The Effects of Climate Change for the Middle East and North Africa

The Economics
of Climate Change
Presentation by
Atif Kubursi (McMaster University)
The New Normal in the Global Economy: Challenges and Prospects for MENA.
ERF 24th Annual Conference, July 8-10, 2018, Cairo, Egypt
The Effects of Climate Change for the Middle East and North Africa

4. On the economics of mitigation
7. Does climate change matter?
6. On the economic analysis of adaptation options
Outline of Presentation
1. Climate change: The new normal
2. Projected impacts
5. On the economics of adaptation
3. Economic costs of climate change

Climate Change: The New Normal
World temperatures may rise by between 1.1°C and 6.4°C during the
21st century (relative to the period 1980-1999), depending on the
emissions scenario that is realized (the "best estimate" range is
between 1.8°C and 4.00C).
Sea levels will rise by 18–59 centimeters by 2100, with thermal expansion
of the oceans being the single most significant contributor to the rise in
sea level.
There is a greater than 90% confidence level that there will be more
frequent warm spells, heat waves, and heavy rainfall.
There is a greater than 66% confidence level that there will be an increase
in droughts, tropical cyclones, extreme high tides, and storm surges.
Most of these projected changes in climate parameters and sea level are
now regarded as being conservative (under-estimated).

Even if greenhouse gas concentrations were to stabilize at existing
levels, anthropogenic warming and sea level rise will continue for
decades and centuries to come respectively due to the time scales
associated with climate processes and feedback effects.

And greenhouse gas concentrations are not about to stabilize at any
levels….
• World primary energy demand is projected to increase by
approximately 36% over the period 2010-2035 (from 12.3 to 16.7
Mtoe).
• Fossil fuels – oil, coal and natural gas – will continue to remain the
primary source of energy.
• The bulk of this increase will take place in developing countries
(China and India in particular).

And greenhouse gas concentrations are not about to stabilize at any
levels….
Coal Oil Natural gas Hydro Nuclear Others
Region
1
2005 2030 2005 2030 2005 2030 2005 2030 2005 2030 2005 2030
CWA 17.4 17.5 12.6 11.1 38.2 41.4 30.0 27.4 1.8 2.6 - -
EA 72.1 60.3 3.3 0.5 4.0 6.8 12.8 11.5 7.6 16.3 0.3 4.6
Pacific - - 64.9 50.9 - 20.8 35.1 23.6 - - - 4.7
SA 65.2 61.2 4.8 2.1 11.1 13.8 15.1 10.8 2.4 8.5 1.2 3.5
SEA 23.6 34.6 14.0 1.4 47.0 43.9 11.5 13.7 - 1.8 3.9 4.5
DMCs 62.3 54.8 5.3 1.6 11.8 15.0 14.1 12.5 5.6 12.0 0.8 4.1
Developed 36.5 32.9 10.1 5.0 20.6 23.1 8.4 7.3 22.1 27.6 2.3 4.0
A&P 56.5 52.0 6.4 2.0 13.8 16.0 12.8 11.9 9.3 14.0 1.1 4.1
1
CWA: Central and West Asia; EA: East Asia; SA: South Asia; SEA: Southeast Asia;
A&P: Asia and Pacific.
Electricity generation mix in 2005 and 2030

Projected impacts
Projected impacts of SLR (% of indicators impacted)
A key reason for this result is that a very large percentage of the urban
population of MENA countries lives in coastal areas.

Projected impacts
0
1
2
3
4
5
6
Qatar
Tunisia
UnitedArabEmirates
Kuwait
Egypt
Libya
WesternSahara
Oman
Iran
Yemen
SaudiArabia
Morocco
Algeria
1 meter 2 meter
Projected impacts of SLR – Country area
(% impacted)

Projected impacts
Projected impacts of SLR – Population
(% impacted)
0
2
4
6
8
10
12
14
Egypt
Tunisia
UnitedArabEmirates
Libya
SaudiArabia
Qatar
Morocco
Oman
Yemen
Kuwait
Iran
Algeria
WesternSahara
1 meter 2 meter

Projected impacts
Projected impacts of SLR – Agriculture
(% impacted)
0
2
4
6
8
10
12
14
16
18
20
Egypt
Tunisia
Libya
Algeria
Morocco
Yemen
Oman
Iran
Kuwait
Qatar
SaudiArabia
UnitedArabEmirates
WesternSahara
1 meter 2 meter

