Environmental indicators, modelling and outlooks

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

 

Several major long-term trends shape the potential for economic growth around the world. The continued depletion of natural capital features prominently among these trends, manifesting itself through environmental pollution, the emission of greenhouse gases (GHGs) that contribute to climate change and continued dependence on increasingly scarce natural resources. It is clear that further degradation of the environment and natural capital can compromise prospects for future economic growth and human well-being. The CIRCLE project aims to identify how feedback from poor environmental quality, climatic change and resource scarcity affect economic growth, and how policies may alter this.

 

Brochure

Latest report

 

Major CIRCLE publications

 

  • The Economic Consequences of Climate Change – This report provides a new detailed quantitative assessment of the consequences of climate change on economic growth through to 2060 and beyond. It focuses on how climate change affects different drivers of growth, including labour productivity and capital supply, in different sectors across the world. The sectoral and regional analysis shows that while the impacts of climate change spread across all sectors and all regions, the largest negative consequences are projected to be found in the health and agricultural sectors, with damages especially strong in Africa and Asia.

 

Other CIRCLE publications

  • Approaches and issues in valuing the cost of inaction of air pollution on human health – This report presents a review of existing approaches to estimate the costs of inaction, as well as the benefits of policy action, for air pollution. It focuses primarily on health impacts from air pollution. The paper presents the “impact pathway approach”, which includes various steps in the analysis of the costs of air pollution. These include quantifying emissions, calculating the concentrations of the pollutants, applying epidemiologic studies to calculate the physical health effects and applying valuation methods to calculate the economic costs of the health impacts. The report also reviews applications of the impact pathway approach to applied economic studies that aim at calculating the macroeconomic costs of air pollution. It proposes possible approaches for including the feedbacks from the health impacts of air pollution in an applied economic framework. While ideally this requires serious modifications of the modelling frameworks and an improvement of the available empirical results, some impacts, such as changes in health expenditures and labour productivity, can easily been incorporated, following the literature on the economic costs of the health impacts of climate change.
  • Implications of water scarcity for economic growth – This background report 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 Computable General Equilibrium (CGE) framework. It covers agricultural water consumption, with special attention to irrigation; water use in energy production; demands for water by households, industry and services; and water supply and allocation. Global freshwater demand is projected to increase substantially in the coming decades, making water one of the most fiercely contested resources on the planet. Water is linked to many economic activities, and there are complex channels through which water affects economic growth. The purpose of this report is to provide background information useful for a quantitative global assessment of the impact of water scarcity on growth using a multi-region, recursive-dynamic, CGE model.
  • Critical minerals today and in 2030: an analysis for OECD countries – This report provides an analysis of critical minerals for the OECD countries as a whole, both today and in 2030, in order to identify how possible trends in economic development will affect minerals criticality in the future. 51 different minerals are included in the analysis. Three measures of mineral supply risk are used: substitutability, recycling rates and the concentration of production in countries that politically relatively unstable. While physical scarcity is not considered to be a source of supply risk in the short term, potential disruptions are instead perceived to come from the nexus of production concentration and geopolitical risks, as well as from future changes in the vulnerability to supply risk – i.e. the “economic importance” of a mineral to the economy. The analysis identifies around 12 to 20 minerals or minerals groups, which are critical in the OECD today. The report also shows what improvements in the substitutability of minerals and in their recycling rates would be sufficient today and by 2030 to mitigate supply risks and vulnerability to them.
  • The Economic Feedbacks of Loss of Biodiversity and Ecosystems Services – The topic of biodiversity loss has been the subject of a vast and growing scientific and economic literature. 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. During the last century, for example, the planet has lost 50% of its wetlands, 40% of its forests and 35% of its mangroves. Around 60% of global ecosystem services have been degraded in just 50 years. 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. This report contributes to an effort to identify environmental pressures under different structural and environmental policy assumptions and the associated damages that will result under different economic scenarios to 2050. Based on these it aims, inter alia, to examine how the environmental pressures may affect economic growth paths. This report contributes to that goal by looking at the 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. The report finishes by identifying the main opportunities and obstacles in including biodiversity and eco-system services into a dynamic general equilibrium framework.
  • Integrated Assessment of Climate Change Impacts: Conceptual Frameworks, Modelling Approaches and Research Needs – This paper presents a framework to include feedbacks from climate impacts on the economy in integrated assessment models. The proposed framework uses a production function approach, which links climate impacts to key variables and parameters used in the specification of economic activity. The key endpoints within climate impact categories are linked to the relevant connections for a range of sectors in the economy. There is considerable heterogeneity across the timing and geographic distribution of changes in climatic variables, the consequent changes in key physical and biogeochemical “endpoints” that might occur over time and space, and the magnitude of the resulting damages that these effects are likely to impose on the range of sectors in the economy. The review underlines the uncertainty involved in each of these dimensions and the research needs for the future.
  • Consequences of Climate Change Damages for Economic Growth: A Dynamic Quantitative Assessment – This report focuses on the effects of climate change impacts on economic growth. Simulations with the OECD’s dynamic global general equilibrium model ENV-Linkages assess the consequences of a selected number of climate change impacts in the various world regions at the macroeconomic and sectoral level. This is complemented with an assessment of very long-run implications, using the AD-RICE model. The analysis finds that the effect of climate change impacts on annual global GDP is projected to increase over time. Underlying these annual global GDP losses are much larger sectoral and regional variations.

