Cost of Inaction and Resource scarcity: Consequences for Long-term Economic growth (CIRCLE)

C CIRCLE

Costs of Inaction and Resource scarcity: Consequences for Long-term Economic growth POLICY PERSPECTIVES

Cost Cons

“mining� by marvin, 2011 (Creative Commons)

THE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 35 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies.

CONTENTS: The OECD’s CIRCLE project

2

The modelling philosophy

4

The economic consequences of climate change

6

The international trade consequences of climate change

9

The economic consequences of outdoor air pollution

10

The biophysical and economic consequences of land-water-energy nexus

14

Resource scarcity and critical materials

16

Loss of biodiversity and ecosystems

18

Water scarcity

19

CIRCLE publications

20

C

C

2 . THE OECD’S CIRCLE PROJECT

1

The OECD’s CIRCLE project

Further degradation of the environment and natural capital compromises future economic growth and human well-being. Without more ambitious policies, the costs and consequences of inaction on important environmental challenges such as climate change, biodiversity loss, water scarcity and health impacts of pollution will be significant.

The “Cost of Inaction and Resource Scarcity; Consequences for Long-term Economic Growth” (CIRCLE) project identifies how feedbacks from poor environmental quality, climate change and natural resource scarcity may affect economic growth in the coming decades.

CIRCLE has generated quantitative projections for economic growth which reflect the costs of policy inaction on climate change, outdoor air pollution and other environmental issues. These reference projections

CIRCLE

Costs of Inaction and Resource scarcity: Consequences for Long-term Economic growth

improve OECD projections of “baseline” economic growth, as well as assessments of the economics of environmental policies. They highlight the economic rationale for stringent climate and pollution policies, and the need to anticipate resource bottlenecks in economic planning. Detailed assessments of the diverse links between economic activity and environmental feedbacks allow a more informed evaluation of policy options, and a comparison of the costs and benefits involved in environmental policy making.

CI

Costs o Conseq

POLICY PERSPECTIVES

THE OECD’S CIRCLE PROJECT . 3

4 . THE OECD’S CIRCLE PROJECT

2

The modelling philosophy

While a certain amount of environmental degradation is already happening, the range of possible outcomes over the course of this century and beyond is very wide. A modelling analysis of the economic consequences of environmental damages at a global level can offer clear insights into the big picture: the direction of change and the interactions that they induce in the economic system.

The core tool used for the CIRCLE project is the OECD’s dynamic global multi-sector, multi-region model ENVLinkages, which is coupled to biophysical and other impact models for an integrated assessment. Using a systems approach allows detailed assessments of how environmental feedbacks affect the economy at global, regional, macroeconomic and sectoral levels.

The modelling approach is to specify the effects of a selected set of environmental impacts on the drivers of economic growth, such as the productivity and supply of specific production factors, as well as changes in consumer demand and international trade; this is called the production function approach. This entails a closed loop of interacting model calculations (see Figure).

First, baseline socioeconomic projections are used to calculate environmental pressures and – using external models –the resulting greenhouse gas and air pollutant concentrations, temperature change and other environmental indicators such as carbon

Source: W

stocks. Secondly, these are used to calculate a set of biophysical impacts, such as changes in crop yields and labour productivity losses. Thirdly, the biophysical impacts are fed into the ENV-Linkages model to assess the implications for different economic activities and the overall macroeconomic costs. This approach allows teasing out the direct and indirect consequences of environmental damages for the global and regional economy. To create a balanced picture, the modelling analysis is complemented with more general qualitative assessments of the other major consequences of policy inaction.

This modelling philosophy is used in full in the assessments of the economic consequences of climate change, outdoor air pollution and the land-water-energy nexus. The economic consequences of water scarcity, loss of biodiversity and ecosystem services and resource scarcity are more difficult to quantitatively assess in an economic framework and are therefore not fully scoped out with modelling analysis.