Cairo
Alexandria Port Said
Egypt
NASA/USGS
Landsat Geocover

Projected impacts
Projected impacts of SLR – GDP
(% impacted)
0
2
4
6
8
10
12
Egypt
Tunisia
UnitedArabEmirates
Qatar
Libya
Kuwait
Oman
Yemen
Morocco
Iran
Algeria
SaudiArabia
WesternSahara
1 meter 2 meter

Projected impacts
Arab Forum for Environment and Development (2009):
“The report has found that virtually no work is being carried out to
make the Arab countries prepared for climate change challenges.
Specifically, no concerted data gathering and research efforts could
be traced regarding the impacts of climate change on health,
infrastructure, biodiversity, tourism, water, and food production. The
economic impact seems to be totally ignored.”

Projected impacts
THOUGHT 2:
There is a fundamental need for a better understanding of the range of
the possible impacts of climate change at the regional, national, and
local levels.
Impacts on:
Understanding the impacts of climate change requires multi-
disciplinary teams.
THOUGHT 3:
• Infrastructure (transport, water supply, health facilities, etc.)
• Agriculture and food production
• Health
• Energy
• Water

For example: Projected impacts on health
Water
Agriculture
Disaster
Health
Impacts
Climate
Change
1 2Sector impacts of CC Sector DR Function
Climate expertise Health expertiseSector expertise

Imagine MENA in 2050.
MENA 2050 will experience higher temperatures, less rainfall,
more extreme weather events (mostly droughts).
There will be a lot more deaths and a lot more people affected by
extreme weather events in MENA 2050 than there is today.
Conclusion:
MENA’s population will increase from approximately 330 to 505
million by 2050.
Projected impacts

Implicit assumption: Climate resilience in MENA in 2050 is the
same as MENA’s existing climate resilience.
Implicit assumption supporting this conclusion
Projected impacts
“Current impacts of climate change on malaria are based
on climatic parameters only. In view of various determinants,
viz. developmental, sociological and ecological aspects
of malaria15, assessments need to be refined attributable
to climate change alone.”
Example: National and Regional Impacts of Climate Change on
Malaria by 2030 (in Current Science, Vol. 10, No. 3, 2011)

Implicit assumption supporting this conclusion
The fact is that climate resilience crucially depends on income
per capita and education.
Income per capita and education in MENA 2050 are going to be
much higher than they are today. This implies that MENA 2050 is
going to be a lot more climate resilient than it is today.
Projected impacts

So, which way is it going to go?
Two things going on:
 More people and more extreme weather events should
yield more people affected, ceteris paribus;
 On the other hand, resilience will be higher.
Hence, when we think about the impacts of climate change (and
therefore when we think about adaptation to climate change),
we need to take into account that climate resilience in the future
is going to be very different than what it is today.
Projected impacts

ititititit
it
it
it eTCEG
P
L
R 





 43210ln)ln( 
R: Impact risk
L: # of persons killed or affected by floods or droughts
P: Population
G: GDP per capita
E: Female educational enrollment rate
C: Precipitation
T: Temperature
e: Random error term
Model:
Projected impacts

For example: Projected impacts on health
Water
Agriculture
Disaster
Health
Impacts
Climate
Change
Planning for the health impacts of
CC means understanding 3 types
of relationship: 1, 2, and 3
1 2
Socio-economic
characteristics
Sector impacts of CC Sector DR Function
3
Economic Function
Climate expertise
Economic
expertise
Health expertiseSector expertise

Projected impacts
While it may be argued that the assessment of the impacts of climate
change is the work of climate scientists as well as relevant field
experts, economists have a significant role to play in this effort to: (1)
factor in the socio-economic determinants of vulnerability (or
resilience); and (2) ensure that the information produced is conducive
to the undertaking of economic analysis.
THOUGHT 4:
Understanding the impacts of climate change and the economics of
climate change requires multi-disciplinary teams.
THOUGHT 5:
We must better understand the socio-economic determinants of the
impacts of climate change.

Economic Costs of Climate Change
 The economic effects of climate
change is the costs of inaction.
Costs of inaction is usually taken to
represent the future baseline
without mitigation and adaptation.
Costs refer to total or average or
marginal costs.

