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Economic Analysis of Climate Change Impacts in
        Europe: a Sectoral Approach




  Antonio Soria, Juan Carlos Ciscar...
The IPTS

The Institute for Prospective Technological Studies (IPTS), based in
Sevilla, is one of the 7 scientific institu...
Question of Interest:
 What are the economic consequences of
  climate change in Europe?
  - overall order of magnitude
  ...
What is known: aggregate impacts




TAR IPCC (2001)         Stern report (2007)

          Source: IPCC 4AR (2007), vol. ...
What is known: social cost of carbon
                        (marginal damage)

Tol (2005) review of literature
   • Mean ...
What is unknown


• Non-market effects
      (e.g. biodiversity, ecosystems)
• Extreme weather risks
• Socially contingent...
Outline

1. Overview of the PESETA project

2. Methodology: the economic CGE model

3. Sectoral results

4. Overall econom...
About PESETA

PESETA stands for: Projection of Economic impacts of
   climate change in Sectors of the European union base...
Project partners and scope

Climate scenarios: DMI, CRU

Six sectoral assessments:
  Agriculture: U. Politécnica de Madrid...
Integrated economic impact assessment

Starting point: physical impact estimates

Some sectors provide with direct effects...
Socioeconomic scenario: GDP, population assumptions


                  Climate model                       Stage 1:
     ...
impacts
 Physical      Physical      Physical     Physical
 impacts       impacts       impacts      impacts
agriculture  ...
Grouping
of countries
Climate Scenarios

Data needs: 50 km resolution; daily and monthly

Selection of scenarios
  2011-2040 period: A2 IPCC SRE...
Four 2080s Scenarios
                                                                                Scenarios
           ...
Temperature
3.9°C (A2 Hadley)   5.4°C (A2 Echam)
Precipitation
3.9°C (A2 Hadley)   5.4°C (A2 Echam)
Methodologies for Physical Impacts Assessment

Detailed process modelling
  Agriculture, DSSAT crop model
  River basin fl...
Economic impact assessment

Starting point: physical impact estimates

Some sectors provide with economic direct effects
 ...
2. The general equilibrium economic model


           The GEM-E3 Model:
      General Equilibrium Model for
      Energy-...
General equilibrium

•   Neoclassical framework
•   Each agent pursues its own interest
•   Decentralised information (pre...
Advantages of CGE modelling
•     Consistency
    •    Theory (microeconomics foundations, within a consistent
         ma...
Criticisms / disadvantages of CGE modelling


•   Weak empirical validation (calibration versus
    econometric estimation...
The GEM-E3 model: European model version
Computable General Equilibrium model

  Representing multiple production sectors ...
The GEM-E3 model: Production
                                                         Production (output)




•   Perfect
...
The GEM-E3 model: Consumption                      Total Income




                                                      ...
3. Sectoral results
Agriculture
Modelling of physical impacts and link
                to general equilibrium model


Site-evidence on average yield chang...
Agriculture

Crop yield
  changes
  (t/Ha),
  production
  losses and
  gains
Agriculture: crop yield changes (%)
                             compared to 1961-1990

                        B2 HadAM3h...
Coastal Systems
Coastal systems: the method

DIVA model

Impact categories: sea floods, migration, other

Integration into the CGE model:
...
Coastal
systems
- No
adaptation
- With
adaptation
Coastal Systems
            people flooded (1000s/year) in main scenarios with
              high climate sensitivity, wit...
River Floods
River Floods: the methodology

LISFLOOD model; integration of damages for various
return periods (from several ‘representa...
River Floods
Change in
  Economic
  damage
  (note red
  means a
  decrease)
River floods
             expected economic damage (million €/year)


                       B2 HadAM3h A2 HadAM3h B2 ECHA...
Human health
Human Health
            average annual heat-related (left) and cold-related (right)
             death rates (per 100,000...
Tourism
Tourism
                  TCI scores in summer

          5.4°C
control
                  Ideal



                  Excel...
Tourism
               Change in expenditure receipts (million €)


                        B2 HadAM3h   A2 HadAM3h   B2 E...
4. Overall economic impact



• Effects of 2080s climate
• On European economy as of today
• Assuming there is no public a...
Annual damage
         in terms of GDP changes (million €)
10000



    0



-10000



-20000



-30000



-40000

       ...
Annual damage
1.0
              in terms of Welfare changes (%)

0.5




0.0




-0.5




-1.0
                           ...
Sectoral decomposition
1.0%
                                                   of welfare changes (%)
                    ...
5. Conclusions

• Integration of various disciplines, consistency
requirements
• Further research is needed, concerning:
 ...
http://peseta.jrc.ec.europa.eu/
Muchas gracias !
Análisis económico de algunos impactos del cambio climático en Europa: un enfoque sectorial
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Análisis económico de algunos impactos del cambio climático en Europa: un enfoque sectorial

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A lo largo de estas jornadas, expertos nacionales e internacionales en el tema analizan la situación actual, tendencias futuras y principales retos que plantean los esquemas de reducción de emisiones y los mercados de carbono como herramientas en la lucha contra el calentamiento global, especialmente después de la cumbre de Copenhague.
Antontio Soria, Jefe de la Unidad de Economía, Cambio Climático y Transporte, de IPTS (Institute
for Prospective Technological Studies), participa con la ponencia "Análisis económico de algunos impactos del cambio climático en Europa: un enfoque sectorial".