Figure 1: Linking economic and environmental impact models

Economic model Projects sectoral and regional economic activity, and projects corresponding environmental pressure (such as emissions)

Assessment of economic consequences Links biophysical impacts to changes in economic variables (such as changes in productivity of production factors)

Environmental model Links environmental pressure to indicators of the state of the environment (such as temperature change, pollutant concentrations, ...)

Impact models Links environmental indicators to (sectoral) biophysical impacts (such as changes in crop yields or incidence of illness)

POLICY PERSPECTIVES

THE MODELLING PHILOSOPHY . 5

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The economic consequences of climate change

Climate change is causing impacts that are already affecting the economy at present and will increasingly do so in the future. Different impacts will affect different parts of the economy (such as labour productivity from reduced health and loss of land from sea level rise), causing adjustments on all markets through production and trade changes The report The Economic Consequences of Climate Change (OECD, 2015) uses the ENV-Linkages model to quantify the macroeconomic costs of a set of climate impacts that affect the economy, including agriculture, coastal zones, some extreme events, health, energy and tourism demand, but it also highlights a number of other major consequences that climate change may cause in the future. This detailed global analysis until 2060 is complemented by more stylised integrated assessment modelling of post-2060 economic impacts, using the ADRICE model.

MAIN MESSAGES ON ECONOMIC CONSEQUENCES l In almost all regions, market consequences from

climate change are projected to be negative, and there are significant non-market impacts and downside risks of tipping points and very severe impacts. l The macroeconomic costs from selected market

impacts alone amount to 1.0 to 3.3% annually by 2060 (see Figure) and 2 to 10% of annual Gross Domestic Product (GDP) by the end of the century in the absence of new policies. This is driven by a continued build-up of greenhouse gas concentrations, which are projected to lead to a global average temperature increase of 1.6-2.6˚C by 2060 and 2.5-5.5˚C by the end of the century in absence of new policies.

Figure 2: Global and regional changes in GDP from selected climate change impacts Percentage change 0%

OECD Europe OECD Pacific OECD America

-1% Latin America

World Rest of Europe & Asia

-2%

-3% Middle East & North Africa South & South -East Asia Sub-Saharan Africa

-4%

-5%

-6%

-7% 2010

2020

2030

Source: OECD (2015), The economic consequences of climate change.

2040

2050

2060

Uncertainty ranges in 2060 due to uncertainty in ECS

Figure 3: Attribution of macroeconomic consequences to selected climate change impacts

2035

2060

Source: OECD (2015), The economic consequences of climate change.

Tourism demand

Agriculture

Coastal zones

l Of the impacts included in the analysis, changes in

crop yields and in labour productivity are projected to affect the economy most strongly, causing losses to annual global GDP in 2060 of 0.8% and 0.9%, respectively (see Figure), and several percent in the most vulnerable regions. “dry_land-wallpaper-3840x2160� by mehmet canli, 2015 (Creative Commons)

l Net economic consequences are projected to be

negative in 23 of the 25 regions modelled in the analysis. They are especially large in Africa and Asia, where the regional economies are vulnerable to a range of different climate impacts, such as heat stress and crop yield losses. Macroeconomic costs in most countries in these regions by 2060 are projected to be between 1.5% and 6.5% of GDP. In countries in higher latitudes, i.e. Canada and Russia, the net economic benefits are projected to outweigh the negative impacts, at least in the coming decades.

Energy demand

Extreme precipitation events

Health

l Climate impacts affect all sectors in the economy

through important indirect effects, not least through the relocation of labour and capital, and represent a systemic risk to the global economy. l The macroeconomic consequences of climate change

are fundamentally non-linear: they increase more than proportionately with temperatures. Uncertainties in the economic and climate system imply a risk that macroeconomic costs from market impacts alone run into the double digits well before the end of the century. l Once greenhouse gases are emitted, they will have

unavoidable and enduring effects on the climate and economy for a century or more, thereby permanently locking the world into higher impacts and a stronger downside risks (see Figure). Together, this implies a strong call for ambitious policy action both on mitigation and on adaptation.