An Example of a Bottom-Up Approach

 Production Function
Approach
 Econometric Approach
 CGE Approach
 Cost/Benefit Approach

Production Function Approach

Econometric Approach
Y =AX1
b1
X2
b2
exp(a1X1+a2 X2 )
Where Y represents agricultural yield and is dependent on X1
(Growing Season Length GSL), and X2 (total precipitation).
β1, β2, α1, α2, are coefficients to be estimated by regression,
A is a constant,
and exp represents an exponential term.

CGE Model
• CGE models capture the mutual sectoral and
regional interdependencies inherent in the
economy.
• These models are increasingly sophisticated in
their ability to incorporate dynamics and time
sensitive variables.
• The CGE methodology was used to capture the
linkages between agriculture and the rest of the
economy in California.

Economics of mitigation
Countries of the MENA region produce between 4.5 and 6% of the
world’s emissions of CO2.
Therefore, investment by MENA countries to reduce their emissions to
zero would have no impact on projected climate change.
In other words, MENA countries must justify such investments on the
basis of national costs and benefits.
Numerous investments in renewable sources of energy in the region:
• Commercialization of wind energy in Egypt;
• Solar heating in Palestine, Tunisia, and Morocco;
• Concentrated solar power projects in Egypt, Tunisia, Algeria;
• Morocco (Ouarzazate – 500 MW);
• CCS project in Algeria;
• Introduction of CNG as transport fuel in Egypt.

THOUGHT 6:
There is a need to identify the range of possible mitigation options in
the energy and non-energy sectors and to estimate the marginal
abatement costs of this range of options so as to identify those
options which yield positive net benefits regardless of climate
change.

MAC curve: Bangladesh
-200
-100
0
100
200
300
400
IAC (2005 USD per ton CO2e)
GHG Abatement Potential (kt CO2e)
2020 GHG AbatementCostCurve- Bangladesh
Efficient diesel rail and diesel truck meeting transport freight demand
Efficient diesel water freight vessels in the transport sector
Efficient CFL Lamps in the residential sector
Efficient diesel water passenger vessels in the transport sector
Efficient diesel pumps in the agricultural sector
Efficienct paddy parboil & milling
technology in the industry sector
Efficienct boilers in the industry
sector
Efficienct hybrid Hoffman kiln in the brick industry
CFL lamps in the commercial sector
Efficienct technology in the
fertilizer industry
Efficient continuous technology in the sugar
industry
EfficientLCDTVinthe residential sector
Nuclear power generation
Renewable power
Efficiencttechnology in the textile industry
Efficient fuell cell and CNG buses in the transport sector
Efficienct furnace in iron and steel industry
Efficient fans in the
commercial sector
Efficient fans
and AC in the
residential
sector
Gas fired plants with
carbon capture and
storage
Efficient refrigerator in the
residential sector
Efficient CNG and gasohol cars in transport sector
Efficient process technologyinthe cementindustry

2020 GHG Abatement Cost Curve - Nepal
-200
-100
0
100
200
300
400
Potential (thousand tons CO2e)
Cost(2005US$pertonCO2e)
206 8366274130
Residential electric cooking replacing 50% kerosene stove
Commercial electric cooking replacing 50% kerosene stove
Residential ICS replacing 50% wood stove
Residential electric water heating replacing 40% kerosene water heater
Commercial electric water heating replacing 40% kerosene water heater
Efficient diesel boiler replacing 50% conventional diesel boiler
Hybrid gasoline car replacing 30% fossil fuel car in Kathmandu
Residential electric space heating replacing 50% kerosene space heater
Electric Train replacing 25% diesel bus in RoN
Electric bus replacing 20% bus service in Kathmandu
Hybrid truck replacing 30% diesel truck in Kathmandu
Residential electricfication from micro-hydro replacing 25% kerosene based lighting
Residenial electrification from solar home system replacing 50%
kerosene based lighting
MAC curve: Nepal

Economics of adaptation
• Globally wettest and driest may not be wettest and driest for MENA
region.
WB EACC Study (2010):
• Scenario: 2 degrees Celsius warmer
• 2 GCMs: Globally wettest (NCAR) and globally dries (CSIRO)
• Horizon: 2010 - 2050
• Results in MENA: Adaptation costs reach approximately USD
3.5 billion (in 2005 dollars) per year, for each year of the period 2010-
2050.
Some limitations:
• There is only one warming scenario: 2 degrees Celsius.
• The nature of the adaptation options, their impacts and costs are
based on literature reviews, not on actual estimates.