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Análisis económico de algunos impactos del cambio climático en Europa: un enfoque sectorial

  1. 1. Economic Analysis of Climate Change Impacts in Europe: a Sectoral Approach Antonio Soria, Juan Carlos Ciscar (JRC, European Commission) jornadas eoi ‘carbon markets and emission reduction’ 3 February 2010, Madrid
  2. 2. The IPTS The Institute for Prospective Technological Studies (IPTS), based in Sevilla, is one of the 7 scientific institutes of the European Commission's Joint Research Centre (JRC) Mission to provide customer-driven support to the EU policy-making process by researching science-based responses to policy challenges that have both a socio-economic and a scientific or technological dimension
  3. 3. Question of Interest: What are the economic consequences of climate change in Europe? - overall order of magnitude - distribution (space, time, sector) <Mitigation and Adaptation policies> White Paper on Adaptation (April 2009) Literature: few references, mainly based on expert judgement (G1)
  4. 4. What is known: aggregate impacts TAR IPCC (2001) Stern report (2007) Source: IPCC 4AR (2007), vol. II, Ch. 20
  5. 5. What is known: social cost of carbon (marginal damage) Tol (2005) review of literature • Mean $97/tC • Standard deviation $203/tC Key, and controversial, assumptions • Discount rate • Equity weighting
  6. 6. What is unknown • Non-market effects (e.g. biodiversity, ecosystems) • Extreme weather risks • Socially contingent effects • Long-term catastrophic risks
  7. 7. Outline 1. Overview of the PESETA project 2. Methodology: the economic CGE model 3. Sectoral results 4. Overall economic impacts 5. Conclusions
  8. 8. About PESETA PESETA stands for: Projection of Economic impacts of climate change in Sectors of the European union based on boTtom-up Analyses Main purpose: Quantitative, multi-sectoral assessment of the monetary estimates of impacts of climate change in Europe JRC funded project To support policymakers Largely based on past DG Research-funded projects (PRUDENCE, DINAS-Coast, cCASHh, NewExt,…)
  9. 9. Project partners and scope Climate scenarios: DMI, CRU Six sectoral assessments: Agriculture: U. Politécnica de Madrid Human health: AEA Technology River basin flooding: JRC/IES Coastal systems: FEEM/Southampton U. Tourism: U. Maastricht-ICIS Coordination and integration into CGE model: JRC/IPTS
  10. 10. Integrated economic impact assessment Starting point: physical impact estimates Some sectors provide with direct effects estimates (e.g. river floods) Overall effects (direct + indirect) assessed with a computable general equilibrium model of Europe
  11. 11. Socioeconomic scenario: GDP, population assumptions Climate model Stage 1: Modeling future climate Climate data (T, P, SLR) Coastal River Agriculture Tourism Systems Flooding model model model model Stage 2: Modeling physical impacts Physical Physical Physical Physical impacts impacts impacts impacts agriculture coasts floods tourism
  12. 12. impacts Physical Physical Physical Physical impacts impacts impacts impacts agriculture coasts floods tourism Valuation Valuation Valuation Valuation agriculture coasts floods tourism impacts impacts impacts impacts Stage 3: Modeling General Equilibrium model economic impacts Economic impacts
  13. 13. Grouping of countries
  14. 14. Climate Scenarios Data needs: 50 km resolution; daily and monthly Selection of scenarios 2011-2040 period: A2 IPCC SRES scenario data from the Rossby Center 2071-2100 period: data from PRUDENCE A2, B2 IPCC SRES scenarios 2 regional climate models, RCMs (HIRHAM, RCA) 2 global circulation models, GCMs (HadCM3, ECHAM4)
  15. 15. Four 2080s Scenarios Scenarios 2.5°C 3.9°C 4.1°C 5.4°C World population in 2100 (1012) 10.4 15.1 10.4 15.1 12 World GDP in 2100 (10 , 1990US$) 235 243 235 243 CO2 Concentration (ppm) 561 709 561 709 ∆ Temperature (ºC)* World 2.4 3.1 2.3 3.1 EU‡ 2.5 3.9 4.3 5.4 Northern Europe 2.9 4.1 3.6 4.7 British Isles 1.6 2.5 3.2 3.9 Central Europe North 2.3 3.7 4.0 5.5 Central Europe South 2.4 3.9 4.4 6.0 Southern Europe 2.6 4.1 4.3 5.6 ∆ Precipitation (%)* EU‡ 1 -2 2 -6 Northern Europe 10 10 19 24 British Isles -5 -2 10 5 Central Europe North 3 1 6 -1 Central Europe South 2 -2 -4 -16 Southern Europe -7 -15 -13 -28 Sea Level Rise (high climate sensitivity) (cm) 49 56 51 59 *Increase in the period 2071–2100 compared to 1961–1990. ‡European regions: Southern Europe (Portugal, Spain, Italy, Greece, and Bulgaria), Central Europe South (France, Austria, Czech Republic, Slovakia, Hungary, Romania, and Slovenia), Central Europe North (Belgium, The Netherlands, Germany, and Poland), British Isles (Ireland and UK), and Northern Europe (Sweden, Finland, Estonia, Latvia, and Lithuania).
