How modelling can make or break climate policy

Last week, France, Germany and twelve other member states penned a statement calling for the EU to reach net-zero carbon emissions by 2050. They specified that the Commission’s mid-century strategy – due to be released in the autumn – must include emissions reduction pathways which are consistent with 1.5°C of global warming.

So far, so very good. But as everyone knows, it’s the economy, stupid. At the end of the day, decision makers will only sign up to sufficiently ambitious policies if they believe them to be the best economic choice. This is why the modelling in the Commission’s mid-century strategy is so important: the choice of methodology directly determines what level of ambition is the most financially attractive.

Simply put, socio-economic and (obviously) environmental benefits increase with higher ambition. But so do investment requirements. Therefore the Commission modellers traditionally seek a balance between what they see as adequate action and acceptable costs. It is like a giant, future-determining set of scales. The basic rule is that the cheapest option wins.

This is why I am worried about the Commission’s methodology. Astonishingly, the Commission has never yet factored climate losses into the balance sheet. It has provided detailed analysis on the investment requirements of higher ambition, but so far nothing on the consequences of not acting. Inevitably, this biases decision makers – who do not see inside the modelling engine – against steeper emissions cuts. In the last big 2050 modelling exercise (in 2011), higher ambition was dismissed as costing ‘fantasillions’, in the words of a Commission advisor working on the dossier.

Yet analysis of the economic impacts of climate change is readily available from impeccable EU sources. According to data from Eurostat and Munich RE (the insurance giant), climate change is already costing the EU about €12 billion euros per year. And this is with ‘just’ 1°C of global warming. Damages are set to increase exponentially with higher temperatures: €120 billion per year in a 2°C scenario and €190 billion with 3°C, according to the European Environmental Agency.

Other studies foresee far higher costs – and more to be gained from taking preventive action. A new study in Nature estimates that keeping global warming to 1.5°C will prevent 20 trillion dollars (worldwide) of cumulative economic losses, compared to a 2°C scenario.

Most Commission officials I have spoken to say climate losses must be an integral part of the cost-benefit analysis. But, frustratingly, others question the accuracy of the numbers and oppose their use. The debate is apparently still ongoing in the Commission. To be sure, it is not possible to precisely predict the GDP losses from climate change. But pretending for the sake of ‘accuracy’ that climate change has no economic consequences would be a disastrous mistake.

My other concern is with the thorniest of all issues in modelling: the choice of discount rate. In climate and energy modelling, the discount rate is the value used to assess the costs of different scenarios. The principle is exactly the same as with the interest rate on an expensive house loan: the higher the rate, the higher the costs – and the less attractive the policy.

The significance of this issue became clear in the recent negotiations on the 2030 energy efficiency target. When assessing the costs of different levels of ambition, the Commission used a 10% discount rate – much more than the 5.7% rate used on average by the Member States for similar analysis. This led to dramatic cost differences: a 40% by 2030 efficiency target using a 5.7% rate requires less investment than a 30% target using a 10% rate.

This methodological clash surfaced too late to change the course of the efficiency negotiations. But the Commission must urgently deal with the problem for the mid-century strategy. According to the International Energy Agency, 44% of global emission cuts must come from energy efficiency. It follows that the choice of discount rate will directly influence the recommended level of EU climate action.

All this is not to be overly critical. The Commission has made big progress on modelling over the years, especially in assessing the positive impacts of higher ambition on health cost savings and GDP gains. And despite the discount rate issue, the Commission championed more ambitious 2030 targets for energy efficiency and renewables, with the result that the EU now has targets for 32.5% and 32%, respectively, compared to 27% before. This translates into at least 46% greenhouse gas cuts by 2030 (more if other policies are taken into account), meaning that the business-as-usual level of emissions cuts is now significantly higher. This is a springboard for further ambition.

But the fact remains that unless the Commission makes in-depth improvements to its modelling methodology, there is a grave danger that the mid-century strategy will undermine, rather than strengthen, the case for adequate climate action to implement the Paris Agreement. Naturally enough, the Commission will defend whatever strategy it proposes, so what it does recommend must be worth defending. The EU is a leader in global climate action. What it does – good or inadequate – will have a knock-on, domino effect round the world. That is why modelling can make or break climate policy.

The views expressed in this column are those of the columnist and do not necessarily reflect the views of eceee or any of its members.