Javed Jafrani


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8, 2018

Climate Change Economics

1.      The
neoclassical approach to modelling climate change includes the treatment of
externalities, the uncertainties involved with them and the discount rate used
to calculate the cost the current generation must bear for the benefit of the
next generation. If we consider only one government, perfect competition, and
with certainty in the outcomes, then we reach the conclusion that the best
solution is to tax the CO2 emitter according to the social cost of
emission. These models were made on the basis on cost-benefit analyses and
consisted on known or anticipated outcomes. Some, like Richard Tol, included
predictable variation in their models. Tol came up with the FUND model which
includes an option to reduce the carbon dioxide emissions and see the effects
of it.1 PAGE (Hope) and DICE (Nordhaus)
were the next step in the modelling and they included a possibility of a sudden
catastrophic event. These events become more likely as the temperature
continues to rise. DICE included uncertainty by giving it a value after
opinions from experts in the field. 2


the Stern Review all this changed. This is because in reality, we have a poor
representation of the people affected (the future generation), many countries,
a very long time span, and a global and interconnected market. The neoclassical
approach thus does not fully incorporate the complexity and makes very broad
assumptions. Stern suggests that future policies and models must include the
economics of human development, information, innovation, the environment and
uncertainty. It is an ethical problem and needs focus on such issues as equity,
fairness, justice and sustainability. Stern used the PAGE2002 model and made
some upward additions to the effect and possibility of catastrophes. Stern used
a low discount rate, claiming that the needs of the future generations are
equal to ours.3
But Nordhaus and others dispute this point on the basis that Stern was biased
and did not actually study whether this is what most humans would do (i.e.
value the lives of future generations over their own needs).4 They also claim that Stern
used the worst-case scenario for estimating the climate damage, and that
underestimates the uncertainty involved.


2.      There
are two ways we can deal with climate change: mitigate, adapt or both. For
developed countries it’s usually the option for mitigation because they result
in the most carbon emissions and high consumptions, whereas the developing
countries usually bear the brunt of the climate change due to inadaptability
and must therefore prepare to adapt to climate change. But then imposing
similar restrictions on developing countries as developed nations results in
the developing countries staying deprived whereas the developed nations stay
privileged, even though they are their overconsumption is the main reason we
are in this mess to begin with.5 For example, Pakistan
contributes to less than 1% of the global carbon dioxide emissions, but is the
7th most vulnerable country to climate change. 6


first thing that countries need to do is to develop a vision for the future and
then decide a common policy that would neither hinder the growth of developing
nations, nor put too much on the developed nations. All nations must cut down
on their emissions if it exceeds the average allowed per nation, or in the case
of developing countries like Pakistan be allowed to continue with existing
practices if below the required average. This policy can be based on the
concept of carbon credits, which should be allotted to countries based on their
requirements. Because this is difficult to enforce, a common body must be made,
like the UN, but should not be biased towards any specific set of countries and
each country should have an equal right in it. Developed nations should also
move towards greener technologies faster than developing nations. All new
projects should be environmentally friendly and more effort towards research
and innovation should be made by the developed countries simply because they
have the means and resources available. Developing countries should also be
given a timeframe within which they are to adopt greener practices, but this
should be further down the line than developed nations. This will allow these
nations to catch up while also ensuring they start adopting green practices

like this was seen in the Kyoto Protocol, whereby several countries were given
targets to reduce the greenhouse gas emissions.7 For countries not yet
given a target for lowering emissions, they were asked to improve the basic
standards of living providing access to basic education and reduction in


3.      Both
mitigation (reducing emissions and stabilizing the level of the greenhouse
gases in the atmosphere) and adaptation (taking necessary measure to adapt to
climate change already happening) are necessary for the survival of mankind in
the centuries to come. But, to hit the nail on the head, we must know exactly
where to focus both these strategies and to what extent. Focusing too much on
mitigation in developing countries will only mean spending too much to reduce
already non-existent levels of emissions. The same goes for developed countries;
spending too much on adaptation would only be overkill because these nations are
already equipped to deal with climate change up to a significantly higher


some cases, the usefulness of adaptation strategies might be inadequate because
some losses are irreversible. In these cases, mitigation might be more useful
and cheaper. Mitigation is also the only strategy that helps in prevention of
long term catastrophic events. However, there is a need for having a world-wide
fund for urgent adaptation needs for developing countries so that no country
must face to brunt of climate change alone.


mitigation and adaptation depend on each other, the discussions made at the COP
should include both together so that proper allocation of responsibilities can
be made. Mitigation and adaptation are interdependent, and neither can be done
in isolation. By itself, neither can help in alleviating the effects of climate
change. There must be a proper portfolio mix with both mitigation and
adaptation strategies. This mix must be dependent on the countries and their
current needs. Over time the mix must be modified as per the needs of the time,
for example once proper adaptation strategies have been implemented the next
step would be to focus more on mitigation.