POLICY PERSPECTIVES

THE ECONOMIC CONSEQUENCES OF CLIMATE CHANGE . 7

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Figure 4: Global changes in GDP from selected climate change impacts in the very long run Percentage change

0%

-2%

-4%

-6%

-8%

-10%

-12%

Likely uncertainty range - Full damages Likely uncertainty range - Committed by 2060

Central projection - Full damages Central projection - Committed by 2060

Weitzman damage function Source: OECD (2015), The economic consequences of climate change.

-14% 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100

MAIN MESSAGES ON POLICIES l Ambitious adaptation and mitigation policies can

reduce the future costs of climate change, but – perhaps more importantly – also limit the downside risks associated with high impacts and crucial tipping points.

However, if only adaptation policies are adopted, total climate change costs are substantially higher than when only mitigation policies are adopted. To keep costs as low as possible, stringent mitigation action needs to be complemented by ambitious adaptation policies, while acknowledging that the remaining biophysical impacts will still lead to relatively minor economic changes in the economic system. l The benefits of adaptation policies, from a reduction

in the selected market impacts alone, may amount to more than 1 percentage point of GDP by the end of the century. If barriers to adaptation are strong, the costs of climate change can even double. l Early and ambitious mitigation action can help

economies avoid half of the macroeconomic consequences by 2060 and could reduce projected reductions of global GDP from 2-10% to 1-3% of global GDP by the end of the century. It can also reduce the risk of triggering the worst negative long-term consequences

of climate change. Less ambitious mitigation policies in the first decades will have lower short-term costs, but lead to higher long-term risks. Despite the potential of mitigation to limit emissions, significant impacts from climate change are projected to persist in vulnerable regions, such as in most countries in Africa and Asia. l Mitigation policies will reduce the negative impacts

of climate change on all economic sectors, yet the costs of these policies will not be borne by all sectors proportionally to their expected benefits. The mitigation policy leads to a shift in the structure of the economy towards more services.

4

The international trade consequences of climate change

The report The International Trade Consequences of Climate Change directly builds on the CIRCLE report on the economic consequences of climate change (OECD, 2015) and provides an analysis of how climate change damages will affect international trade in the coming decades and how international trade can help limit the costs of climate change. It analyses the impacts of climate change on trade considering both direct effects on infrastructure and transport routes and the indirect impacts resulting from changes in endowments and production.

Figure 5: Regional changes in international trade from selected climate change impacts Percentage change

1% Exports

Imports

Canada

Middle East & North Africa

Other Lat.Am. Brazil Mexico China

Indonesia

0% EU Other OECD Other Europe OECD Asia -1% USA

Australia & New Zealand

-2%

Other Asia

Sub-Saharan Africa

-3%

ASEAN 9

Increased competitiveness -4%

Caspian region India

-5% -6%

Decreased competitiveness -7%

-8% -5%

-4%

-3%

-2%

Source: Dellink, et al. (2016), The international trade consequences of climate change

The regional changes in comparative advantage are driven by complex interactions in the economic system, where all sectors in all regions are intricately tied together and where climate damages affect all parts of the economy. Countries that have larger domestic markets and more diversified trade patterns can absorb climate shocks better than countries that are more specialised. In the most affected countries exports are projected to decline more than imports and GDP and this will weaken their trade position. In contrast, producers in the least affected countries can improve

-1%

0%

1%

2% Change in GDP

their competitive position on both domestic and export markets (see Figure). Therefore, despite being negatively affected by climate damages, a region may increase its competitiveness if other competitors for a certain market are more severely damaged, or may decide to specialise in the production of other goods.

This highlights the need for each region to understand the direct impacts of climate change on their sectoral production and on their trade flows, but also the possible impacts of climate change on regions they are competing with for specific markets.

