CIRCLE brochure 2014

CIRCLE

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

2014

The OECD’s CIRCLE project Further degradation of the environment and natural capital compromises prospects for 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 aims at identifying how feedbacks from poor environmental quality, climatic change and natural resource scarcity are likely to affect economic growth in the coming decades.

Over a series of model developments, CIRCLE will generate reference projections for economic growth which reflect the costs of policy inaction. These reference projections will help to improve future OECD projections of economic growth, as well as assessments of the economics of environmental policies, as they are able to include not only costs but also benefits of policy action in terms of reduced environmental damages. This will allow a more informed evaluation of policy options, and a comparison of the costs and benefits involved.

A two-track approach The first track of the CIRCLE project is a quantitative analysis of the economic feedbacks of climate change, air pollution and the nexus between land, water and energy.

The core tool to be used in the analysis is the OECD’s dynamic global multi-sector, multi-region model ENVLinkages, which will be coupled to biophysical models for an integrated assessment. Using a systems approach allows focusing on interactions between the various environmental challenges.

The second track will scope the possibilities to quantitatively assess water-economy linkages, the economic feedbacks of loss of biodiversity and ecosystem services and resource scarcity. If possible, these themes will also be included in the modelling track at a later stage.

Climate change

Modelling track

Air pollution Land-water-energy nexus Water Biodiversity and ecosystems Resource scarcity

Scoping track

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 in all markets through production and trade changes. The CIRCLE project quantifies the macroeconomic costs of a set of climate impacts that affect the economy, including sea level rise, agriculture, energy and tourism, but it also highlights the unquantifiable consequences that climate change may cause in the future with the increasing occurrence of extreme and catastrophic events.

The modelling is based on available literature on how climate impacts affect the economy of major world regions at the macroeconomic and sectoral level. Detailed assessments of the specific impacts are fed into the ENVLinkages model to assess the implications for different economic activities and the overall macroeconomic costs.

This is complemented with a more stylised assessment of the long-run implications, using the AD-RICE model. Further work is planned to expand the number of impacts included and to assess a range of mitigation and adaptation policies.

Preliminary results for the quantitative assessment of the economic feedbacks of climate change damages have been included in the OECD horizontal projects on New Approaches to Economic Challenges (NAEC) and OECD@100, and are reported in “Consequences of climate change impacts for economic growth: a dynamic quantitative assessment� (OECD Economics Department Working Paper, No. 1135, 2014).

According to the model simulations, the effect of climate change impacts on global GDP is projected to increase over time, with damages increasing more rapidly than the global economy. These impacts would lead to a gradually increasing global GDP loss amounting to 0.7% to 2.5% by 2060, assuming firms and households adapt to minimise the costs. Underlying the global GDP losses are much larger variations on consequences from specific climate impacts on specific sectors in specific regions. Among the impacts included in the analysis, agricultural impacts tend to dominate in most regions.

Global impacts of climate change % change wrt no-damages baseline Wider uncertainty range equilibrium climate sensitivity (1째C - 6째C)

Likely uncertainty range equilibrium climate sensitivity (1.5째C - 4.5째C)

Central projection

0.0%

-0.5%

-1.0%

-1.5%

-2.0%

-2.5%

-3.0%

-3.5%

-4.0%

2010

2020

2030

Source: OECD Economics Department Working Paper, No. 1135, 2014.

2040

2050

2060

Air pollution Air pollution is one of the most serious environmental health risks, particularly in big cities and highly populated areas. In absence of new policies, urban air quality will continue to deteriorate causing serious risks to human health. The health consequences of air pollution come at a high cost to society, causing premature deaths as well as increased health costs from additional hospital admissions and use of medicines or decreased labour productivity.

For this part of the CIRCLE project, ENV-Linkages has been improved to include emissions of air pollutants. The improved model will be used to quantify the impacts on GDP of inaction, as well as the benefits of policy action. While the main focus will be on health impacts, future work may, if possible, also take into account other impacts, such as on biodiversity or agriculture. The analysis will include both mortality and morbidity costs. As much as possible the costs will be split between those that can be directly included in a general equilibrium modelling framework, and those that do not correspond to any economic variable, such as the costs of pain and suffering.

The costs that can be modelled will be included in ENV-Linkages as economic feedbacks to quantify the economy-wide costs of local air pollution.

The other costs, which include the valuation of premature deaths, will be highlighted but not included in the model.

Policy packages will be studied to quantify the economic benefits of policy action, with specific attention to policies that address simultaneously climate change and air pollution.

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. Water, energy and land are essential for economic growth and development, and there are strong linkages between land, water and energy (the nexus). Barriers to the use of these resources may limit economic growth.

Policies neglecting these linkages may be sub-optimal and might resolve a specific problem with one of these resources but at the same time impact the others and create additional (and unforeseen) problems. Therefore an integrated approach is needed.

