Integrated economic and climate modelling

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  • 1. INTEGRATED ECONOMIC AND CLIMATE MODELLING1 by William D. Nordhaus December 2011 Cowles Foundation Discussion Paper No. 1839 (page 30-last) Lia Puspitasari Department of MBA-MPP Graduate School of Systems and Information Engineering Presented at Environmental Policy Class University of Tsukuba, Nov 2012
  • 2. III. Illustrative Model Results: The Copenhagen AccordIIIA. Model OutputsThe most important applications of IAMs are: Making consistent projections Calculating the impacts of alternative assumptions on important variables such as output, emissions, temperature change, and impacts. Tracing trough the effects of alternative policies on all variables in a consistent manner Estimating the uncertainties associated with alternatives variables and strategies. Calculating the effects of reducing uncertainties about key parameters or variables.
  • 3. IIIB. Modeling the Copenhagen Accord Focus analysis of the CopenhagenAccord and similar policies. Review histories ofthe international agreements on climatechange, the prospect for climate change and theeconomic implications.
  • 4. IIIC. Policy Scenarios Baseline • No climate-change policies are adopted Optimal • Climate change policies maximize economic welfare, with full participation by all nations starting in 2010 and without climatic constraints Temperature-limited • The optimal policies are undertaken subject to a further constraint that global tempeature does not exceed 2 ºC above the 1900 average Copenhagen Accord • High-income countries implement deep emissions reductions similar to those included in the current U.S. proposals, with developing countries following in the next 2-5 decades. Copenhagen Accord with only rich countries • As in Copenhagen Accord, but developin countries do not participate until the 22nd century.
  • 5. IIID. Major Resultsa. Global CO2 Emissions
  • 6. b. Global temperature projections
  • 7. c. Carbon Prices
  • 8. d. Aggregate Cost and Benefits
  • 9. IIIE. Comparisons with Other Studies a. RICE-2010 compare to its early vintages
  • 10. b. RICE-2010 compare to EMF-22
  • 11. IIIF. Qualification with the Results MajorAnalysis Difficulties Key issue cautions Different The problems vintages of Unrealistically associated smooth picture of the same with model show the functioning of estimation and Whether economic and dramatic they have a validation of changes in political the models large impact systems, In much the results upon current the same way that policies global climate models abstract Find a reliable from the approach to turbulence of estimating the Different weather systems. relationships models have from widely appropriate varying historical or projections cross- of future sectional data conditions Some of elements have no obvious empirical counterpart
  • 12. IV. Some Major Issues for Research in Integrated Assessment ModelingIV.A Introduction Nordhaus review some major issues that arise in construction, design, and interpretations of IAMs.IV. The Social Cost of Carbon Definition of SCC The change in the discounted value of utility of consumption denominated in terms of current consumption per unit of additional emissions. This concept represents the economic cost caused by an additional ton of carbon dioxide emissions (or more succinctly carbon) or its equivalent
  • 13. Mathematical Programming• SCC is the shadow price of carbon emissions along a reference path of output, emissions and climate change.Optimized Climate Policy• SCC=carbon price or carbon taxUncontrolled regime• SCC will generally exceed the (zero) carbon price
  • 14. Application of SCC✔Critical ingredient in climate-change policy - provide policy makers a guidepost to aim for if they are seeking an economically efficient policyfor carbon pricing.✔For rulemaking where countries do not have comprehensivepolicies covering all GHGs - regulators might use the SCC in a calculation of social costs and benefits of policies involvingenergy or climate-affecting decisions. Three different estimates for the SCC
  • 15. IVC. Complexity and TransparencyThe They remain complex non- The DICE models shown has 18 dynamic equations which contain 44 non-trivial parameters. Some of them are relatively inconsequential, others arecomplexity linear systems with several central. The structural equations are invariablyand poorly determined aggregates of complicated non-linear spatial and temporal relationships, likely to be difficult to relationships determine exactly and are probably misspecifiedtransparency of DICE RICE-2010 is very RICE 2010 requires Excel Macro because of the need to solve the model using the Negishi algorithm (toand RICE complicated (requires Excel solve Negishi weights). It is difficult for users other than the model developers to actually use suchmodels Macro) complex models. Small and transparent models are sometimes adopted Large models are very by other researchers or used by students. The DICE model is sufficiently simple that many researchers seldom transferrable. have used it. The example of complex models is OECD GREEN model.Major way in which large models can be tested and validated is trough construction of alternative models by other research groups
