COMMITTEE: GA 2ECONOMIC AND FINANCIAL COMMITTEE (ECOFIN) TOPIC A: THE ROLE OF CLIMATE CHANGE ON THE GLOBAL ECONOMY

BACKGROUND Climate change is a potentially catastrophic global externality and one of the world!s greatest collective action problems. The distribution of causes and effects is highly uneven across countries and across generations. Enormous uncertainty surrounds existing estimates of future damages that may result from climate change, but these potential damages are to a considerable extent irreversible and may be catastrophic if global warming is unchecked. The costs of abating climate change also have a sunk componentthat is, cannot be fully recoveredand are contingent on a multitude of factors, including the rate at which the global economy grows over the long term and the pace at which low-emission technologies emerge and diffuse across the global economy. The discount rate chosen to aggregate damages from climate change and the costs of abating them across generations also has important implications for how various policy options are weighed by policymakers.

The macroeconomic consequences of policies to abate climate change can be immediate and wide-ranging, particularly when these policies are not designed carefully. The promotion of biofuels provides a good example. Expansion of biofuel production in the United States and western Europe in recent years has pushed up food prices and boosted inflation, creating serious problems for poor food-importing countries around the world and limiting the ability of central banks to ease monetary policy in response to recent financial turbulence. The main cause of these negative effects is the fact that advanced economies have placed trade restrictions on imports of biofuels, constraining the production of biofuels in lower-cost countries such as Brazil.

Economic estimates of the impact of climate change are typically based on damage functions that relate GDP losses to increases in temperature. The

estimates of GDP costs embodied in the damage functions cover a variety of climate impacts that are usually grouped as market impacts and nonmarket impacts. Market impacts include effects on climate-sensitive sectors such as agriculture, forestry, fisheries, and tourism; damage to coastal areas from sealevel rise; changes in energy expenditures (for heating or cooling); and changes in water resources. Nonmarket impacts cover effects on health (such as the spread of infectious diseases and increased water shortages and pollution), leisure activities (sports, recreation, and outdoor activities), ecosystems (loss of biodiversity), and human settlements (specifically because cities and cultural heritage cannot migrate). PAST UN ACTION In 2007, climate change truly became an issue of highest concern to the United Nations, because there is now the full understanding that the phenomenon will fundamentally affect the way the world operates in the twenty-first centuryfrom health care, aid and water to economic activity, humanitarian assistance, peacebuilding and security concerns. The United Nations has played a pivotal role in building the scientific consensus, raising the issue to the front pages of the world!s media and putting it in the in-tray of Heads of State and Government, as well as the chief executive officers of businesses and industries. Since February 2007, the IPCC has published three important reports, and the more than 2,000 scientists and experts of the IPCC have put an end to any doubts in the science debate.

The United Nations, through the UN Framework Convention on Climate Change (UNFCCC), has also been at the cutting edge of assisting in the development of creative new carbon markets. The Kyoto Protocol!s Clean Development Mechanism (CDM) allows developed countries to offset some of their emissions through clean and renewable energy projects and certain forestry schemes in developing countries. Over the coming years, the CDM funds flowing from North

to South will reach up to $100 billion. New high-technology industries and job opportunities are emerging in both developed and developing countries. China and India are now home to two of the biggest wind turbine and power companies. Investment in renewable energy, driven in part by the UN-brokered climate treaties, is expected to top $80 billion in 2007. It is bringing down costs and increasing opportunities for deployment in rural areas.

The missing piece in the jigsaw puzzle is a universal agreement by Governments over the steps needed to reach the 60 to 80 percent emission cuts that scientists say are required to stabilize the atmosphere. The UN role as an honest broker will be key over the next two years to realizing trust between nationstrust based on mutual self-interest and a sense that all are acting for a common cause, albeit at different speeds. The elements are already there. The European Union has committed itself to a 20-per cent reduction in GHG emissions by 2020, and up to 30 per cent if others follow. In the United States, there is growing action by cities and states; for example, the Mayor of New York City has announced a pledge to cut the city!s GHG emissions by 30 per cent. Also, over 460 mayors in the United States have pledged to cut emissions by 7 percent below the 1990 levels. California, has announced it will reduce emissions by 25 percent by 2020. QUESTIONS TO CONSIDER 1. What further initiatives can be taken to curb the amount of greenhouse gases emitted by global industries? 2. How can governments be incentivized to agree to follow and execute UN suggestions? 3. How can private industries be incentivized to agree to follow and execute UN suggestions?

FURTHER INFORMATION Climate Change and the Economy: http://www.ase.tufts.edu/gdae/education_materials/modules/The_Economics_of_ Global_Climate_Change.pdf Global Economy due to Climate Change: http://www.imf.org/external/pubs/ft/weo/2008/01/pdf/4sum.pdf How Climate Change Impacts the Economy: http://www.imf.org/external/pubs/ft/fandd/2008/03/tamirisa.htm