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Defend or attack

IPCC is convinced the climate is heating up and, consequently, extreme weather events will become the norm. But will it be better in the long run to defend ourselves against climate change and its consequences or to attack its causes? Liz Bossley investigates

The scientific consensus, set down by the Intergovernmental Panel on Climate Change (IPCC) in its Third Assessment Report, is that, if there is no attempt to curb greenhouse gas (GHG) emissions, global mean temperatures will rise by 1.4-5.8ºC, with concomitant increases in extreme weather events, by 2100.

This degree of uncertainty about the temperature change (and other climate variables) creates difficulties for policymakers. The effect of a 1.4ºC increase in mean temperature is probably manageable, but a 5.8ºC rise could be apocalyptic. The IPCC also predicts a 9-88 centimetre rise in global sea levels by 2100, caused by the expansion of seawater from warming and from glacier melting, leading to potentially major damage to natural and managed ecosystems.

Andy Kerr, an associate at the Consilience Energy Advisory Group (Ceag) says the central "problem is identifying the relative costs in the short and the long term between adaptation, or managing changing climate, and mitigation, or managing emissions. Projecting costs is difficult, especially as we can rarely agree on the basis for their measurement. Another difficulty is that we cannot predict the climate effectively or, more importantly, the changes in society that will occur with and without climate change. So, a conclusive cost-benefit analysis of adaptation versus mitigation will remain elusive."

Today, the cost of mitigation exceeds the cost of adaptation. Society and the international economy are based on the burning of fossil fuels. The task of shifting to sustainable economic development on a greener basis appears daunting, as the early experience of the European Emissions Trading Scheme (ETS) suggests.

Consequently, adaptation to extreme weather might appear preferable before the real effects of climate change begin to bite. But as time goes on, if the IPCC predictions are correct, the financial cost of adaptation will increase and far outstrip the financial cost of mitigation. The value judgements involved in comparing the human cost of droughts and floods, with the human cost to the developing countries that rely on exporting fossil fuels for survival, are such as to defy quantification by mere economists.

If the IPCC is right, could developed countries live with and adapt to the consequences, even if they were motivated on entirely selfish grounds? Says Kerr: "IPCC says it is very likely we will see, amongst other things, more flood, landslide and avalanche damage, more soil erosion, an increase in damage to building foundations caused by ground shrinkage and higher pressure on government and private flood-insurance systems and disaster relief."

At the day-to-day level, individuals in developed western economies can relate to the cost of weather-disaster insurance. Actuaries calculate insurance premia based on the probability of an extreme event occurring. Pete Davies, another Ceag associate says: "Most observations in life, from the height of school children to prices in a particular market, fit a similar structure. The mathematical representation of the distribution of these observations is called Normal, or Gaussian distribution, or the bell-shaped curve.

"If we consider the normal distribution of weather events, globally we will see lepto-kurtosis in the weather curve – fat tails" (see Figure 1). In other words, the extreme event becomes the norm.

Compensation for extremes

Insurers typically provide financial compensation for extreme events, usually beyond two standard deviations from the mean. The insurers finance the pay-out of claims with the premia paid by the majority of payers, who will experience normal weather and will, therefore, not submit an insurance claim. Says Davies: "The fatter the tails on the normal distribution curve of weather, the more claims will be submitted and the more the insurers will charge for weather protection."

The UN Framework Convention on Climate Change, and the Kyoto Protocol and the European ETS that respond to it are based on mitigation rather than adaptation. That puts the energy industry in the firing line – it is inextricably intertwined with the climate industry, with 80% of GHG emissions attributable to fossil fuel combustion (see Table 1).

The obvious response to global warming in developed countries has been to focus on reducing emissions from power generation. Coal and oil emit high levels of GHGs when burned, significantly more than gas.

Putting values on the carbon produced, if 1 megawatt hour (MWh) of power produced from coal emits 0.34 tonnes of carbon dioxide equivalent (tCO2e), a 38% efficient coal plant releases 0.9 tCO2e/MWh. If 1 MWh of power produced from gas emits 0.2 tCO2e, a 50% efficient CCGT releases 0.4 tCO2e/MWh. The price of an allowance to emit 1 tCO2e in the market at the time of writing, early May 2005, is Euro16.50/tCO2e ($21.30/tCO2e). Consequently, in terms of CO2, 1 MWh of power produced from coal costs Euro14.85, compared with Euro6.6 for gas.

Renewable sources either do not emit CO2, or its sources can be matched by equivalent sequestration (in the case of burning biomass). Because nuclear generation has no CO2 emissions projects do not qualify for the incentives provided to green projects under the Kyoto Protocol.

Ultimately, by whatever mechanism it is achieved, mitigation of climate change involves reduced use of fossil fuels. Opec countries have won few friends by challenging this premise from within. Some, notably Saudi Arabia, have signed the Kyoto Protocol and are lobbying for compensation for what could be seen as an internationally co-ordinated attack by the UN on their livelihood as an exporter of fossil fuels.

The views expressed by the comparatively wealthy Opec states apply equally to many of the lesser-developed countries that hope to use oil, gas and coal to finance economic growth. Many such countries are in areas of the world that are likely to be hardest hit by the droughts and floods forecast by IPCC. For them, adapting to climate change is not an option, because they do not have the financial resources to do so.

Liz Bossley and Andy Kerr are authors of Climate Change and Emissions Trading: What Every Business needs to Know. Liz Bossley and Pete Davies are authors of A Practical Guide to Quantitative Analysis in Energy Markets. Further details on

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