The Treatment of Economic Issues by the Intergovernmental Panel on Climate Change

David Henderson

Issues relating to climate change, and to the choice of policies for dealing with it, are now highly topical. In Britain, both the Prime Minister and the Leader of the Opposition have recently emphasised the urgent need for measures to limit greenhouse gas emissions, and Mr Blair has stated his intention to place this issue high on the agenda of the coming G8 summit meeting. In this context, readers may be interested to hear of some recent exchanges relating to economic aspects of these issues. Aside from their intrinsic interest, the exchanges raise wider questions as to the role of economics and economists in the policy process. David Henderson, formerly (among other things) Head of the Economics and Statistics Department of the OECD, and now Visiting Professor at the Westminster Business School, has been one of the participants in the current debate. This is his personal report.

The Intergovernmental Panel on Climate Change (IPCC) is a joint subsidiary of two international agencies, the World Meteorological Organisation (WMO) and the United Nations Environment Programme (UNEP). It was created by the member governments of these two agencies in 1988. Since then it has produced three full-scale Assessment Reports, issued respectively in 1990, 1995 and 2001. Work is now in progress on the Fourth Assessment Report (AR4), which is due in 2007.

The Panel operates through three Working Groups. WGI is concerned with scientific aspects of climate change, WGII with the prospective impacts of such change and ways of adapting to it, and WGIII with mitigation of the impacts. Each of the Groups produced its own report as part of the Third Assessment Report. Alongside them was the Special Report on Emissions Scenarios (SRES), prepared for WGIII, which provided in particular a range of projections of greenhouse gas emissions, covering the period from 1990 to 2100. Between them these four reports make up some 3,300 pages of text. Their preparation involved a small army of participants---authors, contributors, reviewers, and commentators---with delegates from member governments closely involved in the final stages of revision. Collectively, these participants make up what may be termed the IPCC milieu.

An economic dimension

In an official document headed 'Principles governing IPCC work', which can be viewed on its website, the role of the Panel is specified as being:

Thus the responsibilities of the IPCC include that of advising and informing its member governments on the economic factors that may bear on 'human-induced climate change'.

The economic aspects are sometimes viewed as incidental or peripheral. For example, in a recent exchange in the House of Lords (15 July 2004) Lord Whitty, replying for the government to a question put by the former Chancellor of the Exchequer, Nigel Lawson (now Lord Lawson of Blaby), said that

This is a misleading statement. For one thing, economic considerations, and criteria, are relevant to deciding what form the 'something' that 'we do' should take. For another, projections of global warming are based on projected atmospheric concentrations of CO2, which in turn are based on the projections of CO2 and related emissions which emerge from the SRES; and the emissions figures themselves are linked to SRES projections of world output, world energy use, and the carbon-intensity of energy sources. In these latter projections economic factors are central. True, they act in conjunction with demographic and technical factors, but these are themselves subject to economic influences. If and in so far as the treatment of these latter influences is open to question, the basis for IPCC projections of global average temperature changes cannot be taken as assured.

Given its unavoidably close involvement with economic issues, it is worth inquiring how and through what mechanisms the IPCC has chosen to deal with them. What is the role of economics and economists in the production of IPCC reports? Is there scope for improvement here? For me, recent personal experience has thrown some light on these questions.

A critique and its reception

Over the past two and a half years or so, I and a co-author---Ian Castles, formerly Head of the Australian Bureau of Statistics---have put forward a joint critique of economic aspects of the work of the IPCC. While our main single target has been the SRES, our concerns extend to the IPCC process and milieu as a whole, including the Panel's sponsoring departments and agencies. Moreover, we have gone beyond criticism, by putting forward proposals for action.

The main heads of our critique of the SRES can be summarised as follows:

• For the base year of 1990 it compares real GDP across countries on the basis of market exchange rates (MERs), rather than purchasing power parity (PPP) converters. These comparisons greatly overstate the differences in GDP per head between developing regions and OECD member countries.
• It gives a misleading account of the factors that bear on the choice between MERs and PPPs, and of the implications of such a choice.
• It builds in, for reasons that are open to question, rapid convergence in GDP per head between developing regions and OECD member countries. By thus assuming the substantial closure of a greatly overstated initial gap, it arrives at projections of output and GDP per head for developing regions which are higher than they would have been if the 1990 starting point had been correct, and high by comparison with other projections
• As a result, total projected world GDP is pushed up; and this in turn is reflected in higher projected emissions. Hence even the scenarios which show the lowest cumulative emissions over the present century do not in fact represent lower limits. The SRES projections do not, as is claimed for them, adequately encompass the full range of uncertainties about the future.

Our critique thus covers not only the results of the exercise, in the form of specific projections of emissions, but also the approach, the analytical basis of parts of the Report.

Our arguments have been strongly contested by authors who were involved with the SRES. Interested readers are referred to a series of articles that has appeared in recent issues of the journal Energy and Environment: the first four of these---two on each side---comprise the exchanges between us and the SRES authors, and three further articles have since appeared. [FN 1] Those who would prefer to invest considerably less time can be recommended, first, to two articles from the Economics Focus page of The Economist (15 February and 8 November, 2003), which weigh in on our side, and second, to an official press release issued by the IPCC in December 2003 and now posted, in a somewhat less impolite form than the original version, on the Panel's website. This latter document is concerned to expose our critique as baseless. Among other things, it states that 'In recent months some disinformation has been spread questioning the scenarios used by the IPCC'; and it refers to Castles and me as 'so called "two independent commentators"'.

