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THE COST OF INACTION
- Can there be a market solution to the problem of climate change'

Climate Change 2007: The Physical Science Basis is a 21-page summary of a report prepared by Working Group I appointed by the Intergovernmental Panel on Climate Change. IPCC was set up in 1988 jointly by the United Nations Environment Programme and the World Meteorological Organization. This summary is the first important document placed in the public domain by IPCC as part of its Fourth Assessment Report on Global Climate Change 2007. The summary was adopted by Working Group I in Paris on February 2, 2007. There are also other Working Groups — II, III and IV — addressing aspects of climate change, and their reports are expected to be made available in the course of this year to complete FAR 2007.

There can be nothing but praise for such a gigantic effort carried out competently and speedily with the help of experts from so many member countries of the UN and the WMO. For promoting this effort alone, IPCC and the governments concerned deserve to be commended. I have also no doubt that this report is the most important public document on climate change at hand and would remain so for years to come. As it happens, its importance has been heightened by the fact that FAR 2007 shows substantial methodological advance in assessment techniques over IPCC’s Third Assessment Report on Global Climate Change (TAR 2001) presented six years ago.

The report has to be carefully studied and discussed from all angles not only by policy-makers but also by ordinary people all over the globe, for it concerns everybody. But the human problem is complicated by the fact that climate change is a global concern like bird flu, but unlike a pandemic, it hits different peoples and regions of the earth unequally, in different ways and different time-frames.

Over the past few days, the report has attracted much media attention abroad and moderate attention in India, too. Many of the comments are from deeply concerned individuals. Some of these, as expected, are premeditated shots from experts. But some others show growing interest in people who are now made aware of the “whodunit” question of global warming (do humans have a decisive role in it'). I would strongly recommend to all who feel intrigued — and most of us must be — that they go to the full text of this extremely reader-friendly summary made available on February 2, 2007 itself on BBC news (02_02_07_ climatereport.pdf). I have tried to give you only a glimpse of the report to draw your attention to an elementary issue in economics that usually goes unattended by our experts.

FAR 2007 depended on many fresh observations and new methodological techniques to relate the modelling of the greenhouse gases, solar activity, land surface properties and some aspects of aerosols. The main gains were in the quantitative estimates of what scientists call “radiative forcing”. This term has been defined as a measure of the influence that a studied factor is calculated to have in altering the balance of incoming and outgoing energy in the earth-atmosphere system. It is an index of the importance of the factor as a potential climate-change mechanism. Positive forcing tends to warm the surface while negative forcing tends to cool it. With the newer box of tools, scientists can use definitive language in assessing climatic changes, and pointing to the role of the human hand in that change, than they previously could.

Here are a few examples. In the third assessment report, TAR 2001 IPCC had said that it was “likely” that human activities lay behind the trends observed at various parts of the planet; “likely” in IPCC terminology means between 66 per cent and 90 per cent probability. Now, the panel says it is at least 90 per cent certain that human emissions of greenhouse gases rather than natural variations are warming the planet’s surface.

They now project that temperatures would probably rise by between 1.8O Celsius and 4O Celsius. In TAR 2001, on the basis of a less definitive methodology, the numbers given had been 1.4O C and 5.8O C.

On sea level, FAR 2007 now projects an average rise in sea levels globally of between 28 and 43 centimetres. TAR 2001 had suggested a range of nine to 88 cm. Importantly, IPCC adds the following: computer models of climate do not generally include water coming into the oce- ans as ice caps melt. So the IPCC had to exclude from its calculations the effect of this process that scientists do not yet understand well in quantitative terms. But this clearly could have a big impact. As for climate change influencing the intensity of tropical storms in some areas of the world, the IPCC concludes it was likely — implying a greater probability than 66 per cent — that rising temperatures were a factor.

Let me now come to three important expert’s comments on FAR 2007. Susan Soloman, joint lead author of the summary: “We can be very confident that the net effect of human activity since 1750 has been one of warming.” Achim Steiner, executive director of the United Nations Framework Convention on Climate Change, the agency that oversees the operation of the Kyoto Treaty: “The report would galvanise national governments into action. If you are an African child born in 2007, by the time you are 50 years old you may be faced with disease and new levels of drought.” More significantly, India’s Rajendra Pachauri, director general of the Tata Energy Research Institute and current chairman of IPCC: “The options for mitigating greenhouse gas emissions appear in a different light, because you can see what the costs of inaction are.”

I am at one with all these sentiments. But as a welfare economist (currently an endangered species), I must confess I really cannot see what the costs of inaction are. Or rather, if I see at all, I only “see through a glass, darkly”. For effective costs, like effective demand, are countable only when they are revealed. If the market does not see the cost, no action can be taken to recover it without breaking the market rules of the game.

A.C.Pigou (The Economics of Welfare, 1920) first devised a way of counting the “social cost” of an economic activity (say, running the furnace in a mill) by looking at the pollution that resulted from the smoke going up the chimney, dirtying, among other things, people’s shirt collars and increasing their laundry bills. That additional cost was part of the social cost that would not be covered by the perpetrator unless the state charged the mill. And so on. He was being both novel and clever. But that was nearly ninety years back. Pigou was not thinking then of the damage caused to an unborn generation, transacting in markets of the future, featuring currently unknowable relative costs. If he did, he would perhaps be as puzzled as I am.

In the Kyoto and other protocols, one sees mainly processes calculated to calm the nerves of worried governments, but hardly designs to satisfy both buyer and seller of an identifiable good — a requirement that almost defines a market transaction. As it happens, the world’s richest and strongest country, where much of the pollution is generated, declines to enter any protocol to curtail the progressive destruction of even its own non-replaceable petroleum resource. It rightly considers its billions spent on and in poorer countries as ample compensation. Also, and expectedly, the world’s two most populous countries rightly decline to coerce impoverished people to stop cutting down trees for fuel and shelter, or killing off wild fauna for survival.

Scientists may have proved conclusively that humans are damaging the prospects of their own future generations in both situations. But since Nature does not allow people several generations lower down to compensate their departed forefathers for bearing the losses today, and nobody living today finds much reason to do so either, I do not see how a market solution to the problem of climate changes over time can exist, leaving aside the question of that solution also being stable.

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