CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI 1 Dottorato Climate Change and Policy Modelling...

CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI

1

Dottorato

Climate Change and Policy Modelling Assessment

An introduction to Integrated assessment modelling

Francesco Bosello

2CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI

Is Climate Change a Problem?

Yes if even though independently upon human contribution some negative consequences for our welfare may arise

Is this an economic problem?

Yes if we decide to act alleviating these adverse consequences given scarce resources

In addition in the presence of a human contribution

Costs and benefits of ADAPTATION strategies

We may decide to intervene to reduce CC causes given scarce resources

Costs and benefits of MITIGATION strategies

Harmonizing MITIGATION ADAPTATION


When we come to economics the issue is to providing:

A measure (through some indicators) of the “welfare” impact of climate change

(possibly) indication on and “rank” of solutions (policies or policy mix) in term of effectiveness, efficiency, equity

Information on the costs and benefits of different climate change mitigation and adaptation policies


Social economic environmental systems are integrated

EnvironmentalSystem

Contribution to Global Warming and to Climate Change and

Variability

Sea level rise , air, water, land quality and availability,

ecosystems’ change etc.

Envir. impacts

Change in production andconsumption patterns and

welfare

Econ. impacts

Vulnerability

PoliciesMitigationAdaptation

Socioeconomic System

Climatic impacts

Econ. Pressures

Changes in emissions and land

cover

Changes in quality/quanti

ty of prod. factors

Envir. Pressures


The object of the evaluation: “areas” of impact

Water resources

Agricultural and food security

Terrestrial and freshwater ecosystems

Coastal zones and marine ecosystems

Human settlements

Energy and industry

Insurance and other financial services

Human health

STRESSES

RESPONSES

Source: IPCC, Climate Change 2001, “Impacts and Vulnerabilities”

Climate Change


=>

Climate system dynamics

Environmental system dynamics

Social-economic system dynamics

And of their interdependences

is needed

Integrated Assesment“philosophy” and modelling approach

(increasingly used since the beginning of the ’90)

Some representation of:


Given this complexity

We need to simplify: Using models simplified “pictures” of the true state of the world, but sufficiently representative.

We need to adopt an integrated approach: all the different “components” of the problem should be represented .

Integrated Assessment Models: Integrated Assessment (IA) is a process aimed at combining, interpreting and communicating knowledge from diverse scientific fields in order to tackle an environmental problem comprehensively by stressing its cause-effect links in their entirety. (Rotmans, Dowlatabady,1995)


Peculiarities of CC impact assessment and modeling

UNCERTAINTY: the knowledge of environmental and socio-economic dynamics, and of the feedback between the two is still affected by a large amount of uncertainty.

GEOGRAPHICAL SCALE: climate change is a global phenomenon affecting the whole world, at the same time environmental and socio-economic impulses and responses are highly differentiated across regions.

TIME SCALE: climate change is a long-term phenomenon. Assessing impacts on environmental and socio-economic systems requires a long-run perspective.


Peculiarities of CC impact assessment and modeling

EFFECTS INVOLVING INTERACTING SYSTEMScharacterized by:• Non linearity (in environmental and economic systems) • Discontinuity (“Jumps”, abrupt changes of state e.g. extreme

events, catastrophes, new technologies), • Irreversibility (non-return point e.g. species extinction,

irreversible investments high sunk costs).

WELFARE MEASUREMENT (ethical judgements): • Inter-personal utility comparison (is it possible to compare and

aggregate utility?) • Inter-temporal utility comparison (is it legitimate to discount and

what discount rate has to be used?)• Existence of NON market values which unit of measurement

(money, loss of human life, multi-criteria approach)?


Aggregating welfare through “space”

i

ii WW nii ,....,11

ni

i ...1 1

Examples of social welfare functions

Any choice involves a subjective or ethical judgment!

min( ) 1,...,

max lowesti

i

W W i n

W

Utilitarian (Benthamite)

Utilitarian equity weighted

Rawlsian, maximin


Aggregating welfare through time

The “traditional” role of time and discounting

Reasons to discount Pure time preference (uncertainty)Distributional issues (equity)

t

drtDF

1

1)(

dr = 0 => present = futuredr > 0 => present more important than future

NB

Time

NB1(dr1)

NB2(dr2)

NB3(dr3)

dr1 < dr2 < dr3

T*T°

Any choice involves a subjective or ethical judgment!