  • 16. IVD. Positive versus Normative ModelsDescription of RecommendationsAction Positive Ex: Stern ReviewEx: Baseline NormativeProjections Positive Models Normative Models As a description of how Seen as the recommendations of economies and real world decision a central planner, a world makers (consumers, firms, and environmental agency, or a govenments) actually behave disinterested observer incorporating a social welfare function This issue arises particularly in the analysis of the discount rate
  • 17. IVE. The Discount RateEconomic theory of discounting✔ assumes great prominence in climate-change IAMs because ofthe long delays between investments in abatement and returnsin averted damages.2 concepts Discount rate on Real return on capital, real interest rate, the opportunity goods cost of capital, the real return • A market based concept that measures a relative price of goods at diffeent points of time Generational discount rate Pure rate of social time preference • Involves the relative weight of the economic welfare of different households or generations over time
  • 18. Most analysis of the discounting issue in the economic and IAMliteratures use the approach of The Ramsey-Koopmans-Cass model of optimal economic growth Ramsey equation: r*= ρ + αg* it shows that in a welfare optimum under simplified condition, the rate of return on capital (r*) is determined by the general discount rate (ρ), the consumption elasticity (α), and the rate of growth of generational per capita consumption (g*) Prescriptive view Descriptive approach Analysis argue for particular values of the Assumes that investments to slow ethical parameters , ρ and α, and from climate change must compete with this derive the ethically appropriate investments in other areas. The discount rate on goods (Cline:1994, and benchmark for should therefore reflect Stern Review:2007) the opportunity cost of investment.
  • 19. IVF. Uncertainty for thin-tailed distributionsThe important uncertainties are:☑ pace of economic growth in different regions☑ the damage in different regions☑ the pace at which developing countries move their laborforces and economies out of agricultureThin-tail uncertaintySecond-order uncertainty which examines the impact of thesecond moment or distributions (dispersion around themean) assuming that distributions are normal or close tonormal.
  • 20. IVG. Higher-moment uncertainty (“fat tails”) andcatastrophic climate changeHigher-moment uncertaintyThe potential for “fat tails” in the distribution of uncertainparameters and the risk of catastrophic climate change.Catastrophic outcomesOne in which world per capita consumption declines at least fiftypercent below current levels for an extended period. By catastrophic, the damages from climate change far larger than what is envisioned in the direst of current IAM projections
  • 21. IVH. Strategic considerations and the game-theoretic aspects of climate change policyCentral issues in climate change:The facts that it involves many countries for many time periods.- No single country or generation can reduce emissions sufficiently to ensure that there are no dangerous interferences with the climate system.- The world is locked into a non-cooperative equilibrium with no effective mechanism to break out.
  • 22. IVI. Modeling Technological ChangeMost studies and models of environmental and climate-changepolicy have sidestepped endogeneous technologicalchange/induced innovation.Approaches to include induced innovation • To understand why technological change appears to have been largely labor saving Research Model • Technological change is a public good that is produced by research, development, and innovation • Models to increase the granularity of the technological description down to individual technologies Learning Model • Rationalize early investments in technologies, of being competitive in the future
  • 23. V. Final Thoughts• The present survey of IAM models shows the enormous progress that the field has made over the two decades since its emergence.• The most important results from IAMs is the concepts and estimation of efficient paths of abatement and carbon pricing required for slowing climate change• Much works remaining for modelers, require further refinement and better modeling, particularly in isssues surrounding uncertainty, technological change, and the need for mechanisms to break the non-cooperative
  • 24. Thank You