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. A range of scenarios will be developed to assess the consequences of reduced availability or quality of land, water and energy resources. The analysis will first focus on biophysical bottlenecks regarding water availability, looking at groundwater depletion and water allocation across sectors.

Next, bottlenecks regarding land availability will be studied, including scenarios for land degradation and limits to land conversion. The consequences of these bottlenecks for key variables such as crop yields will then be linked to economic activities where appropriate.

Biodiversity & ecosystems The links between biodiversity and ecosystem services and the economic and social values that they support are extremely complex. First, economic activities have an impact on the services that these systems provide.

These services have a value not dissimilar to the values provided by other goods and services and changes in these values need to be taken into account in project and policyrelated decisions. Second, a loss of ecosystems makes the functioning of the economic system less effective. The regulating services that ecosystems provide contribute to transport, energy, agriculture, recreation and related sectors.

There are also important feedback links. For instance when wetlands are converted into agricultural land, its role in regulating water flow is removed to a large extent and the risk of floods increases.

These linkages between ecosystems and the economic system need to be better understood, ideally by integrating ecosystem functions into traditional economic models.

Furthermore, very little literature is available on how biodiversity is linked to specific economic activities, and how biodiversity loss interrupts these activities.

A full integration of the costs of a loss of biodiversity and ecosystem services into the economic modelling framework may therefore be beyond the reach of the project. The scoping activities in this area will focus on the main opportunities and obstacles in providing a tentative assessment of the consequences of the loss of biodivefsity and ecosystems on the macro economy.

Water There are complex channels through which water affects economic growth, and traditionally economic models are not suited to investigate the impact of water scarcity and pollution on economic growth. Water can be seen as partially replenishable. For production, water is an input that combines with other production factors to generate output. A key sector is agriculture (both irrigated and rainfed crop production), but there are also many industrial uses, including cooling for electricity generation and municipal water uses. Pressure on the resource has significantly increased, in line with demographic growth and economic development. And even when water use is not directly consumptive, it may diminish the potential uses by altering the quality of the water source.

The analysis of water-economy linkages starts with an investigation of the economic feedbacks of water scarcity and water use. If possible, the water-economy linkages will be included in ENV-Linkages, and the assessment will be harmonised with the insights from the assessment of the land-water-energy nexus.

The water-economy linkages work may at a later stage be extended to an analysis of the consequences of water pollution on economic activity. The latter could focus on health impacts, analogous to the analysis of air pollution.

Global water demand: Baseline scenario, 2000 and 2050 irrigation

domestic

livestock

manufacturing

electricity

Km3

6 000

5 000

4 000

3 000

2 000

1 000

0

2000

2050

OECD

2000

2050

BRIICS

2000

2050 RoW

2000

2050 World

Source: OECD (2012), OECD Environmental Outlook to 2050; output from IMAGE.

Resource scarcity Mineral resources cover a large variety of natural resources from metals to fossil fuels and enter the global economy through various applications. Minerals prices have been decreasing throughout the 20th century due to technological progress towards extraction and exploration.

This price pattern seems to have found an end with the sharp increase in world demand and a slowdown in highgrade deposits discoveries after 2000.

Given the central role played by minerals in the economy, it is therefore critical to investigate minerals scarcity and what would be the consequences of supply disruptions, long-lasting high minerals prices, or high price volatility on the economy and geopolitics. The Grantham Research

The work focuses

Institute at the London School of Economics contributes

on assessing supply

to this analysis through a study which aims at measuring

and consumption

the criticality of specific non-energy material resources.

Work focuses on assessing supply and consumption

characteristics ,

characteristics , looking at both supply risks and the

looking at both

importance of materials for the economy. A wide range of

supply risks and the

materials are being assessed to identify which ones are

importance of materials

most critical. Robustness of available information and projected trends will also be taken into account. A case study will then identify the consequences of this critical material for economic growth. In contrast to the other CIRCLE themes, this analysis will not be global, but focus on OECD countries.

for the economy.

Project partners The CIRCLE project is led by the OECD Environment Directorate, with the engagement of other parts of the OECD and experts nominated by member governments. CIRCLE also draws upon the expertise of a number of other institutions which are engaged as collaborating partners.

These include: •

The Basque Center for Climate Change (BC3), Spain.

•

The Fondazione Eni Enrico Mattei at the Mediterranean Center for Climate Change (CMCC-FEEM), Italy.

•

The Grantham Research Institute at the London School of Economics and Political Science (LSE-GRI), United Kingdom.

•

The Institute for Applied Systems Analysis (IIASA), Austria.

•

The Institute for Global Environmental Strategies (IGES), Japan.

•

The Institute for Prospective Technology Studies (JRC-IPTS), Spain.

•

The National Institute for Environmental Studies (NIES), Japan.

•

The Netherlands Environmental Assessment Agency (PBL), The Netherlands.

CIRCLE

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

More information 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)