Economics of adaptation
THOUGHT 7:
We must better understand the economics of adaptation at the local
level. What are the adaptation options? What are the impacts
(benefits) of these options? What are their costs? How do local people
adapt to climate change? What is the role of the public sector?

There is no need to adapt economic analysis to climate change. The
general framework of analysis works just fine.
Economic analysis of adaptation options
THOUGHT 8:
The greatest difficulty in conducting an economic analysis of a climate-
proofing investment is not with the economics; it is with the
identification of projected changes in climate variables, and then of the
physical impacts of these changes on infrastructure. Once these
impacts are quantitatively identified, the economic analysis of climate-
proofing investment is relatively straightforward.

Changes in the Net Present Value of the
Project as a Result of Climate Change
ΔNPV(P) > 0 ΔNPV(P) < 0
Keep project
in portfolio
Economic analysis of project-
level climate-proofing options
NPV(CP) > 0 NPV(CP) < 0
NPV(P) < 0 NPV(P) > 0 NPV(P) < 0NPV(P) > 0
Remove
project from
project
portfolio
Keep project
in portfolio
without
adaptation
Remove
project from
project
portfolio
Keep project
in portfolio
with
adaptation

Changes in the Net Present Value of the
Project as a Result of Climate Change
ΔNPV(P) > 0 ΔNPV(P) < 0
Keep project
in portfolio
Economic analysis of project-
level climate-proofing options
NPV(CP) > 0 NPV(CP) < 0
NPV(P) < 0 NPV(P) > 0 NPV(P) < 0NPV(P) > 0
Remove
project from
project
portfolio
Keep project
in portfolio
without
adaptation
Remove
project from
project
portfolio
Keep project
in portfolio
with
adaptation
Corollary: The fact that an
infrastructure is projected to
be adversely impacted by
climate change does not
necessarily imply that it should
be climate-proofed.

In general, the economic analysis of development projects is
weak. Often times, the economic analysis is not used to assess
alternatives and guide decision-making about investment
projects; it is often used to justify decisions which have been
made.

“The percentage of Bank projects that are justified by cost-
benefit analysis has been declining for several decades,
owing to a decline in adherence to standards and to difficulty
in applying cost-benefit analysis. (…) in many cases there is
a lack of attention to fundamental analytical issues such as
the public sector rationale and comparison of the chosen
project against alternatives. The Bank’s use of cost-benefit
analysis for decisions is limited because the analysis is
usually prepared after the decision to proceed with the
project has been made.”
World Bank (2010), Cost-benefit analysis in World Bank projects,
Washington, D.C.

Unfortunately, this weakness applies to the economic analysis of
adaptation options.
For example:
• The economic analysis of a road project covers an horizon
of 30 years while the economic analysis of climate-proofing
options of this same road covers an horizon of 50 years.
• Different discount rates are used in the economic analysis of
the project itself and in the economic analysis of the
adaptation options.

THOUGHT 9:
Economic analysis as a tool to guide decision-making of public
sector investments has lost its credibility. We must return to the
undertaking of credible, reliable, and objective economic
analyses.
THOUGHT 10:
The economic analysis of public sector investment projects must
explicitly account for risk (probabilistic cost-benefit analysis;
risk-based economic analysis; real option analysis). Simplistic
sensitivity analysis is not helpful.

There is a great temptation to increase the capital costs of
infrastructure projects to account for climate change by some
standardized “climate change adaptation coefficients”. This
temptation should be avoided. Adaptation options and costs are
specific to local circumstances.
THOUGHT 11:

International financial institutions require that specific discount
rates be used to calculate the present value of costs and benefits.
Given the required level of these discount rates, climate change
does not really matter.
Does climate change matters
THOUGHT 12:
There is little need to undertake the economic analysis of
adaptation investments given the nature of the instructions
provided by IFIs. These instructions must be challenged with
appropriate analytical and empirical work.

The Effects of Climate Change for the Middle East and North Africa

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