Welfare and non market values

Total econ. value (TEV)

Use Value (UV)

Non Use

Value (NUV)

Direct Use Value (DUV)

Indirect Use Value

(IUV)

Option Value (OV)

Bequest Value (BV)

Existence Value (EV)

Direct economic benefits: e.g. tourism

or production

Functional benefits: e.g. protection vs

geological risk

Possible future use

Heritage for future generations

Intrinsic value of existence

Travel cost

Hedonic pricing

Production function

Averting behavior

CV

SCE

Revealed preferences

Stated preferences


Aggregating welfare and units of measure

Good reasons in favour of “money”

Nevertheless “irreversibility” is present, e.g.: extinction of ecosystem or species, biophysical limits, risk to human life

Add to or substitute for money: number of species lost, increase in mortality, land area (see e.g.: ecological footprint) etc.

Multi-criteria, multi-metric approaches


The climatic information can be seldomly used directly for an economic assessments

Most likely, it has to be “mediated” by environmental impacts which on their turn have to be suitably translated into changes of meaningful economic variables

Summarising, also at this preliminary stage, it is clear that…

i.e. “items” to which, directly and/or indirectly, an economic “value” can be associated.

The whole process is affected by large uncertainties


A temperature change can be associated to an economic assessment as long as:

Example:

the good or service produced by that activity (say food/rice) has a market value ( direct cost or change in preferences)

the factor of production used (say land) has a market value associated to its productivity and the link between the two is clearly identifyied or modelled (production function approach)

It can be linked to an impact on an “activity” relevant for human “welfare” e.g. agriculture and changes in agricultural productivity

and


A model taxonomy: hard vs soft link

Hard-linked climate-economic models

Economic system

Climatesystem

Emissions

Damages

Climate and economics treated as a “unified” system represented by a consistent set of differential (climatic + economic) equations. Emissions from economic activity build CO2 concentration stock and temperature. A (more or less refined) damage

function translates temperature increase into GDP losses.

Mitgation

Adaptation


A model taxonomy: hard vs soft link

Soft-linked climate-economic models

Climate System

Environm.impact

module(s)

Economic Impact

module(s)

Economic Assessment

O OI I

Climate, environment and economics treated separately. Outputs of climate models are inputs to environmental impact modules. Outputs of environmental impact modules are inputs to economic impact modules these provide final economic assessment. Inputs and outputs need to be “translated” into the different “languages” or “formats” used by different models/disciplines

O

OIMitgation

Adaptation


Hard and soft link, examples

(Some) Hard linked integrated assessment models: “first generation” DICE (Nordhaus, 1991), RICE (Nordhaus, Yang, 1995), CETA (Peck, Teisberg, 1992), “second generation” MERGEII (Manne, Richels, 2004)), RICE 99 (Nordhaus, Boyer, 2001), FEEM-RICE (Buonanno et al., 2002), “third generation”, MIND (Edenhofer et al, 2006), WITCH (Bosetti et al., 2007)

(Some) Soft linked integrated assessment models: AIM (Morita et al. 1994 and updates), IMAGE II (Image team, 2002 and updates), ASF (Sankowsky et a., 2000 and updates), MESSAGE (Riahi and Roherl, 2000 and updates), MARIA (Mori, 2000 and updates), MINICAM (Edmonds et al., 1996 and updates) all used by IPCC to produce emission scenarios.

