The Challenge of Global Warming: Economic Models and Environmental - - PowerPoint PPT Presentation

The Challenge of Global Warming: Economic Models and Environmental Policy

William Nordhaus (Yale) April 2007

William Nordhaus (Yale) () Global Warming April 2007 1 / 8

Overview

Outlines latest version of the Dynamic Integrated model of Climate and the Economy (DICE-2007) Incorporates greenhouse gas emission, climate change and damages into an aggregated Ramsey-style model Compares implications of alternative policy proposals to doing nothing and the "optimum"

William Nordhaus (Yale) () Global Warming April 2007 2 / 8

DICE 2007

Objective function: W =

T max

∑

t=0

• 1

1 + ρ t c1α

t

1 α

• Lt

where Lt follows a "logistic" function converging to 8.4 billion, ct = Ct/Lt and Tmax = 600 years (BGP) Production Function: Qt = ΩtΛtAtK γ

t L1γ t

where Ct + It = Qt and Kt = It + (1 δK )Kt1

William Nordhaus (Yale) () Global Warming April 2007 3 / 8

Geophysical Sectors

Climate damage: Ωt = 1 1 + ψ1TAt + ψ2T 2

At

where global mean surface temperature, TAT evolves according to TAt = TAt1 + ξ1 fFt ξ2TAt1 ξ3 [TAt1 TLt1]g TLt = TLt1 + ξ4 [TAt1 TLt1] Ft = η

• ln
• MAt

MA,1750

• + FXt

and the carbon cycle is represented by MAt = πEt + φ11MAt1 + φMUt1 MUt = (1 π)Et + φ22MUt1 + φ32MLt1 + φ12MAt1 MLt = φ33MLt1 + φ23MUt1

William Nordhaus (Yale) () Global Warming April 2007 4 / 8

Abatement Costs: Λt = 1 θ1tµθ2

t

where µt = emission control rate (control variable) Total carbon emissions Et = EIt + ELt where emissions from industry are given by EIt = σt (1 µt) Qt , ! implicit price of CO2 : Pt = 1 σt (1 µt)

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Major Contentious Issues

The subjective discount rate, 1/(1 + ρ) and αr , ! calibrated to long run growth of 1.4% and a real interest rate of 4.3%: ln ct+1 ct ' r ρ α = 0.043 0.015 2 = 0.014 , ! could have chosen ρ = 0.001 and α = 3 : ln ct+1 ct ' 0.043 0.001 3 = 0.014 , ! makes a big di¤erence to optimal policy and welfare implication Uncertainty Regional disaggregation , ! RICE–2008

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Alternative Policies Evaluated

No controls (baseline) Optimal policy: µt set to maximize welfare objective CO2 concentration constraints: upper limit on CO2 ppm from 1900 Temperature change constraints: upper limit on rise in oC from 1900 Kyoto protocol (various versions): one o¤ reduction to 5% below 1990 emissions by 2012 Stern proposal: choose optimal µt under low discount rate, but evaluated under "observed" rate Gore proposal: rapid rise in µt from 15% to 90% by 2050 Geoengineering?

William Nordhaus (Yale) () Global Warming April 2007 7 / 8

• 54 -

50 100 150 200 250 2005 2015 2025 2035 2045 2055 2065 2075 2085 2095 2105 Carbon price (2005 US$ per ton C) Optimal Baseline < 2 degrees C < 2x CO2 Stern Gore Kyoto w US

Figure V-4. Carbon prices for different strategies This figure shows the globally averaged carbon price of CO2 under different strategies for the next century. Note the upward tilt of the strategies. Note these are per ton carbon; for prices per ton of CO2, divide by 3.67. Prices are for 2008 for the first period.

• 56 -

50 100 150 200 250 300 2005 2015 2025 2035 2045 2055 2065 2075 2085 2095 2105

Carbon emissions (tons C per decade)

Optimal Baseline < 2 deg C < 2x CO2 Stern Kyoto w US Gore

Figure V-6. Global emissions of industrial CO2 per decade by policy

• 57 -

300 400 500 600 700 800 900 1000 1100

2 5 2 2 5 2 4 5 2 6 5 2 8 5 2 1 5 2 1 2 5 2 1 4 5 2 1 6 5 2 1 8 5 2 2 5 Carbon concentrations (ppm)

Optimal Baseline < 2 deg C < 2x CO2 Stern Kyoto w US Gore

Figure V-7. Atmospheric CO2 concentrations by policies

• 58 -

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

2 5 2 2 5 2 4 5 2 6 5 2 8 5 2 1 5 2 1 2 5 2 1 4 5 2 1 6 5 2 1 8 5 2 2 5 Temperature change (C)

Optimal Baseline < 2 deg C < 2x CO2 Stern Kyoto w US Gore Geoeng

Figure V-8. Projected global mean temperature change by scenario Note that increases are relative to 1900 average.

• 59 -

5 10 15 20 25 30

1 9 6 1 9 7 1 9 8 1 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 2 1

Per capita consumption (2005 US $)

Baseline Optimal Stern < 2x CO2

Figure V-9. Per capita consumption, major runs

• 51 -
• 25
• 20
• 15
• 10
• 5

5 10 15 20 O p t i m a l L i m i t t

• 1

. 5 X C O 2 L i m i t t

• 2

X C O 2 L i m i t t

• 2

. 5 X C O 2 L i m i t t

• 1

. 5 d e g r e e C L i m i t t

• 2

d e g r e e C L i m i t t

• 2

. 5 d e g r e e C L i m i t t

• 3

d e g r e e C S t e r n R e v i e w d i s c

• u

n t i n g G

• r

e p r

• p
• s

a l G e

• e

n g i n e e r i n g Present value of policy (trillions 2005 US$)

ObjFun PV (Dam + Abate)

Figure V-1. Present value of alternative policies The figure shows the difference in present value of a policy under two measures. The first bar is the objective function, and the second is the present value of the sum of abatement and damages. The policies are shown in Table IV-1. Note that the baseline is omitted as it has zero present value.

• 52 -
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Optimal < 2X CO2 < 2.5X CO2 < 2 degree C < 2.5 degree C < 3 degree C Kyoto with US Kyoto w/o US Strong Kyoto

Present value of policy (trillions 2005 US$)

ObjFun PV (Dam + Abate)

Figure V-2. Present value of alternative policies The figure shows the same values as in Figure V-1 with the larger values omitted for clarity.

• 53 -

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% Optimal < 1.5X CO2 < 2X CO2 < 1.5 degree C < 2 degree C < 2.5 degree C Kyoto with US Strong Kyoto Stern Gore Geoengineering

Costs, benefits are % of income Benefits/income Costs/income

Figure V-3. Costs and benefits as percent of income The figure separates costs and benefits for major policies and shows them as a percent of total income (all figures are discounted at the consumption discount rate). Figures are shown relative to the baseline of no controls.

Main Results

Theoretical optimum implies gradually rising emissions, leveling out by 2100 and rapidly rising implicit carbon price , ! reduces rise in gobal temperature to 1.7oC over next century , ! optimal price per ton of carbon is $23.4 in 2007 Alternative versions of Kyoto have almost no impact (both in terms

• f costs and bene…ts)

More ambitious proposals (Stern and Gore): big reduction in emissions, but economically very costly due to initial rate of reduction Nordhaus: "Slow, steady, universal, predictable and boring — those are probably the secrets to success for policies to combat global warming."

William Nordhaus (Yale) () Global Warming April 2007 8 / 8