 

 

Key challenges

World population is projected to reach over 9 bn and the world economy is projected to nearly quadruple.
Global energy demand would be 80% higher in the absence of a radical policy shift, with 85% still based on fossil energy. This would increase GHG emissions by 50%, putting the world on a path 3-6 degrees C warmer by the end of the century.
Urban air pollution would worsen, with the number of premature deaths linked to particulate matter doubling to 3.6 mn per year.
In the coming decade, the competition for scarce land is projected to intensify severely, threatening global food supply and increasing pressure to continue deforestation.
Global biodiversity loss is projected to continue, with a further 10% loss by 2050 and climate change becoming the fastest growing driver for this loss.
With global water demand projected to increase by 55%, water resources would become scarcer, leaving over 40% of the world’s population in severely water stressed river basins.
In order to address these environmental challenges, governments need a better understanding of the net benefits of action.

Source: Environmental Outlook to 2050, OECD, 2012.

The OECD Environmental Outlook to 2050

  • The Environmental Outlook to 2050 presented a one-way analysis of the impacts of socio-economic develop-ments on the environment, but the available tools did not allow for a two-way analysis that included the feedbacks of environmental pollution, climate damages and resource bottlenecks to the economy.
  • If quantification of such feedbacks becomes possible, the quadrupling of the world GDP to 2050 projected by the Outlook under a “business-as-usual” scenario would be revised to provide a sense of how environmental degradation and resource bottlenecks could dampen economic growth prospects.
  • The OECD’s Environment Policy Committee launched a multi-year follow up project to the Environmental Outlook: Cost of Inaction and Resource Scarcity; Consequences for Long-term Economic Growth (CIRCLE).
  • A broad global assessment that encompasses the economic growth implications of several environmental challenges as well as resource scarcity and that explicitly look at trade-offs and synergies between them can shed new light on the scale of global environmental challenges for the economy. It also paves the way to assess the benefits of policy action.

 

Policy CIRCLE could give us

  • The Environmental Outlook to 2050 estimated the costs of selected policy actions. However, these costs of action did not take into account the benefits of these policies. If we are able to quantify and have a better understanding of the costs of inaction, or the economic benefits of policy action, it could help governments to better understand the net benefits of “greening” policies and provide a critical evidence base to help to gain support for such measures.
  • Unless more ambitious policies are implemented to reconcile economic growth with conservation and sustainable use of the environment and natural resources, the costs of inaction could be significant.

A two-track approach around six thematic areas

Project themes and tracks - A two-track approach around 6 thematic themes

 

Better understaning inter-linkages

  • When devising new policies, it is essential to take a systems approach, and to stress the inter-linkages among different environmental challenges. These inter-linkages occur not least through the shared enabling environmental media. These media provide critical economic and environmental services. For instance, freshwater is important for irrigation in agriculture, cooling in industry and energy production and as drinking water. These different demands compete for the scarce water that is available. Simultaneously, water pollution threatens the quality of available water resources and can affect human and ecosystem health. CIRCLE is therefore designed to eventually look at the interactions (trade-offs and synergies) between the different environmental issues, the policy responses to them, and the economy.

Quantifying costs and benefits

  • Over a series of model developments during this and next biennium, CIRCLE could provide assessments of the economic impacts of a selected number of major environmental and resource scarcity issues. The environmental challenges being examined quantitatively include climate change, air pollution and the land-water-energy nexus. The possibilities to assess water scarcity and pollution, biodiversity and ecosystem services loss and natural resource scarcity will also be scoped. CIRCLE will generate reference projections for economic growth which reflect the costs of policy inaction in these areas insofar as these are adequately measurable. Such reference projections would be more appropriate starting points for future projections of economic growth, as well as for assessments of the economics of environmental policies, as they are able to include not only costs but also benefits of policy action. This would allow a more informative evaluation of policies, and a comparison of the costs and benefits involved.

 

Further reading

 

Contacts

  • Shardul Agrawala, Head, Environment and Economy Integration Division, OECD Environment Directorate
  • Rob Dellink, Co-ordinator Modelling and Outlooks, Environment and Economy Integration Division, OECD Environment Directorate
  • E-mail: ENVEEIAssistants@oecd.org
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