4.      Discounting
in climate change economics is all about the intergenerational and
intertemporal equity and how they affect our behavior and current consumption
patterns. Arrow and Stiglitz suggested two approaches to discounting,
prescriptive and descriptive. The descriptive approach uses the existing
discount rates in the real-world markets and matches it with the social
discount rates. The prescriptive approach uses the Ramsey’s equation, based on
the principles of intertemporal equity.

equation: ? = ? + ?g

is the discount rate used in climate change economic models, ? is the
intergenerational discount rate considering all generations have equal
resources, ? is the elasticity of marginal utility and g is the growth rate of

is an exemplar of the descriptive approach and used a discount rate of 6%,
whereas Stern used the prescriptive approach to get a discount rate of 1.4%
approximately. Because Stern believed that the future generation should be
considered equal to us, he kept the value of ? very low. A low value of the
discount rate asks for quick and large-scale mitigation efforts. But Nordhaus
(2007) and Tol (2006) claimed that this low discount rate was the principal
weakness of the Stern Review. They stated that the actual savings behavior
demonstrated by individuals means that the discount rate showed be higher9 and that Stern only set
this rate based on his own biased judgement rather than on the true preferences
of individuals. Till now there is still not a common consensus reached on the
true value of the rate of pure time preference. 

5.      The
pros of the transfer of power of the environment ministry to the provincial
level are that the provinces know their own regions and issues better than the
federal government. As there are varying levels of vulnerability to climate
change in different regions, it is better to have a separate ministry for each
so that funds can be allocated accordingly and fairly to the place where it is
needed the most.10
As climate change adaptation is a task that needs to be done at a microlevel as
well, giving provincial governments the authority is more logical. As a matter
of fact, it needs to be divided further into the local divisions so that
further responsibility and ownership can be felt by the citizens. As each
province has separate levels of vulnerability, each needs to have its own
policy rather than going for a one-size-fits all policy. With provincial
ministry departments, there can be more accountability as compared to the
federal government.


cons of such a policy are that at the provincial level we can see cases of
nepotism and general corruption of the local department.11 Local governments might
not be as serious about the global issues, especially when most of their
populace is not aware of climate change or its implications. To the unaware
locals, spending money on adaptation strategies would seem like money being
wasted. If the federal government does not keep a check or stringent controls
over the provinces, then these ministries will end up doing not enough at best.


6.      In
developing countries like Pakistan, an increase in the availability of
electricity is directly linked to an increase in the overall standard of living
and eventually in GDP. Similarly, an increase in GDP results in an increase in
the demand of energy, and the last decade has seen several power cuts as the
dwindling energy supply machine of Pakistan struggles to cope up with the
demand.12 Since 2007, Pakistan
faces a constant energy shortfall of at least 5000 MW of electricity13 which results in constant
load shedding especially in rural areas. The major issue is the poor state of
the electricity generation mix in the country, with 36% being generated through
furnace oil, 29% via gas and only 32% being hydroelectricity. The Power Policy
of 1994 led to a shift from hydro power to thermal (furnace oil mainly) power
plants. This has led to a higher overall cost of electricity production and
eventually the price of energy in Pakistan. 14

now, the policy of the government of Pakistan seems to be of increasing the
electricity supplies in any case, whether by green renewable sources or by
dirty sources. The recent MoU signed between the SECMC (Sindh Engro Coal Mining
Company Ltd), the CPIH (China Power International Holding Ltd) and the SSR (Sino
Sindh Resources Pvt Ltd) plans to develop approximately 6000 MW of electricity
using coal based plants in the next 10 years15. The coal will come from
the Thar coal fields and would be a utilization of the otherwise wasted natural
resources of Pakistan. But the hidden cost to the environment of these carbon
dioxide emissions would raise the cost that we estimate today. As the world is
moving towards renewable energy sources, Pakistan is investing heavily in long
term dirty energy projects. This is the classic case of developing countries
looking to gain a cost advantage rather than considering the future costs to
the environment and exactly what the US and others complained about in the
Kyoto Protocol.16


power plants in Pakistan have always been a topic of controversy because of the
dispute over the water supply between the provinces. The Kalabagh Dam, if
commissioned in the Punjab province, would have a capacity of 3600 MW of clean
energy but the construction was not started due to opposition from the other
provinces which claimed that it was a threat to the small provinces.17


