03 March 2010

Bias in IPCC WGIII? A Guest Post by Richard Tol, Part I

Richard Tol is a research professor at ESRI in Ireland, one of the top 175 economists in the world and a contributor to the work of the Intergovernmental Panel on Climate Change (IPCC), where his work is widely cited. In this guest post, the first of a series, Richard takes a look at parts of the IPCC AR4 Working Group III, which has largely escaped scrutiny in recent months. He concludes:
Chapter 11 of AR4 WG3 suggests that climate policy could stimulate economic growth and would create jobs. These claims are supported by gray literature only, and they are biased.
Please have a look at Richard's full discussion below. If you have questions or criticisms of Richard's analysis please submit them in the comments, I am sure that Richard will be happy to engage.
A Look at IPCC AR4 WGIII: A Guest Post by Richard Tol

The Fourth Assessment Report (AR4) of Working Group II (WG2) of the Intergovernmental Panel on Climate Change (IPCC) has been discussed extensively in recent months. A number of errors were discovered. Few documents are without fault. What is surprising, however, is that the IPCC has denied obvious mistakes; and that the errors all point towards alarmism about the impacts of climate change.

The WG3 report did not attract the same scrutiny. This could create the impression that WG3 wrote a sound report. That impression would be false. Just as WG2 appears to have systematically overstated the negative impacts of climate change, WG3 appears to have systematically understated the negative impacts of greenhouse gas emission reduction.

Part I: Climate policy could stimulate economic growth and create jobs

I will first focus on Chapter 11: Mitigation from a cross-sectoral perspective. This chapter assesses the economic costs of greenhouse gas emission reduction.

The first and second order draft of the chapter and the review comments can be found here:

The first order draft omits two crucial tables, both on the cost estimates of emission abatement. One of the key results of Chapter 11 therefore has not gone through the double review that is a hallmark of the IPCC procedures.

Section 11.4.4 has the following paragraph:
The Stern Review (2006), which was commissioned by the UK Treasury, also considers a range of modelling results. Drawing on estimates from two studies, it reports the costs of an emissions trajectory leading to stabilization at around 500–550ppm CO2-eq. One of the two studies (Anderson, 2006) calculates estimates of annual abatement costs (i.e. not the macro-economic costs) of 0.3% of GDP for 2015, 0.7% for 2025 and 1% for 2050 from an engineering analysis based on several underlying reports of future technology costs. His uncertainty analysis, exploring baseline uncertainties about technology costs and fuel prices, shows a 95% prediction range of costs from –0.5% to +4% of GDP for 2050. The other study is a meta-analysis by Barker et al. (2006a) and looks at the macro-economic costs in terms of GDP effects. The study aims to explain the different estimates of costs for given reductions in global CO2 in terms of the model characteristics and policy assumptions adopted in the studies. With favourable assumptions about international flexibility mechanisms, the responsiveness and cost of low-carbon technological change, and tax reform recycling revenues to reduce burdensome taxes, costs are lowered, and in some cases become negative (i.e. GDP is higher than baseline).
Three papers are referred to: Anderson, Barker, and Stern. None of the three was peer-reviewed. Anderson and Stern were omitted from the Second Order Draft. Barker et al. (2006) was referred in the Second Order Draft, as follows:
Research has continued to focus on differences in various cost estimates across models (Weyant, 2000; Weyant, 2001; Lasky, 2003; Weyant, 2003; Fischer and Morgenstern, 2005; Barker et al., 2006).
These prices and costs are largely determined by the approaches and assumptions adopted by the modellers, with GDP outcomes being strongly affected by assumptions about 35 technology costs and change processes (see 11.5 above), the use of revenues from permits and taxes (see 11.4 above), and capital stock and inertia (considered below) (Fischer and Morgenstern, 2006, Barker et al., 2006).
That is, in the Second Order Draft, Anderson (2006) was omitted; and the gray publication Barker et al. (2006) was used to support the peer-reviewed paper of Fischer and Morgenstern. In the published chapter, Anderson (2006) and Barker et al. (2006) are used to support the notion that “costs are lowered, and in some cases become negative”.

Section 11.8.2 reads as follows:
A number of studies point out that investments in greenhouse gas mitigation could have a greater impact on employment than investments in conventional technologies. The net impact on employment in Europe in the manufacturing and construction industries of a 1% annual improvement in energy efficiency has been shown to induce a positive effect on total employment (Jeeninga et al., 1999). The effect has been shown to be substantially positive, even after taking into account all direct and indirect macro-economic factors such as the reduced consumption of energy, impact on energy prices, reduced VAT, etc. (European Commission, 2003) The strongest effects are seen in the area of semi-skilled labour in the building trades, which also accounts for the strongest regional policy effects. Furthermore, the European Commission (2005) estimates that a 20% saving on present energy consumption in the European Union by 2020 has the potential to create, directly or indirectly, up to one million new jobs in Europe.

Meyer and Lutz (2002) use the COMPASS model to study the carbon taxes for the G7 countries. They find that recycling revenues via social security contributions increases employment by nearly 1% by 2010 in France and Germany, but much less in US and Japan. Bach et al. (2002), using the models PANTHA RHEI and LEAN, find that the modest ecological tax reform enacted in Germany in 1999–2003 increased employment by 0.1 to 0.6% by 2010. This is as much as 250,000 additional jobs. There is also a 2–2.5% reduction in CO2 emissions and a negligible effect on GDP. The labour intensity of renewable energy sources has been estimated to be approximately 10 times higher in Poland than that of traditional coal power (0.1–0.9 jobs/GWh compared to 0.01–0.1 jobs/GWh). Given this assumption, government targets for renewable energy would create 30,000 new jobs by 2010 (Jeeninga et al., 1999).

In a study of climate policies for California, Hanemann et al. (2006) report small increases in employment for a package of measures focusing on the tightening of regulations affecting emissions.
Six studies are cited to support the notion that emission reduction creates jobs. Only one of the six is peer-reviewed: Bach et al. (2002). That paper adds:
Another important assumption shaping the results relates to the way in which wage formation is modeled. In our core simulations we assume that the induced increase in employment does not trigger higher wage claims. If, instead, it is assumed that the trade unions react to employment growth by increasing their wage demands, this could significantly dampen economic growth and neutralize the positive employment effects.
That is, the positive impact of climate policy on employment is fragile.

This is indeed the conclusion of Patuelli, Nijkamp and Pels (2005, Ecological Economics, 55 (4), 564-583). Their meta-analysis was published before the AR4 deadline, but overlooked by the IPCC authors. They assess 94 estimates of the impact of ecological tax reform and find an average increase of employment of 0.64% but with a standard deviation of 1.33%. The 6 studies cited in Chapter 11 only have positive effects – Bach et al. after censoring – and are thus not representative of the literature.

Section 11.8.2 does not alert the reader to the fact that climate policy would only have a positive impact on employment if the revenues of a carbon tax or an auction of emission permits are used to reduce taxes on labour. There is no positive impact on employment if emission reduction is achieved by subsidies on renewables or if emission permits are given away for free – as is common.

Similarly, it is well-accepted in the literature that emission abatement would stimulate economic growth if policy reform is smart and well-designed. By the same token, a badly designed policy could greatly enhance the costs. Boehringer et al. (2009) estimate, for instance, that the EU 20/20/2020 package is more than twice as expensive as needed.

Chapter 11 of AR4 WG3 suggests that climate policy could stimulate economic growth and would create jobs. These claims are supported by gray literature only, and they are biased.