The economics of climate change C C 175 Christian Traeger Ch i ti - PowerPoint PPT Presentation

The Economics of Climate Change – C 175 The economics of climate change C C 175 ‐ Christian Traeger Ch i ti T Part 6: Integrated Assessment g Background/Further reading: g g Nordhaus, W. D. & J. Boyer (2000), Warming the World, MIT Press. Stern N (2007) The Economics of Climate Change Cambridge University Stern, N. (2007), The Economics of Climate Change, Cambridge University Press. Nordhaus, W.D. (2008), A Question of Balance ‐ Weighing the Options on Global Warming Policies, Yale University Press. g , y Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 1

The Economics of Climate Change – C 175 What is an Integrated Assessment? So far we have analyzed  The science of climate change addressing the relation between GHG emissions, temperature and climate change, and their impacts  the economics of policies addressing GHG emissions  the economics of policies addressing GHG emissions Now we combine the two aspects! p An integrated assessment model (IAM ) combines scientific and socio ‐ economic aspects of climate change for the purpose of assessing impacts and policies impacts and policies. Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 2

The Economics of Climate Change – C 175 Why an Integrated Assessment Model? Why is such a combined model useful for assessing climate change? Because  GHG emissions affect climate change  Climate change affects economic production and welfare  Economic production and welfare affect GHG emissions ‐ > continuous interaction between the economy, welfare, and climate system y A policy that changes one of the above aspects changes all aspects and how they develop influence each other over time! h h d l i fl h h i ! Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 3

The Economics of Climate Change – C 175 Components of an Integrated CC Assessment Population, technology, Mitigation production, consumption Policy Emissions Emissions Atmospheric concentrations Fee edbacks Radiative forcing Temperature rise and global climate change Direct impacts (e.g. crops, forests, ecosystems) Socio ‐ economic impacts Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 4

The Economics of Climate Change – C 175 A Prototype of an IAM: DICE Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 5

The Economics of Climate Change – C 175 Building Blocks of an Integrated Assessment Model We introduce a slightly simplified version of a stylized IAM: Nordhaus’ widespread DICE model  We analyze the most important equations determining Production, Investment, and Emissions d d   And equations describing how Capital Capital   GHG concentrations  Temperatures p  evolve over time (stocks!)  Finally, a welfare function is to be maximized adhering to these equations ti Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 6

The Economics of Climate Change – C 175 Building Blocks of IAMs: Production  Production: In period t output is   1       1 t t Y Y A A K K L L t t t t D t which is made up of  Cobb Douglas production function with inputs  Capital K t  Labor L  Labor L t  Technological Progress A t (increases over time)  Damage D t reduces output  Costs incurred for reducing emissions Λ t (emissions coming up later) Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 7

The Economics of Climate Change – C 175 Building Blocks of IAMs: Production   1     1 t Y A K L t t t t How do we get the values (in DICE)? D t  L b  Labor L t is exogenous estimate taken from population models L i ti t t k f l ti d l  Capital K t is calculated as part of the model ( ‐ > endogenous ) (next building block)  Parameter γ is estimated γ = 3  Parameter γ is estimated γ =.3  Technological Progress A t is exogenous ‘estimate’  Damage D t is approximated as a quadratic function of temperature :    2 D a a T a T t 0 1 t 2 t Note: Thus, modeling precipitation change or sea level rise is cut out in the model and adverse effects are directly related to temperature change d l d d ff di l l d h  Costs of emission reduction is estimated as a function Λ t ( μ t ) of the emission ‐ control rate μ t (percentage of emissions mitigated, emissions coming up later) (p g g , g p ) Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 8

The Economics of Climate Change – C 175 IAMs: on Damages... (Stern Review) Global temperature change (relative to pre ‐ industrial) Global temperature change (relati e to pre industrial) 0 ° C 1 ° C 2 ° C 3 ° C 4 ° C 5 ° C Food Food Falling crop yields in many areas, particularly developing regions developing regions Falling yields in many Possible rising yields in developed regions some high latitude regions Water Water Water Water Significant decreases in water Significant decreases in water Small mountain glaciers Sea level rise threatens availability in many areas, including disappear – water Mediterranean and Southern Africa major cities supplies threatened in several areas Ecosystems Ecosystems Extensive Damage Rising number of species face extinction to Coral Reefs Extreme Extreme Rising intensity of storms, forest fires, droughts, flooding and heat waves Weather Weather Events Events Risk of Abrupt and Risk of Abrupt and Risk of Abrupt and Risk of Abrupt and Increasing risk of dangerous feedbacks and abrupt, Major Irreversible Major Irreversible large ‐ scale shifts in the climate system Changes Changes Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 9

The Economics of Climate Change – C 175 IAMs: on Damages... (IPCC AR4) Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 10 Sources: IPCC (2008)

The Economics of Climate Change – C 175 Regional damage estimates in DICE ‐ 2007 Regional damage estimates for 2005 and temperature increase of 2.5°C Uses individual indices relating temperature/climate change to damage for the different dimensions of damage (columns). Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 11

The Economics of Climate Change – C 175 Aggregate Damage Estimates DICE ‐ 2007  Adding estimates for catastrophic damages and  Aggregating over Regions and  Extrapolating for temperature changes other then 2 5°C yields Damage  Extrapolating for temperature changes other then 2.5 C yields Damage Source: Nordhaus (2007) Figure 3 3 Damage function in DICE 2007 versus earlier Source: Nordhaus (2007), Figure 3 ‐ 3, Damage function in DICE ‐ 2007 versus earlier model (RICE ‐ 1999) and estimated range from IPCC AR4, which reports that “global mean losses could be 1–5% GDP for 4°C of warming”. Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 12

The Economics of Climate Change – C 175 Building Blocks of IAMs: Capital  Production uses capital which is accumulated over time:  In the present capital can be measured ( K 0 ),  If capital (stock!) is K t in the period t then in period t+1 it is         K 1 K I t  1  t 1 k k t t t t  a fraction δ k of the capital depreciates  I t describes new investment into capital  I describes new investment into capital   I Y C t t t  Everything produced but not consumed is invested Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 13

The Economics of Climate Change – C 175 Building Blocks of IAMs: Emissions  Emissions from production in period t (flow):        1 E ( 1 ) A K L t t t t t t  σ t : ratio of uncontrolled industrial emissions to output (metric tons of carbon per output, ‘carbon ‐ intensity of output’)  μ t : emissions ‐ control rate (fraction mitigated at cost Λ t ( μ t ) )  Emissions from land use change and forestry in period t (flow): LUCF t LUCF taken as exogenous k  Stock of emissions in period t+1 :      M ( 1 ) M E LUCF  t 1 M t t t  fraction δ M of emission stock naturally depleted (leaves the atmosphere)  Note: Actual DICE also models carbon transfer to and in oceans Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 14

The Economics of Climate Change – C 175 Building Blocks IAM: Temperature  Temperature: In period t temperature increase w.r.t. preindustrial is              T T T T F F T T  1 t t t t  Temperature increases proportional to the difference between  Radiative forcing F t in period t  The equilibrium forcing λ T t that would correspond to T t  σ characterizes delay in temperature increase (small σ slow change) σ characterizes delay in temperature increase (small σ slow change)  Radiative forcing F t is given by With:          • η = forcing parameter η g p M M         t ln     M   • M preind = Preindustrial CO2 stock     preind  F OtherGHGs t t   ln 2 • OtherGHGs t = non ‐ CO2 GHGs       taken as exogenous Spring 09 – UC Berkeley – Traeger 6 Integrated Assessment 15