7.      One
of the ways that a country can contribute to a greener future is by not only
reducing its own greenhouse gas emissions but by also helping other lesser
developed countries do the same. As most developing countries do not have the
technology or resources to finance greener energy projects, the developed
countries can provide focused aid to these projects in developing countries so
that instead of dirty energy projects all new projects would be clean energy
projects. An example are the recent coal power plant projects in Pakistan18, which could have been
green projects such as nuclear, solar, hydro or wind if more investment was
provided in the form of foreign aid.


developing countries like Pakistan focus more on mitigation strategies, then
there will be less resources to focus on adaptation strategies. To limit risks
faced by the developing countries in adopting these strategies, there should be
a global fund and country-wide funds that would help these countries
financially, allowing them to make greener choices that would eventually have
an impact in the entire world and future generations.19 Improving the controlling
the greenhouse gases needs to be a joint effort from all countries as we share
a common atmosphere. The world’s economies are linked, and a catastrophe in one
country would be felt by almost all other nations to some extent.


the UNFCCC, although the developed countries have offered to help the
developing nations in terms of technology and resources, but this has not yet
been formulated into a plan. Some of the aid will help the developing countries
reach their SDGs, while some are for projects such as prevention of
deforestation. At the end of the second millennium, there was transfer of
approximately $12 billion to the developing countries. Some of this is
transferred via the Global Environment Facility (GEF), in which the developed
nations are to pay for the “full incremental costs” of the efforts by
developing nations to alleviate climate change. Due to GEF, developing
countries such as Pakistan have been able to push greener electricity
generation in the form of wind, solar or biomass, which otherwise have high
initial costs. To cater the needs of developing countries, three more funds
have been made: Special Climate Change Fund, the Adaptation Fund and the Least
Developed Countries Fund. 20


next step is formalizing these plans and funds so that the money goes where it
is needed the most. The UNFCCC must monitor these funds and ensure that no
country takes any undue advantage and that the planned projects are carried out
as planned.


8.      The
23rd session of the Conference of Parties (COP23) was held at Bonn,
Germany in November 2017 and was hosted by the small island of Fiji. It began
with the biggest climate change demonstration of approximately 25,000 people.
The primary focus was to formulate a plan for the implementation of the Paris
and prepare for the Talanoa Dialogue to be held later this year 22. Proponents of climate
change claim that a faster and more large-scale step is needed to counter
climate change, they fail to understand the massive complications involved with
this. Considering that, any talks that happen are a way forward for humanity as
a whole and cannot be marked as a failure.


were many notable achievements of the COP23: 23 


Talanoa Dialogue is going to be a platform for the countries to share their
stories and best practices in battling climate change. This is to help other
hesitant countries take a step forward with increased confidence.

implementation guidelines of the Paris Agreement have been laid out and will
help businesses to invest in greener technology that is here to stay. The
guidelines are to be finalized at the next COP (COP24) to be held in Poland in

Ocean Pathway Partnership was launched to create collaboration in the existing and
future projects being done for a healthy ocean.

InsuRelience Global Partnership was launched after a contribution of €110
million by the German Federal Ministry for Economic Cooperation and Development,
which will help in providing affordable insurance to the people most at risk
due to climate change.

Fiji Clearing House for Risk Transfer was launched, again with providing
information on the best insurance solutions for the most vulnerable countries.

Gender Action Plan was finalized which aims to increase the contribution of
women in UNFCCC and other climate change initiatives all over the world.

Local Communities and Indigenous Peoples Platform was launched to give the
local indigenous people a voice in climate talks.

was the first time an agreement was made on agriculture by several countries.

Adaptation Fund was again reloaded with extra funding which would help the
vulnerable people in developing countries to adapt to the effects of climate

though the US president, Donald Trump, stated that the US would be pulling out
of the Paris Agreement, another US delegation led by Jerry Brown (Governor
California) and Michael Bloomber (ex-mayor of New York City) promised to uphold
the emission targets given to the US under the Paris Agreement.

Health Initiative for the Vulnerable was launched by the UNFCCC and the WHO to
provide medical support for the Small Island States from the health impacts of
climate change.

the Powering Past Coal Alliance was formed by the UK and Canada, in which 27
countries took a vow to phase out coal power generation.24 The UK promised to
eliminate dependency on coal by the year 202525.


we can see that even though slow, progress is being made in leaps and bounds as
compared to business-as-usual. Over the years the COP21 an COP23 will be seen
as the breeding grounds for all future climate change mitigation and adaption
initiatives. We cannot claim that the COP23 was a failure, and if anything, it
was a resounding success for mankind.