  16. 16. Temperature 3.9°C (A2 Hadley) 5.4°C (A2 Echam)
  17. 17. Precipitation 3.9°C (A2 Hadley) 5.4°C (A2 Echam)
  18. 18. Methodologies for Physical Impacts Assessment Detailed process modelling Agriculture, DSSAT crop model River basin flooding, LISFLOOD hydrological model Coastal systems, DIVA model Reduced-form exposure-response functions Tourism Human Health
  19. 19. Economic impact assessment Starting point: physical impact estimates Some sectors provide with economic direct effects estimates (e.g. river floods) Overall effects (direct + indirect) assessed with a computable general equilibrium model of Europe: GEM-E3 model
  20. 20. 2. The general equilibrium economic model The GEM-E3 Model: General Equilibrium Model for Energy-Economics-Environment interactions
  21. 21. General equilibrium • Neoclassical framework • Each agent pursues its own interest • Decentralised information (preferences of consumers and technology of firms) • Simultaneous optimal behaviour • Interaction of all markets • Interaction of all agents (consumers, firms, government, rest of the world)
  22. 22. Advantages of CGE modelling • Consistency • Theory (microeconomics foundations, within a consistent macroeconomic framework) • Data (Input-output, National Accounts, SAM) • Structural model (versus reduced-form models): explain behaviour of agents in markets, taking into account institutions • Transparency • Systematic analysis; not mechanical • Flexibility • Can address a broad range of policy issues
  23. 23. Criticisms / disadvantages of CGE modelling • Weak empirical validation (calibration versus econometric estimation) • The critical role of functional forms • Simplification of exogenous elements of the model • Data requirements • Heavy computational load
  24. 24. The GEM-E3 model: European model version Computable General Equilibrium model Representing multiple production sectors and countries Integrating energy and environment in the economy GEM-E3: Standard Version 24 countries, 18 sectors (Eurostat) Perfect competition for all commodity markets Environmental module fully incorporated (All GHGs included)
  25. 25. The GEM-E3 model: Production Production (output) • Perfect competition Level 1 Reserves Labour • Nested CES Capital Energy production Materials bundle function Agriculture • Fully flexible Ferrous, ore, metals Electricity Level 2 coefficients chemicals Other en. intensive • EU Electrical goods Coal Labour econometric Transport equip. Oil Fuels Materails Fuels bundle evidence on Other equipment Gas elasticities Consumer goods Labour Level 3 Building/Constr. Telecommunication Credit & insurance Materials Credit & insurance Market services Non-market services Level 4
  26. 26. The GEM-E3 model: Consumption Total Income Disposable income Leisure Savings Intertemporal maximization of consumer’s utility Labour Supply Investment in Monetary involving consumption, dwellings Assets savings, leisure Consumption labour supply also derived from utility maximization Durable goods Non-durable goods and steady state solution used services LES with durable and non- durable goods • Cars • Food • Heating Systems • Clothing • Electric Appliance • Housing • Housing furniture and operation • Medical care and health expenses • Purchased transport • Communication • recreation, entrertainment etc. Consumption of non-durables • Other services linked to the use of durables • Fuels and power O ti ft t
  27. 27. 3. Sectoral results
  28. 28. Agriculture
  29. 29. Modelling of physical impacts and link to general equilibrium model Site-evidence on average yield change across Europe, DSSAT model Yield changes (t/Ha) Interpreted as TFP change Y = TFP CES(K, LEM)