Along with our critique, our suggestions for change have been rejected by the Panel. The main proposals that we have made are three:

• That the SRES, because it is open to serious criticisms, should not be taken as the basis and starting point of AR4: an alternative and firmer basis should be sought, through less elaborate and more short-cut procedures than those of the SRES.
• That in assessing possible future developments in the world economy, and ways of projecting them, the involvement of economic historians and historically-minded economists should now be ensured---for the first time.
• That more generally, and going well beyond scenario-building, the IPCC process should be broadened, in particular through the active involvement, first, of national statistical offices in member countries, and second, of ministries of finance and economics.

As to the first of the above suggestions, the IPCC has determined that 'the SRES scenarios provide a credible and sound set of projections, appropriate for use in the AR4'. As to the other two, the Panel and its member governments appear as fully content with the present established procedures and arrangements for participation. The opening paragraph of the press release referred to above says of the IPCC that

Overstated claims

In relation to economic aspects, there is good reason to question the claims to authority and representative status that the IPCC makes on its behalf. [FN 2] Those of us who are sceptics do not question the numbers of those involved, their diligence, or the existence and observance of formal review processes. But we think that when it comes to the treatment of leading economic issues, the milieu is neither fully competent nor adequately representative. We also hold that building in peer review is no safeguard against dubious assumptions, arguments and conclusions if the peers are all drawn from the same restricted professional milieu. [FN 3]

A leading illustration of our case (it is not the only one) is the issue of MERs versus PPPs. Here the internationally agreed System of National Accounts (SNA), which dates from 1993, gives unambiguous guidance. In its opening chapter, it specifies (paragraph 1.38) that:

Despite this ruling, misleading MER-based international comparisons have been uncritically made, not only by the SRES, but also in the reports of both WGII and WGIII; more recently, in a report issued by UNEP; and more recently still, in a document prepared for an IPCC-sponsored conference by one of the three current Vice-Chairs of the Panel. It seems probable that not one of the many participants in these various proceedings had heard of the SNA, and it is not referred to in either the text of the SRES or its 17 or so pages of references.

In the context of national accounts, there is a specific error in the SRES which, though only incidental, shows that mere numbers are no guarantee of representative status. On p. 115 of the Report the concept of GNP---now more usually referred to as GNI---is wrongly defined. This basic error was not picked up by any of the 53 authors, 4 review editors and 89 expert reviewers who are listed as participants in the preparation of the SRES.

In the IPCC press release referred to above, the statement is made that 'the economy does not change by using a different metrics (PPP or MEX), in the same way that the temperature does not change if you switch from degrees Celsius to Fahrenheit'. This assertion could be interpreted in different ways, but on any interpretation the analogy appears as false. Admittedly, not all economists would accept without qualification the case for using PPP-based converters, rather than some exchange-rate-based alternative; but even the sceptics do not argue that the choice is immaterial. [FN 4]

In the British case, it might be supposed that one or two members of the Government Economic Service, now said to be 800 strong, not to mention a person from the National Statistics Office, would have been drawn into the economic work of the IPCC and made it less unrepresentative. There is no sign of any such involvement. Speaking in the House of Lords last April on behalf of the responsible department, the Department of the Environment, Food and Rural Affairs, Baroness Farrington said that 'the views of Mr Castles and Mr Henderson were considered extremely carefully,,, by the Government,,,' If such consideration has indeed been given, its results have not been communicated to me.

A way forward

The economic content of AR4 can be strengthened only if new participants are brought into the process, and this can be achieved only if and in so far as member governments act accordingly: the IPCC milieu appears impervious to unofficial criticism. In this context, it is the central economic departments of state---treasuries, ministries of finance or economics, and organisations such as the US Council of Economic Advisers---that have a potentially key role. Up to now, and despite the large amounts that are at stake, they have been content to leave the handling of economic issues within the IPCC process to the departments and agencies directly concerned. The questionable treatment of these issues by the IPCC and its sponsoring organisations, which Castles and I have drawn attention to as independent outsiders, has apparently not been noticed by a single official in a single finance or economics ministry in a single country. It is high time for this situation to change, and for these latter departments to become involved.

Fortunately, a straightforward route to their participation exists for the taking. For the economic departments and agencies in OECD member countries, an instrument is to hand for their prompt collective involvement: it is the OECD itself. They should act now to ensure that IPCC-related economic issues are placed on the agenda of the OECD's Economic Policy Committee. This could be the start of a process by which economics and economists become more adequately represented in proceedings and decisions where much is at stake.

31 December 2004

Notes

* This article is scheduled to appear as a feature article in the January 2005 issue of the Royal Economic Society's Newsletter.

1. The four articles are to be found in Vol 14, Nos 2 and 3; Vol 14, No 4; and Vol 15, No 1. Three further articles have appeared in Vol 15, No 3 - one by Warwick McKibbin and two colleagues from the Australian National University, writing as model-builders, one by Jacob Ryten, formerly of Statistics Canada, on the MER versus PPP issue, and the third by Ian Castles on the role of the IPCC.

2. Doubts on this score, as also about the current policy presumptions of both government and opposition in Britain, were recently voiced in a joint letter from seven economists to The Times (24 September 2004). The signatories were Wilfred Beckerman, Ian Byatt, Nigel Lawson, Julian Morris, Alan Peacock, Colin Robinson and me.

3. It is not only in relation to economic aspects that such queries have been raised about the IPCC process and its results, by critics writing about other subject areas.

4. An interesting by-product of our critique has been some high-level rapid-fire professional exchanges on the uses and limitations of PPP-based comparative data. Meghnad (Lord) Desai (House of Lords proceedings, 21 April 2004)) and Richard Cooper (in a letter to The Economist, 18 June 2004) have emerged as sceptics. A contrary view is taken by The Economist itself, in an editorial dated 29 May 2004; by Angus Maddison in a letter (10 July 2004) replying to that of Cooper; and (more fully) by Jacob Ryten in the article referred to in note 1 above.