POLICY PERSPECTIVES

THE INTERNATIONAL TRADE CONSEQUENCES OF CLIMATE CHANGE . 9

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The economic consequences of outdoor air pollution

Air pollution is one of the most serious environmental risks. The most recent Global Burden of Disease (GBD) study estimates that air pollution – indoor and outdoor combined – was the cause of 5.5 million premature deaths globally in 2013.

Air pollution also has further consequences on human health, leading in particular to an increasing number of respiratory and cardiovascular diseases. Moreover, it affects crop yields and the environment, with impacts on biodiversity and ecosystems, amongst others. These impacts have significant economic consequences, which will affect economic growth as well as welfare.

The report The Economic Consequences of Outdoor Air Pollution presents projections of the costs of outdoor air pollution, focusing on impacts on human health, including both mortality and morbidity, and agriculture (see Figure). Both the consequences for the economy, using the ENV-Linkages model, and the welfare costs from premature deaths and pain and suffering, using stand-alone calculations, are quantitatively assessed.

Direct costs

Direct costs Direct costs

Disutility of illness

Health expenditure

Labour productivity

Indirect costs

Indirect costs Indirect costs

Mortality

Agricultural yields

“Chinese’s masks” by Nicolò Lazzati, 2009 (Creative Commons)

Figure 6: Selected cost categories of outdoor air pollution

MAIN FINDINGS l In absence of additional and more stringent policies,

increasing Gross Domestic Product (GDP) and energy demand will lead to a significant increase in global emissions of air pollutants, according to projections using the OECD’s ENV-Linkages model. l Rising emissions lead to increasing concentrations

of particulate matter (PM2.5) and ground level ozone (see Figure). In several areas, average concentrations of PM2.5 and ozone are already well above the levels recommended by the WHO Air quality guidelines. l

The projected increase in concentrations of PM2.5 and ozone will lead to substantial effects on the economy. According to the calculations in this report, air pollution-related healthcare costs are projected to increase from USD 21 billion (using constant 2010 USD and PPP exchange rates) in 2015 to USD 176 billion 2005 in 2060. By 2060, the annual number of lost working days, which affect labour productivity, are projected to reach 3.7 billion (currently around 1.2 billion) at global level.

l The market impacts of outdoor air pollution, which

include labour productivity, health expenditures and agricultural crop yields, are projected to lead to global economic costs that gradually increase to 1% of global GDP by 2060 (see Figure).

Figure 7: Concentrations of outdoor air pollutants Particulate matter

Ozone

2010

2010

2060

2060

Source: OECD (2016), The economic consequences of outdoor air pollution.

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THE ECONOMIC CONSEQUENCES OF OUTDOOR AIR POLLUTION . 11

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Figure 8: Global changes in GDP from selected air pollution impacts

Source: OECD (2016), The economic consequences of outdoor air pollution.

Percentage change 0%

-0.20%-

-0.40%-

-0.60%-

-0.80%Agriculture

Health expenditure

Labour productivity

All

-1.00%-

-1.20%-

2015

2020

2025

2030

2035

2040

2045

2050

Figure 9: Premature deaths from exposure to particulate matter and ozone

2055

2060

Source: OECD (2016), The economic consequences of outdoor air pollution.

Number of deaths caused by outdoor air pollution per year per million people

2500 2060, non-linear

2060, nonlinear

2010, based on GBD

2000

1500

1000

OECD America

OECD Europe

OECD Pacific

Rest of Europe & Asia

l The most dangerous consequences from outdoor air

pollution are related to the number of premature deaths. This report projects an increase in the number of premature deaths due to outdoor air pollution from approximately 3 million people in 2010, in line with the latest Global Burden of Disease estimates, to 6‑9 million annually in 2060 (see Figure). A large number of deaths occur in densely populated regions with high concentrations of PM2.5 and ozone, especially China and India, and in regions with aging populations, such as China and Eastern Europe.