  30. 30. Agriculture Crop yield changes (t/Ha), production losses and gains
  31. 31. Agriculture: crop yield changes (%) compared to 1961-1990 B2 HadAM3h A2 HadAM3h B2 ECHAM4 A2 ECHAM4 2025 2.5°C 3.9°C 4.1°C 5.4°C Northern Europe 37 39 36 52 62 British Isles -9 -11 15 19 20 Central Europe North -1 -3 2 -8 16 Central Europe South 5 5 3 -3 7 Southern Europe 0 -12 -4 -27 15 EU 3 -2 3 -10 17
  32. 32. Coastal Systems
  33. 33. Coastal systems: the method DIVA model Impact categories: sea floods, migration, other Integration into the CGE model: Interpretation of sea flood cost as capital loss Interpretation of migration cost as additional obliged consumption (welfare loss)
  34. 34. Coastal systems - No adaptation - With adaptation
  35. 35. Coastal Systems people flooded (1000s/year) in main scenarios with high climate sensitivity, without adaptation B2 HadAM3h A2 HadAM3h B2 ECHAM4 A2 ECHAM4 A2 ECHAM4 2.5°C 3.9°C 4.1°C 5.4°C high SLR Northern Europe 20 40 20 56 272 British Isles 70 136 86 207 1,279 Central Europe North 345 450 347 459 2,398 Central Europe South 82 144 85 158 512 Southern Europe 258 456 313 474 1,091 EU 775 1,225 851 1,353 5,552
  36. 36. River Floods
  37. 37. River Floods: the methodology LISFLOOD model; integration of damages for various return periods (from several ‘representative basins’) Economic valuation: projection of change in 100-year flood damage for the scenario (relative to control) Integration into the GEM-E3 model: Damage to residential buildings (additional obliged consumption) Damage to productive sectors (industry, services,…): Capital loss Production loss
  38. 38. River Floods Change in Economic damage (note red means a decrease)
  39. 39. River floods expected economic damage (million €/year) B2 HadAM3h A2 HadAM3h B2 ECHAM4 A2 ECHAM4 simulated 2.5°C 3.9°C 4.1°C 5.4°C 1961-1990 Northern Europe -325 20 -100 -95 578 British Isles 755 2,854 2,778 4,966 806 Central Europe North 1,497 2,201 3,006 5,327 1,555 Central Europe South 3,495 4,272 2,876 4,928 2,238 Southern Europe 2,306 2,122 291 -95 1,224 EU 7,728 11,469 8,852 15,032 6,402
  40. 40. Human health
  41. 41. Human Health average annual heat-related (left) and cold-related (right) death rates (per 100,000 population) 3.9°C scenario Note: using climate-dependent health functions (no acclimatisation)
  42. 42. Tourism
  43. 43. Tourism TCI scores in summer 5.4°C control Ideal Excellent Very good Good Acceptable Marginal Unfavourable 4.1°C
  44. 44. Tourism Change in expenditure receipts (million €) B2 HadAM3h A2 HadAM3h B2 ECHAM4 A2 ECHAM4 2.5ºC 3.9ºC 4.1ºC 5.4ºC Norhern Europe 443 642 1,888 2,411 British Isles 680 932 3,587 4,546 Central Europe North 634 920 3,291 4,152 Central Europe South 925 1,763 7,673 9,556 Southern Europe -824 -995 -3,080 -5,398 EU 1,858 3,262 13,360 15,268
  45. 45. 4. Overall economic impact • Effects of 2080s climate • On European economy as of today • Assuming there is no public adaptation, so that priorities for adaptation within the EU can be explored
  46. 46. Annual damage in terms of GDP changes (million €) 10000 0 -10000 -20000 -30000 -40000 2.5°C -50000 3.9°C 4.1°C 5.4°C -60000 5.4°C, 88 cm SLR -70000 Southern Central Europe Central Europe British Isles Northern EU Europe South North Europe
  47. 47. Annual damage 1.0 in terms of Welfare changes (%) 0.5 0.0 -0.5 -1.0 2.5°C 3.9°C 4.1°C -1.5 5.4°C 5.4°C, 88 cm SLR -2.0 Southern Central Europe Central Europe British Isles Northern EU Europe South North Europe
  48. 48. Sectoral decomposition 1.0% of welfare changes (%) Tourism River floods Coastal systems 0.5% Agriculture 0.0% -0.5% -1.0% -1.5% -2.0% 2.5oC 3.9oC 5.4oC 5.4ioC 2.5oC 3.9oC 5.4oC 5.4ioC 2.5oC 3.9oC 5.4oC 5.4ioC 2.5oC 3.9oC 5.4oC 5.4ioC 2.5oC 3.9oC 5.4oC 5.4ioC 2.5oC 3.9oC 5.4oC 5.4ioC Southern Europe Central Europe South Central Europe North British Isles Northern Europe EU
  49. 49. 5. Conclusions • Integration of various disciplines, consistency requirements • Further research is needed, concerning: • Costs and benefits of adaptation • Cross-sectoral consistency • Land use modelling • Monte Carlo analysis
  50. 50. http://peseta.jrc.ec.europa.eu/
  51. 51. Muchas gracias !

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