Transcript Slide 1

Integrated Assessment Models
of Economics of Climate Change
Economics 331b
Spring 2009
1
Note on final problem set
This will be ready later this week.
You should fine-tune your little model to make sure that it
is working reasonably well.
Basic problem will be to find the “optimal” mitigation
policy.
This will involve:
- Setting up an objective function
- Finding the μ(t) that optimizes the objective function
- Then doing some alternatives (different discount rates,
climate models, GDP growth rates)
2
CO2 concentrations at Mauna Loa
390
380
370
360
350
340
330
320
310
60
65
70
75
80
85
90
95
00
05
3
CO2 emissions US (millions tC/yr)
2,000
1,600
1,200
800
400
1930
1940
1950
1960
1970
1980
1990
2000
2010
4
Trend in CO2 emissions relative to GDP, US
.6
.5
.4
.3
.2
CO2-GDP ratio
Trend (-1.7 percent per year)
.1
1930
1940
1950
1960
1970
1980
1990
2000
2010
5
Instrumental record: global mean temperature index (°C)
Temperature anomaly (1895-1905 = 0)
1.0
0.8
GISS
Hadley
US NCDC
0.6
0.4
0.2
0.0
-0.2
-0.4
1850
1875
1900
1925
1950
1975
2000
6
Projections and the paleoclimatic record
Temperature record and projections
to 2200, Vostok core, Antarctica
Temperature (2000 = 0)
8
4
0
-4
-8
-12
-400,000
-300,000
-200,000
-100,000
0
Years before present
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Some detail on how output and emissions are generated
Twelve regions (j = US, China, India, EU, Africa, ...)
j
1. Population exogenous : ΔL t = L
j 
j
1  n 
t
t-1 
j
t
2. Total factor productivity exogenous : ΔA = A
j 
j
1  h 
t
t-1 
j
j j
3. Production is Cobb - Douglas in A, L, K is Y = A  K 
t
t t
α
 j
L 
 t
1-α
4. CO emissions are function of output, intensity, and emissions - reduction rate :
2
j
t
j
t
j
t
j
t
E = σ Y [1 -  ]
(Can also write this as function of carbon price.)
5. National investment rate is endogenous and optimized per the Ramsey model,
over per capita consumption (c), and countries are combined using the "Negishi algorithm."
12  ∞
j
j
j

max
W =    φ t U(c t ,L t )R(t) 
j

c
j=1  t=1
t


6. Current version is solved on Excel - Solver, with approximately 155 lines per country.
What will be the impacts by sector?
Impact of
Industy
Adaptation
policies
Climate-change
impacts
Energy-intensive Large near term
Moderate
medium term
Moderate long
term
"Natureintensive"
Small
Moderate
medium term
Large long term
Other
Small
Small
Small
Climate policies
9
Aggregate damage estimates from different studies
Damages as percent of output
6
5
4
3
2
1
0
-1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-2
-3
Global mean temperature increase (°C)
Source: Richard Tol, Jour. Econ. Persp., 2009
10
Estimated Damages from Yale Model and IPCC Estimate
7
Tol survey
6
RICE-2010
Damages as percent of output
5
4
IPCC estimate
3
2
1
0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
-1
-2
-3
Global mean temperature increase (°C)
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Scenarios for Analysis
Monday
1. Baseline. No emissions controls.
2. Economic cost-benefit “optimum.” Emissions and carbon
prices to maximize discounted economic welfare.
3. Limit to 2 °C. Climatic constraints with global
temperature increase limited to 2 °C above 1900
On Wednesday
4. Copenhagen, all countries. Uses US emissions targets
joined by other rich countries, with developing
countries entering after 1 -3 decades.
5. Copenhagen, rich only. Uses US emissions reductions
joined by other rich countries, with developing
countries staying out.
12
Solution details
1. In most general case, have
W = W[UUS(c1, c2, …), UChina(c1, c2, …),…]
2. Simplify for 1 country (see MU and MC diagram),
which yields:
max U(  *) 
t
*
 [ MU(  t )  C( t )]e
rt
dt
0
3. Further simplify by assuming fixed output and simple
cost and abatement functions:

max Y   [Yt  D(  t )  C( t )]e
t
0
rt
dt
13
MU, MC
Utility (to be
maximize)
MC
MU
0
μ*
Abatement
14
Baseline projections: IPCC Scenarios and RICE-2010
RICE-2010
Model with
no policy
measures
15
Emissions trajectories alternative policies
25
RICE-2010
Model with
no policy
measures
CO2 emissions (GtC per year)
Optimal
Baseline
20
Lim T<2
15
10
5
0
2005
2025
2045
2065
2085
2105
16
Carbon prices alternative policies
500
450
Carbon price (2005 $ per ton C)
RICE-2010
Model with
no policy
measures
Optimal
400
Lim T<2
350
300
250
200
150
100
50
0
2005
2025
2045
2065
2085
2105
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What do carbon prices mean in practice?
Carbon tax,
2010
Minimal
“Optimal”
Climate constrained
(ΔT < 2 °C)
Increase, price of energy, US
[$/tC]
Gasoline
All energy
expenditures
$10
35
50
1.0%
3.3%
4.8%
1.5%
5.4%
7.7%
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Carbon prices alternative policies
100
RICE-2010
Model with
no policy
measures
Carbon price (2005 $ per ton C)
90
80
70
60
50
40
Optimal
30
Lim T<2
20
10
Current global policy
0
2005
2015
2025
2035
19
Temperature profiles: RICE -2010
Global mean temperature (degrees C)
7.0
Optimal
6.0
5.0
Baseline
Lim T<2
4.0
3.0
2.0
1.0
0.0
2005 2025 2045 2065 2085 2105 2125 2145 2165 2185 2205
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Agenda
Monday
- Integrated assessment models
- The Yale DICE/RICE model
Wednesday
- Presentations on Kyoto and Copenhagen
- Assessment of policies
Next week:
- Cap and trade v. carbon prices
- Wrap up
- Final problem set due
21
Implementation of Policies
- Move from science to policy
- Disappointment of scientists
- Three level decisions:
- Global
- National
- Individual
- Virtually unique set of policy issues in historical context
because of global public good, long-time lags,
asymmetric impacts and costs, uncertainties,
catastrophic potential
- Presentations on cap and trade theory and
Kyoto/Copenhagen Accords on climate change
22
Scenarios for Analysis
Monday
1. Baseline. No emissions controls.
2. Economic cost-benefit “optimum.” Emissions and carbon
prices to maximize discounted economic welfare.
3. Limit to 2 °C. Climatic constraints with global
temperature increase limited to 2 °C above 1900
On Wednesday
4. Copenhagen, all countries. Uses US emissions targets
joined by other rich countries, with developing
countries entering after 1 -3 decades.
5. Copenhagen, rich only. Uses US emissions reductions
joined by other rich countries, with developing
countries staying out.
23
Structure of policies
Kyoto Protocol: Rich countries only, 7 percent average cuts, only
for first “budget period”: 2008 – 2012. Minimal global cuts.
Copenhagen Accord: Deep cuts for rich countries (see next slide
for US). In principle, developing countries follow soon.
Copenhagen, rich countries only: Same as Accord, with
developing countries not participating till 2200.
Key issue of whether have the “trade” in “cap-and-trade”
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From Science to Implementation
1. Understand the basic science
2. Weigh costs and benefits to determine a “reasonable
policy ” for emissions, economic, and climate trajectory
3. Design an approach for translating the policy into
actual steps (taxes, regulations, subsidies, …)
4. Negotiate both among nations (e.g., Copenhagen) and
in national decision-making bodies (Congress, CCP, EU
bodies,…)
25
Four Approaches
• Internationally harmonized carbon tax – economist’s
ideal.
• Universal cap and trade – close second if well designed,
but Kyoto Protocol is not doing well.
____________________________________________
• Regulatory substitutes (CAFE standards, ban on light
bulbs, …) – very inefficient approaches
• Voluntary measures (carbon offsets) have little
effectiveness and penalize the virtuous.
26
Major Approaches
Cap and trade (see earlier presentations and readings)
Harmonized carbon taxes
• Raise prices of GHGs proportional to carbon content
• All countries would levy a comparable tax
• Countries would retain all revenues (this is not an
international transfer program)
Hybrid plans:
• Auction permits
• Floor and cap on auction prices
27
Pros and Cons
Pros of cap and trade:
- Familiar to political participants
- Part of Kyoto Protocol
- Does not involve “T” word
- Allows transfer of resources to developing countries
Pros of carbon taxes:
- Lower volatility
- Can capture revenues (public finance “double dividend”)
- Less prone to corruption
- Friendlier for small countries to join
- A proven fiscal regime
28
Quantity-type regimes show extremely volatile prices
12.0
Price (May 1994=1)
8.0
Price oil
Price SO2 allowances
S&P 500
4.0
2.8
2.0
1.6
1.2
0.8
0.4
94 95 96 97 98 99 00 01 02 03 04 05
Source: Nordhaus, Various.
29
Financial volatility under quantityand price-type monetary regimes
20
Federal funds rate
Three-month Treasury bill rate
16
12
Period of price-type
monetary policy
8
4
0
Period of
quantitative
monetary
policy
80
81
82
00
01
02
03
04
05
06
07
08
30
Volatility in EU CO2 trading system:
This volatility is inherent in such a system because of priceinelasticity of supply and demand
Source: Metcalf, Carbon Taxes, Hamilton Project.
31
It is important for governments to capture the revenues
(either through 100% auctions or taxes):
– raise revenues for distributional policies
– reduce the efficiency losses from taxation.
32
Corruption
Quantity-type systems with international trading are much
more susceptible to corruption than price-type regimes.
International cap-and-trade plans are a three-sided game.
There are strong incentives for a corrupt domestic
government to collude with corrupt polluting firms to
underestimate domestic emissions and hide from
international monitors.
33
The problem of offsets
Offsets have been part of all plans.
Clean Development Mechanism (CDM) in the Kyoto Protocol
has been major source of “accounting emissions” and has very
questionable additionality.
For example, in EU-ETS, there have been virtually no internal
emissions reductions. The Clean Development Mechanism in
EU has 280 million tons of offsets compared to 130 million
tons of emissions reductions for current phase.
Another set of defective financial instruments like credit default
swaps?
34
Regime Uncertainty
• The international cap-and-trade program is a radical and
unproven approach, whereas taxes are well understood
and have been used in every country of the world.
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