Latin America

Middle East & N. Africa

South & Southeast Asia

Other Africa

South Africa

Other Asia

India

Indonesia

ASEAN 9

North Africa

Middle East

Other Lat. Am.

Brazil

Other Europe

Caspian region

Russia

Non-OECD EU

China

Korea

Japan

Aus. & NewZ.

Other OECD

Other OECD EU

EU large 4

USA

Mexico

Chile

0

Canada

500

Sub-Saharan Africa

l The annual global welfare costs associated with

the premature deaths from outdoor air pollution, calculated using estimates of the individual willingness-to-pay to reduce the risk of premature death, are projected to rise from USD 3 trillion in 2015 to USD 1825 trillion in 2060 (see Figure). In addition, the annual global welfare costs associated with pain and suffering from illness are projected to be around USD 2.2 trillion by 2060, up from around USD 300 billion in 2015, based on results from studies valuating the willingness-to-pay to reduce health risks.

OECD 2015

2060

2015

2060

90

390

330

3 300

0.3%

0.5%

0.6%

1.5%

70

270

50

330

1 550

3 750-3 850

3 440

20 540-27 570

5%

5%

6%

9-12%

1 210

2 610-2 680

470

2 060-2 770

TOTAL market impacts (billions USD)

Share of income (percentage)

Per capita (USD per capita)

TOTAL non-market impacts (billions USD)

Share of income (percentage)*

Per capita (USD per capita)

World

l Policies to limit air pollution emissions would lead to

an improvement in air quality, reduce risks of very severe health impacts, and, if properly implemented, generate considerable climate co-benefits. l The potential economic consequences of both the

market and non-market impacts of outdoor air pollution are very significant and underscore the need for strong policy action. l There’s no one-size-fits-all recipe for reducing the

impacts of air pollution. As both the sources of air pollutant emissions and the economic consequences of air pollution are very unequally distributed across different regions, policies need to be tailored to specific local circumstances. Nevertheless, the implementation of policies, such as incentivising the

adoption of end-of-pipe technologies, implementing air quality standards and emission pricing, will certainly help avoid the worst impacts of outdoor air pollution.

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THE ECONOMIC CONSEQUENCES OF OUTDOOR AIR POLLUTION . 13

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The biophysical and economic consequences of the land-water-energy nexus

Economic activity is supported by environmental resources in many ways. One important link between the economy and the environment is through the use of scarce land, water and energy resources. Land, water and energy are essential for economic growth and development, and there are strong linkages between these three environmental resources (the nexus). Bottlenecks in the use of these resources may limit economic growth.

The focus of the report The Biophysical and Economic Consequences of the Land-Water-Energy Nexus is on a dynamic, integrated, and disaggregated analysis of how land, water and energy interact in the biophysical system and the economic system (see Figure). The land-water-energy nexus is modelled through linking the Netherlands Environment Assessment Agency PBL’s spatially explicit biophysical IMAGE model with OECD’s ENV-Linkages model. Different scenarios with a time horizon until 2060 are simulated to analyse the interconnections of bottlenecks related to the nexus.

This approach allows to capture additional mutual influences compared to an assessment which looks at resources individually. Many consequences are very local in time and space. Furthermore, there are significant data gaps and limitations to the modelling tools that prevent an adequate representation of the nexus issues in the modelling frameworks. Nonetheless, the modelling analysis and anecdotal evidence together can shed light on the key elements in the nexus and how they affect the economy.

Figure 10: Key interactions in the land-water-energy nexus

Policy objectives (III) Welfare

Food security

Env. quality

Economic activities (II)

Energy Resource (I)

Water pumping, fertiliser production, field preparation, harvest

Water security

Biomass for biofuel Land use

Agriculture

Socioeconomic drivers Demographic & economic trends

Rain-fed & irrigated crops

Pumping, processing, desalination

extraction

Land

Energy security

Energy Power generation, fossil fuel extraction & processing

Water

(power plant discharges, fracking...)

