparities in income. This is important in the context of climate change because a significant proportion of the impacts do not have a market value; therefore, willingness to pay (which depends on income) to avoid, or willingness to accept compensation to put up with the impacts, is generally used to replace their value.

DFID (1997) Eliminating World Poverty: A Challenge for the 21st Century,
London:HMSO.