2014

CIRCLE
Costs of Inaction and Resource scarcity:
Consequences for Long-term Economic growth
The OECDs CIRCLE
project
Further degradation of the environment and natural capital compromises prospects for
future economic growth and human well-being. Without more ambitious policies, the
costs and consequences of inaction on important environmental challenges such as
climate change, biodiversity loss, water scarcity and health impacts of pollution will be
signicant.
The Cost of Inaction and Resource Scarcity; Consequences for Long-term Economic
Growth (CIRCLE) project aims at identifying how feedbacks from poor environmental
quality, climatic change and natural resource scarcity are likely to affect economic
growth in the coming decades.
Over a series of model developments, CIRCLE will generate reference projections
for economic growth which reect the costs of policy inaction. These reference
projections will help to improve future OECD projections of economic growth, as
well as assessments of the economics of environmental policies, as they are able
to include not only costs but also benets of policy action in terms of reduced
environmental damages. This will allow a more informed evaluation of policy options,
and a comparison of the costs and benets involved.
The rst track of the CIRCLE project is a quantitative
analysis of the economic feedbacks of climate change, air
pollution and the nexus between land, water and energy.
The core tool to be used in the analysis is the OECDs
dynamic global multi-sector, multi-region model ENV-
Linkages, which will be coupled to biophysical models for
an integrated assessment. Using a systems approach allows
focusing on interactions between the various environmental
challenges.
The second track will scope the possibilities to
quantitatively assess water-economy linkages, the economic
feedbacks of loss of biodiversity and ecosystem services
and resource scarcity. If possible, these themes will also be
included in the modelling track at a later stage.
A two-track approach
Climate change
Air pollution
Modelling
track
Land-water-energy
nexus
Water
Biodiversity and
ecosystems
Resource
scarcity
Scoping
track
Climate change is causing impacts that are already affecting
the economy at present and will increasingly do so in the
future. Different impacts will affect different parts of the
economy (such as labour productivity from reduced health
and loss of land from sea level rise), causing adjustments
in all markets through production and trade changes. The
CIRCLE project quanties the macroeconomic costs of a
set of climate impacts that affect the economy, including
sea level rise, agriculture, energy and tourism, but it also
highlights the unquantiable consequences that climate
change may cause in the future with the increasing
occurrence of extreme and catastrophic events.
The modelling is based on available literature on how
climate impacts affect the economy of major world
regions at the macroeconomic and sectoral level. Detailed
assessments of the specic impacts are fed into the ENV-
Linkages model to assess the implications for different
economic activities and the overall macroeconomic costs.
This is complemented with a more stylised assessment of
the long-run implications, using the AD-RICE model. Further
work is planned to expand the number of impacts included
and to assess a range of mitigation and adaptation policies.
Preliminary results for the quantitative assessment of
the economic feedbacks of climate change damages have
been included in the OECD horizontal projects on New
Approaches to Economic Challenges (NAEC) and OECD@100,
and are reported in Consequences of climate change
impacts for economic growth: a dynamic quantitative
assessment (OECD Economics Department Working Paper,
No. 1135, 2014).
A two-track approach
Climate change
Climate change
According to the model simulations, the effect of climate change
impacts on global GDP is projected to increase over time, with
damages increasing more rapidly than the global economy. These
impacts would lead to a gradually increasing global GDP loss
amounting to 0.7% to 2.5% by 2060, assuming rms and households
adapt to minimise the costs. Underlying the global GDP losses are
much larger variations on consequences from specic climate impacts
on specic sectors in specic regions. Among the impacts included in
the analysis, agricultural impacts tend to dominate in most regions.
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
2010 2020 2030 2040 2050 2060
% change wrt no-damages baseline
Wider uncertainty range
equilibrium climate sensitivity (1C - 6C)
Likely uncertainty range
equilibrium climate sensitivity (1.5C - 4.5C)
Central projection
Global impacts of climate change
Source: OECD Economics Department Working Paper, No. 1135, 2014.
Air pollution is one of the most serious
environmental health risks, particularly in big
cities and highly populated areas. In absence
of new policies, urban air quality will continue
to deteriorate causing serious risks to human health. The health consequences of
air pollution come at a high cost to society, causing premature deaths as well as
increased health costs from additional hospital admissions and use of medicines
or decreased labour productivity.
For this part of the CIRCLE project, ENV-Linkages has been improved to include
emissions of air pollutants. The improved model will be used to quantify the
impacts on GDP of inaction, as well as the benets of policy action. While the
main focus will be on health impacts, future work may, if possible, also take into
account other impacts, such as on biodiversity or agriculture. The analysis will
include both mortality and morbidity costs. As much as possible the costs will be
split between those that can be directly included
in a general equilibrium modelling framework,
and those that do not correspond to any economic
variable, such as the costs of pain and suffering.
The costs that can be modelled will be included in
ENV-Linkages as economic feedbacks to quantify
the economy-wide costs of local air pollution.
The other costs, which include the valuation of
premature deaths, will be highlighted but not
included in the model.
Policy packages will be studied to quantify
the economic benets of policy action, with
specic attention to policies that address
simultaneously climate change and air
pollution.
Air pollution
Land-water-energy nexus
Economic activity is supported by environmental resources
in many ways. One important link between the economy and
the environment is through the use of scarce land, water
and energy resources. Water, energy and land are essential
for economic growth and development, and there are strong
linkages between land, water and energy (the nexus). Barriers
to the use of these resources may limit economic growth.
Policies neglecting these linkages may be sub-optimal and
might resolve a specic problem with one of these resources
but at the same time impact the others and create additional
(and unforeseen) problems. Therefore an integrated approach
is needed.