Water

Fertiliser pollution

Climate change Temperature Rainfall

Megatrends

Policies Climate change mitigation Energy, water regulation

Figure 11: Regional groundwater depletion

Large, unsustainably used aquifer (depleted 2050)

Local aquifers (depleted in 2040)

Large aquifers (not depleted)

Minor groundwater resources

MAIN FINDINGS l There is no clear evidence of an absolute scarcity

of nexus resources. The impacts from land-waterenergy-bottlenecks vary by a great extent across regions and time periods. The main problem is not the global availability of resources, but having them available at the right time in the right place.

Source: Durand-Lasserve et al.

(2016), The biophysical and economic consequences of the land-water-energy nexus.

l The ability of international trade to smoothen

regional differences in demand and supply is a powerful tool to mitigate the consequences of local bottlenecks. The tradability of goods is therefore one of the most important factors to consider when assessing the impacts of bottlenecks. l The nexus resources are significantly affected by

l Availability of (clean) freshwater regionally seems to

be the main bottleneck in the nexus. Unlike energy security and food security, regional bottlenecks in water security (see Figure) are difficult to manage through international trade and transportation. l Specific bottlenecks, not least those related to water

stress, can have significant economic impacts in specific regions that already have a high vulnerability in food, water and energy security, but the effects on the global economy are minor. This does not mean that the nexus bottlenecks are without serious consequences: a shock in one specific sector in one specific region tend to cause a ripple effect throughout the economy and on other economies.

climate change. Substitution patterns between resources can re-inforce the links with climate change, especially when fossil fuel based energy is used for water supply, or when land extensions for agriculture involves deforestation. But these linkages also represent indirect costs and benefits for climate change policies. l Uncertainty of supply can lead to significant costs to

the system, and the macroeconomic costs of the nexus bottlenecks will only be low if they are well-managed.

Uncertainty in the availability of the nexus resources at the right time in the right place has to be seen as one of the main contributor to the cost of the nexus. l The bottom line is therefore that negative economic

l There are (limited) possibilities to substitute away

from one particularly scarce resource to the other resources. But markets for land, water and energy are not perfect, and price signals are often distorted.

Therefore, the relative scarcity of the different resources is not adequately projected through their prices, and private actions do not minimise social costs.

consequences of the nexus bottlenecks tend to be concentrated in those countries that show strong bottlenecks in those economic activities that cannot be substituted or imported. Specifically, regions with strong decreases in crop yields and higher production costs and that are neither able to trade the most affected crops nor substitute them with other goods within their region are particularly affected.

POLICY PERSPECTIVES

THE BIOPHYSICAL AND ECONOMIC CONSEQUENCES OF LAND-WATER-ENERGY NEXUS . 15

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Resource scarcity and critical materials

Raw materials are essential for the global economy and future development depends on their continued supply. Like fossil fuels, minerals are non-renewable. In general, they are available in geographically clustered areas, making security of supply a potential risk In many cases, the exhaustion of economically competitive minerals deposits in industrialized countries has made supplies increasingly dependent on the political stability of mineral-rich emerging economies. At the same time, increasing demand from these emerging markets, new technologies that require large amounts of rare minerals, low substitutability in applications and low rates of recycling have made economies more vulnerable to potential supply disruptions.

The report Critical Materials Today and in 2030 performs for the first time an analysis of critical minerals for the OECD countries as a whole. In addition, this is done not only today, but also in 2030, in order to form an initial picture of how possible trends in economic development will affect which minerals are critical in the long-run future (see Figure). While the non-renewable nature of minerals is an eventual constraint on what can be extracted, reserves are generally large and market mechanisms work to alleviate the problem. Potential disruptions are instead perceived

to come from the nexus of production concentration and geopolitical risks.