9.      Considering
the data provided:


Present Value ($)











Total expected value =

         $ 3,000,000


the total expected value of the policy is $3 million if the policy is pursued.
As the society is risk-neutral, it does not matter to them that there is a
chance of losing $10 million. The expected gains are more than if the policy
was trashed, hence the policy should be pursued.


10.   Critique on: District Level Climate Change
Vulnerability Index of Pakistan


The paper by Aneel
Salman and Arif Rahman aims to develop a Vulnerability Index (VI) for the
various districts of Pakistan, as opposed to a single index for the whole
country. This is because the data for calculating the VI is different across
the country districts and only by looking at the individual countries can we
know the true picture of what is going on. In the past, only a common data for
the country had been analyzed, which is not suitable for calculating the VI for
each district, hence the paper aims to gather and analyze data for each of the
districts. The paradigm of the paper is positivistic, in that the purpose is to
calculate the VI and prove that it is significantly different for all the
districts of Pakistan.

The paper is more
necessary after the 18th Amendment in which the separate provinces
were given full authority over their own environment ministries. To know which
districts are most at risk due to climate change, we need to develop the VI for
each of these districts and then allocate funds and support accordingly.


As the VI is a
measure of Exposure, Sensitivity and Adaptive Capacity, the formula used to
calculate the VI is as below:



The indicators of
these parameters were based on the availability of the data sets. A total of 16
indicators were available at the time of research and these were used to
calculate the district-wise VIs. The data was collected from Pakistan Social
and Living Standards Measurement (PSLM), and The Pakistan Meteorological

The distance and
deviation of each of the social and adaptive indicators from the average
country data was used to calculate the specific vulnerability for that
indicator. For the bio-physical parameters the deviation from the historic data
of that district was used to calculate the vulnerability.

After calculating the
VIs the districts were set in order of descending vulnerability and it shows
that Chitral is the most vulnerable, whereas Lahore is the least vulnerable to
climate change. Rural areas are more vulnerable than urban areas. The most
vulnerable province was Balochistan. The biggest contributors to vulnerability
were the reliance on the environment for food and energy in rural areas and


The paper was
important in that it shed light on the future policy framework with respect to
climate change in Pakistan. More efforts can be made to get a better picture if
we increase the number of indicators. One such indicator would be the strength
of the community in a certain district; the fact that people are willing to
cooperate and help their neighbors in the event of a catastrophe. Another
indicator is the availability of medical care in the event of an emergency,
especially in case of a district wide event. In this case, are the medical
facilities able to cope with the added pressure? These is scope of further data
collection and addition to this Vulnerability Index to make it even more
accurate. This VI can also be used to create policies based on individual data
and see the improvements made by these policies in an easily understandable
representation and would help the provincial governments set objective


2 The
‘DICE’ Model: Background and Structure of a Dynamic Integrated Climate-Economy
Model of the Economics of Global Warming, by William Nordhaus (1992)

3 Stern
Review: The Economics of Climate Change (2006)

4 Climate
Economics:  The State of the Art, by Frank
Ackerman and Elizabeth A. Stanton

5 To Mitigate or to Adapt: Is that the Question?
Observations on an Appropriate Response to the Climate Change Challenge to
Development Strategies, by Zmarak Shalizi and 
Franck Lecocq

6 Global
Climate Risk Index 2018, Germanwatch eV

Kyoto Protocol (

8 To Mitigate or to Adapt: Is that the Question?
Observations on an Appropriate Response to the Climate Change Challenge to
Development Strategies, by Zmarak Shalizi and 
Franck Lecocq

9 Climate
Economics:  The State of the Art, by Frank
Ackerman and Elizabeth A. Stanton

10 A
District Level Climate Change Vulnerability Index of Pakistan, by Arif Rahman
and Aneel Salman


12 Forecasting
of Pakistan’s net electricity energy consumption on the basis of energy pathway
scenarios, by Usama Pervez and Ahmed Sohail (2014)

13 Pakistan
Energy Vision 2035, Arshad H. Abbasi et al. (2014)

14 Pakistan
Energy Vision 2035, Arshad H. Abbasi et al. (2014


Kyoto Protocol (



19 To Mitigate or to Adapt: Is that the Question?
Observations on an Appropriate Response to the Climate Change Challenge to Development
Strategies, by Zmarak Shalizi and  Franck

Development and Climate – Engaging Developing Countries, by Thomas Heller and
Priyadarshi Shukla (2003)






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