The land-water-energy nexus is modelled through linking the
Netherlands Environment Assessment Agency PBLs spatially
explicit biophysical IMAGE model with OECDs ENV-Linkages
model. A range of scenarios will be developed to assess the
consequences of reduced availability or quality of land,
water and energy resources. The analysis will rst focus on
biophysical bottlenecks regarding water availability, looking
at groundwater depletion and water allocation across sectors.
Next, bottlenecks regarding land availability will be studied,
including scenarios for land degradation and limits to land
conversion. The consequences of these bottlenecks for key
variables such as crop yields will then be linked to economic
activities where appropriate.
The links between biodiversity and ecosystem services
and the economic and social values that they support
are extremely complex. First, economic activities have
an impact on the services that these systems provide.
These services have a value not dissimilar to the values
provided by other goods and services and changes in these
values need to be taken into account in project and policy-
related decisions. Second, a loss of ecosystems makes the
functioning of the economic system less effective. The
regulating services that ecosystems provide contribute to
transport, energy, agriculture, recreation and related sectors.
There are also important feedback links. For instance when
wetlands are converted into agricultural land, its role in
regulating water ow is removed to a large extent and the
risk of oods increases.
These linkages between ecosystems and the economic
system need to be better understood, ideally by integrating
ecosystem functions into traditional economic models.
Furthermore, very little literature is available on how
biodiversity is linked to specic economic activities, and how
biodiversity loss interrupts these activities.
A full integration of the costs of a loss of biodiversity
and ecosystem services into the economic modelling
framework may therefore be beyond the reach of the
project. The scoping activities in this area will focus on the
main opportunities and obstacles in providing a tentative
assessment of the consequences of the loss of biodivefsity
and ecosystems on the macro economy.
Land-water-energy nexus Biodiversity & ecosystems
Biodiversity & ecosystems Water
There are complex channels through which water affects economic growth, and
traditionally economic models are not suited to investigate the impact of water scarcity
and pollution on economic growth. Water can be seen as partially replenishable. For
production, water is an input that combines with other production factors to generate
output. A key sector is agriculture (both irrigated and rainfed crop production), but
there are also many industrial uses, including cooling for electricity generation and
municipal water uses. Pressure on the resource has signicantly increased, in line with
demographic growth and economic development. And even when water use is not
directly consumptive, it may diminish the potential uses by altering the quality of the
water source.
The analysis of water-economy linkages starts with an investigation of the economic
feedbacks of water scarcity and water use. If possible, the water-economy linkages will
be included in ENV-Linkages, and the assessment will be harmonised with the insights
from the assessment of the land-water-energy nexus.
The water-economy linkages work may at a later stage be extended to an analysis of the
consequences of water pollution on economic activity. The latter could focus on health
impacts, analogous to the analysis of air pollution.
Global water demand: Baseline scenario, 2000 and 2050
Source: OECD (2012), OECD Environmental
Outlook to 2050; output from IMAGE.
0
1 000
2 000
3 000
4 000
5 000
6 000
2000 2050 2000 2050 2000 2050 2000 2050
OECD BRIICS RoW World
K
m
3
irrigation domestic livestock manufacturing electricity
The work focuses
on assessing supply
and consumption
characteristics ,
looking at both
supply risks and the
importance of materials
for the economy.
Mineral resources cover a large variety of natural
resources from metals to fossil fuels and enter the global
economy through various applications. Minerals prices
have been decreasing throughout the 20th century due to
technological progress towards extraction and exploration.
This price pattern seems to have found an end with the
sharp increase in world demand and a slowdown in high-
grade deposits discoveries after 2000.
Given the central role played by minerals in the economy,
it is therefore critical to investigate minerals scarcity and
what would be the consequences of supply disruptions,
long-lasting high minerals prices, or high price volatility
on the economy and geopolitics. The Grantham Research
Institute at the London School of Economics contributes
to this analysis through a study which aims at measuring
the criticality of specic non-energy material resources.
Work focuses on assessing supply and consumption
characteristics , looking at both supply risks and the
importance of materials for the economy. A wide range of
materials are being assessed to identify which ones are
most critical. Robustness of available information and
projected trends will also be taken into account. A case
study will then identify the consequences of this critical
material for economic growth. In contrast to the other
CIRCLE themes, this analysis will not be global, but focus on
OECD countries.
Resource scarcity
Project partners
The CIRCLE project is led by the OECD Environment
Directorate, with the engagement of other parts
of the OECD and experts nominated by member
governments. CIRCLE also draws upon the expertise
of a number of other institutions which are engaged as
collaborating partners.
These include:
The Basque Center for Climate Change (BC3),
Spain.
The Fondazione Eni Enrico Mattei at the
Mediterranean Center for Climate Change
(CMCC-FEEM), Italy.
The Grantham Research Institute at the London School of Economics and Political
Science (LSE-GRI), United Kingdom.
The Institute for Applied Systems Analysis (IIASA), Austria.
The Institute for Global Environmental Strategies (IGES), Japan.
The Institute for Prospective Technology Studies (JRC-IPTS), Spain.
The National Institute for Environmental Studies (NIES), Japan.
The Netherlands Environmental Assessment Agency (PBL), The Netherlands.
More information
Please visit the project website:
www.oecd.org/environment/circle.htm
For information about the main modelling tools
used for the CIRCLE project:
www.oecd.org/environment/modelling
Contact us:
shardul.agrawala@oecd.org
(Head of the Economy Environment Integration Division)
rob.dellink@oecd.org
(Co-ordinator Modelling and Outlooks)
Project partners
CIRCLE
Costs of Inaction and Resource scarcity:
Consequences for Long-term Economic growth