The analysis identifies around 12 to 20 minerals or minerals groups, which are critical in the OECD today (see Figure). Minerals like the rare earth elements (heavy and light), germanium and natural graphite have a particularly high supply risk, while minerals such as barytes, tungsten and vanadium are particularly economically important.

Looking out to 2030, a stronger role is assumed for the physical availability of reserves in determining where production takes place, which results in increased supply risk for barytes, borate, phosphate rock and molybdenum.

Lastly the report shows what improvements in the substitutability of minerals and in their recycling rates would be sufficient today and more importantly by 2030 to mitigate supply risks and vulnerability to them. The results are highly mineral-specific, with some minerals requiring huge increases in substitutability and/or recycling from a low base, while others require only small improvements.

Figure 12: Determining criticality of materials Concentration of production

CRITICALITY AREA SUPPLY RISK

Concentration of reserves Political stability

Substitutability

Recycling ECONOMIC IMPORTANCE Breakdown by end-use sectors

Source: Coulomb et al. (2015), Critical minerals today and in 2030: an analysis for OECD countries.

Value added of end-use sectors

Figure 13: The criticality of selected minerals

5

Source: Coulomb et al. (2015), Critical minerals today and in 2030: an analysis for OECD countries.

REE (Heavy

4 Germanium Natural graphite REE (Light)

Supply risk

3

Niobium Magnesium

Antimony Cobalt

2

Fluorspar Magnesite

Tungsten

Silicon metal

Indium

Barytes Beryllium Gallium Chromium Borate PGMs Scandium Vanadium Molybdenum Iron ore Rhenium Coking coal Tin Lithium Manganese Zinc Aluminium Tantalum Gypsum Bauxite Tellurium Feldspar Bentonite Hafnium Limestone Diatomite Perlite Silica sand Nickel Selenium Talc Silver Clays Gold Copper Potash Titanium Phosphate rock

1

0 0.02

0.04

0.06

0.08

Economic importance

0.1

0.12

POLICY PERSPECTIVES

RESOURCE SCARCITY AND CRITICAL MATERIALS . 17

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8

Loss of biodiversity & ecosystems

The links between biodiversity and ecosystem services and the economic and social values that they support are extremely complex.

These linkages between ecosystems and the economic system need to be better understood, ideally by integrating ecosystem functions into traditional economic models. A full integration of the costs of a loss of biodiversity and ecosystem services into the economic modelling framework is beyond the reach of the project.

Species are estimated to be going extinct at rates 100 to 1000 times faster than in geological times. Globally, terrestrial biodiversity is projected to decrease by a further 10% by 2050. As with biodiversity, the planet has also experienced major losses in the services derived from ecosystems. While there is a large and growing literature on the values associated with the services that ecosystems provide, much less has been done in analysing the causality in the other direction – i.e. in assessing the linkages from changes in ecosystem services to the functioning of the economy.

The report The Economic Feedback of Loss of Biodiversity and Ecosystem Services looks at the economic consequences of the loss of biodiversity and ecosystem services. It does so by reviewing the main findings in the literature and key issues involved in the valuation of biodiversity and ecosystems services, as well as key issues involved in linking loss of biodiversity and ecosystems services to economic activity. It highlights that the economic significance of biodiversity and ecosystem services is potentially very high, but that it is not clear how individual sectors depend on these services. The report finishes by identifying that there are very significant obstacles in including biodiversity and eco-system services into a large-scale economic modelling framework. Nonetheless, meaningful steps can be made in the representation of a number of specific ecosystem services that are more closely linked to economic activity, such as those provided by agriculture, fisheries and forestry.

9

Water scarcity

Global freshwater demand is projected to increase substantially in the coming decades, making water one of the fiercest contested resources on the planet. Water is linked to any economic activities, and there are complex channels through which water affects economic growth. .