Other: SGM (MIT), ICES (FEEM) exercise


Examples of Soft Linked Models


Hard vs Soft Link: pros and cons

Hard-linked Soft-linked

Climateenvironmental

economic details

“Time treatment”

Policy perspective

Necessarily “simplyfied”“high” aggregation

Can be very high“high” disaggregation

“Refined” usually full intertemporal optimization

“Simplyfied” usually (comparative) static or

recursive-dynamic

Links and feedback

Better suited for policy optimisation

Better suited for policy evaluation

Fully consistent and integrated

The feedback loops are not necessarily closed


A model taxonomy: static vs dynamic

Static Models Dynamic Models

They provide a snapshot of economic systems in a given

(present or future) time.Adjustments to shocks (from the old to the new equilibrium) are

instantaneous.No time no transition

Time appears explicitly.Recursive dynamic: sequence of static equilibria (usually) linked by capital accumulation process. Myopic nature of (agents’ decision) the adjustment.- Myopic “strict sense”: exogenous investment. - “Adaptive expectations”: investment driven by the equalisation of rate of returns with “mistakes”- Fully dynamic: the equilibrium is irtertemporally consistent. Perfectly rational and fore sighting agent decides.No sistematic errors. - OLG CGE



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RE Structure

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AE Structure

])[(][)(, tttktit XEXXEXE

)]([ wwCr

Crrrr rRrRrgdpi

“AE” In the dynamic recursive structure of ICES

Investment decisions determining future (next period) capital stock are taken only on the base of current (previous) period information.

One piece of information is thus missing, that related to future (expected) rates of return to capital


A model taxonomy: partial vs general equilibrium

Partial Equilibrium Models General Equilibrium Models

All assessments and modelling approaches where the feedback inside the economic system are

not taken into account.“Rebound effects” are neglected.

Typical nature of bottom-up models, non market valuation exercises and direct costing

evaluations.

All markets are interdependent. Input and output re-locate

inter-nationally/sectorally responding to price signals:

(AUTONOMOUS ADAPTATION) This allows:

- to study how initial shocks propagate- to highlight the difference between

initial and final impacts

The two approaches are not in opposition: PE basis for GE analysis (in addition remember the scale issue)


A model taxonomy: the technology

Top-Down Models Bottom-Up Models

Phylosophy Economic Engineering

Economic view GE PE

Main variables Elasticity of substitution

Technical progress: Exogenous AAEI or “backstop approach”

Initial cost, installed capacity residual life, penetration of different technologies technological adoption/diffusion is thus endogenous

Detail Geographically/sectorally high, economically high, technologically low

Geographically high, economically low, technologically (energy sectors) high

Energy demand Typically endogenous Typically exhogenous

Energy substitution and emissions

“Pessimistic” (high costs)

Rebounds & lower cost options not usually accessible

“Optimistic” (low costs)

No rebounds & lower cost options accessible


Hybrid approaches,MARKAL-MACROWITCH

Connections between the

two approaches are possible



BARROSO



Exogenous Dynamics

> Population (World Bank)> Labor stock (ILO)> Labor productivity G-Cubed model version 48E (McKibbin, 2001)> Land productivity IMAGE 2.2, B1 Scenario (RIVM, 2001)

> World Oil Price (61€/barrel) in line with EU assessment (2008)> Energy (Coal, Oil, Oil Products and Gas) autonomous

improvement (2% Per Year) in line with EU assessment (2008)

> Tfp has been adjusted to move GDP closer to IPCC B2 scenario



CO2 Emissions (Mton of CO2)

GTAP-E EU assessment (EC, 2008)

2020 Baseline scenario 4577 4294

2020 Reduction scenario 3609 3468

EU Policy Impacts GTAP-EEU assessment

(EC, 2008)

CO2 reduction wrt 2020 BAU -21.15% -19%

Carbon price€/ton of CO2 39.33 39 (GEME3)

GDP loss -0.75% -0.35%

Employment -0.23% -0.04%

Electricity price 1.44% 10-15% (PRIMES)

Oil imports -9% < 0

Gas imports -31% < 0

Output En. Int. Ind. -2% -2%


An assessment taxonomy

Policy Evaluation Exercises Policy Optimization Exercises

IF - THEN - What are the economic consequences (e.g. in terms of international/intersectoral trade, GDP, welfare etc.) of a specific perturbation (e.g. a tax levied on the production or consumption of a given good, a change in factor productivity and endowment) imposed on a system?- What is the tax or subsidy required to accomplish a given policy target?

What is the path of a given control variable (e.g. the tax, or investment, or abatement rate) allowing to reaching a given target minimising cost or maximising welfare?


HANDS ON THE IMAGE MODEL

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CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI 1 Dottorato Climate Change and Policy Modelling...

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