The report Implications of Water Scarcity for Economic Growth provides a detailed review of the literature on water, water scarcity, sectoral activity and economic growth, and identifies the possibilities and bottlenecks in incorporating water use into a CGE framework. It covers agricultural water consumption, with special attention to irrigation, water use in energy production, and demands for water by households, industry and services. Finally, it discusses water supply and allocation. Throughout the report, it provides background information useful for a quantitative global assessment of the impact of water scarcity on growth using a large-scale economic modelling framework (see Figure).

Based on the evidence assembled, there appear to have been relatively few instances in which water scarcity has significantly slowed the long term rate of national economic growth. Furthermore, in reviewing the literature on water demand, the ample opportunities for

conserving water across the board are striking, including in the electric power sector, the production of industrial steam, residential consumption, and irrigated agriculture.

The report argues that the main reason why such substitution has not been more widespread to date is due to the absence of economic incentives for conservation.

The presence of large inter-sectoral distortion heightens the need for general equilibrium analysis. But implementation of a global general equilibrium (CGE) model with detailed representation of water demand and supply will be a significant undertaking, and is beyond the scope of the CIRCLE project. It is essential to break out water from the other inputs in the CGE model, treat water as both an input and an output, and add sectoral detail, with special attention to crop irrigation. Furthermore, there are challenges in assigning appropriate values to water and specifying allocation rules for dealing with water scarcity.

POLICY PERSPECTIVES

WATER SCARCITY . 19

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CIRCLE publications

Alberini, A., A. Bigano, J. Post and E. Lanzi (2016), “Approaches and issues in valuing the costs of inaction of air pollution on human health”, OECD Environment Working Papers, No. 108, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jlww02k83r0-en Coulomb, R., S. Dietz, M. Godunova and T. BligaardNielsen (2015), “Critical Minerals Today and in 2030: An Analysis for OECD Countries”, OECD Environment Working Papers, No. 91, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jrtknwm5hr5-en Dellink, R., E. Lanzi, J. Château, F. Bosello, R. Parrado and K. de Bruin (2014), “Consequences of Climate Change Damages for Economic Growth: A Dynamic Quantitative Assessment”, OECD Economics Department Working Papers, No. 1135, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jz2bxb8kmf3-en Dellink, R., H. Hwang, E. Lanzi and J. Chateau (2016), The International Trade Consequences of Climate Change, forthcoming.

Durand-Lasserve, O., F. Hellmann, J. Chateau, R. Dellink and T. Kram (2016), The Biophysical and Economic Consequences of the Land-Water-Energy Nexus, forthcoming.

Hertel, T. W. and J. Liu (2016), “Implications of Water Scarcity for Economic Growth”, OECD Environment Working Papers, No. 109, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jlssl611r32-en Markandya, A. (2015), “The Economic Feedbacks of Loss of Biodiversity and Ecosystems Services”,OECD Environment Working Papers, No. 93, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jrqgv610fg6-en OECD (2016), The Economic Consequences of Outdoor Air Pollution, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264257474-en OECD (2015), The Economic Consequences of Climate Change, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264235410-en.

OECD (2012), OECD Environmental Outlook to 2050: The Consequences of Inaction, OECD Publising, Paris, http://dx.doi.org/10.1787/9789264122246-en.

Sue Wing, I. and E. Lanzi (2014), “Integrated Assessment of Climate Change Impacts: Conceptual Frameworks, Modelling Approaches and Research Needs”, OECD Environment Working Papers, No. 66, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jz2qcjsrvzx-en

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POLICY PERSPECTIVES

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For more information on the CIRCLE project, please visit the project website: www.oecd.org/environment/circle.htm For information about the main modelling tools used for the CIRCLE project: www.oecd.org/environment/modelling Contact us: shardul.agrawala@oecd.org (Head of the Economy Environment Integration Division) rob.dellink@oecd.org (Co-ordinator Modelling and Outlooks) elisa.lanzi@oecd.org (Economist at the Economy Environment Integration Division)

OECD Environment Directorate, October 2016