Co-Effects of CC and GHG Mitigation Policies Bruce McCarl Distinguished and Regents Professor of...

Co-Effects of CC and GHG Mitigation PoliciesCo-Effects of CC and GHG Mitigation Policies

Bruce McCarl

Distinguished and Regents Professor of Agricultural Economics

Texas A&M University

Presented atClimate Change Segment of Advanced Resources Class

College Station, Feb 2011

Discussion OutlineDiscussion Outline

What are Co-Effects of CC and GHG mitigation Policies?

Do Co-Effects Matter?

Ways to Measure and Quantify Co-Effects

(EPIC, CENTURY, NWPCAM, Econometric techniques)

Case Studies of Co-Effects e.g. water quality, soil erosion,

wildlife habitat, and biodiversity

Government Intervention

Policy Design for Co-Effects

CC resulting from an increase in atmospheric concentrations of

GHGEs is a public externality.

“Externality” = Benefits or costs arise from an activity which is

created by a person and that person does not take full account of

the impacts on the others.

Externality is a result of a market failure. A market does not

efficiently allocate resources – either too much or too little.

GHG mitigation policies can also cause externalities.

Example of externalities related to CC policies

e.g. a tax on carbon in the energy sector

Positive Negative

Human health improvement High energy prices

Endangered species, etc. Unemployment, etc.

CO-Effects of CC and GHG Mitigation: Economic PerspectiveCO-Effects of CC and GHG Mitigation: Economic Perspective

4

AF Strategies for GHG MitigationAF Strategies for GHG Mitigation

Example of externalities and other effects related to GHG mitigation

policies

e.g. a tax on carbon in the agricultural and forestry sectors

Positive Negative

Water quality improvement High food prices

Less erosions, etc. More pesticide use, etc.

Many terminologies are used to describe CO-EFFECTS which refers

to effects arising from GHG mitigation polices such as

co-benefits/costs, income distributional shifts, ancillary

benefits/costs, side-benefits, secondary benefits/costs, cleaner

water, reduced runoff, increases across GHG accounts etc.

Few studies address these issues especially negative co-effects e.g.

use of more pesticides or irrigation, effects on other GHGs.

CO-Effects of CC Policies: Economic PerspectiveCO-Effects of CC Policies: Economic Perspective

FuelSecurity

LifeStyles

RecreationalImpacts

Direct Effects

CCEffects

CO-Effects

EnvironEffects

EconEffects

SocialEffects

Land UseChange

EndangeredSpecies

AirQuality

JobCreation

WaterQuality

SoilQuality

Bio-diversity

RuralEcon

TechProgress

ETC.

Ag CO-Effects of CC Policies FrameworkAg CO-Effects of CC Policies Framework

PublicHealth

?? ?? ?? ??

Do Co-Effects Matter?Do Co-Effects Matter?

Previous studies indicate that there are significant CO-Effects

associated with GHGE mitigation, but most of the studies focus on

positive CO-Effects (co-benefits).

Figure 8.9: Summary of ancillary benefits estimates in 1996 US$/tC.

Source: Climate Change 2001: Working Group III: Mitigation http://www.grida.no/climate/ipcc_tar/wg3/337.htm

MC + Externality Costs

CarbonTax ($/TCE)

Emission Reduction (tons)

MC

Figure 2. Marginal Cost Curve for Carbon Emission Reductions

Tax0

Q0 Q2


Inclusion of CO-Effects will affect cost of reductions.

MC + Externality Benefits

Q1


Inclusion of CO-Effects will affect cost of abating of emissions and quantity.

At market equilibrium, society would produce Q* at P*.

If there are externality benefits, society produces too little energy(Q* < Q1) with too high price (P* > P1).If there are externality costs, society produces too much energy(Q* > Q2) with too little price (P* < P2).

$

Energy

MCprivate

SMC = MCprivate + Externality Costs

Figure 1. Social Marginal Benefit and Marginal Cost Curve for Energy

P*

Q2 Q*

P2

SMB

Q1

P1


Inclusion of CO-Effects will affect overall mitigation assessment.

The social optimal output is at the quantity where

SOCIAL BENEFITS = SOCIAL COSTSSOCIAL COSTS = PRIVATE COST - EXTERNALITY BENEFITS/COSTS

Problem: how to get the accurate measures of these externalities?

These externalities can over- or underestimate social welfare gain under different mitigation policies.

Suppose that the social costs for 2 mitigation policies is such that

SC1 > SC2 so society favors mitigation 2

But the order of the private costs is reversed

PC2 > PC1 so private groups prefer mitigation 1

Numerical Example:

SC1 =150 , but PC1 = 50 + Externality = 100

SC2 =100 , but PC2 = 100 + no Externality

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Co-effects of Emission Reductions by Energy SectorCo-effects of Emission Reductions by Energy Sector

– Coal use releases sulfur dioxide, particulates, chemicals that contribute to air pollution including ozone

– $10 per ton carbon tax could result in $3 health benefit from associated NOx reductions (Burtraw, 1999)

– Approximate by using marginal costs as social willingness to pay, 15$ per ton of CO2 (EIA, 1995).

Measure and Quantify Co-EffectsMeasure and Quantify Co-Effects

Quantitative Indicators

Although some Co-Effects are not monetized, quantitative indicators

are useful.

Use biophysical simulation or other air/water quality simulation

models such as EPIC, CENTURY, SWAT, NWPCAM

EPIC

Multi-environmental Indicators

40

50

60

70

80

90

100

0 50 100 150 200 250 300

Po

llu

tio

n (

%/a

cre)

Carbon price ($/tce)

Nitrogen Percolation

Nitrogen Subsurface Flow

Soil erosion

Phosphorus loss through sediment

Measure and Quantify Co-EffectsMeasure and Quantify Co-Effects

Monetization

Development of methods to quantify Co-Effects in terms of dollar

values

Econometric techniques such as non-market valuation, ricardian

model, etc.

Note that: If a policy focuses on the environmental quality and in doing

so this policy affects the CC, then now the CC effects are

considered Co-Effects to this policy.

For example, a policy focusing on cutting air pollution also

benefits the climate through reduction of GHG emissions.

Would you be willing to pay __$ on

an annual basis for a management

program designed to preserve

endangered species XX?

14

ASMGHG

Carbon Prices

RegionalCrop Mixinput useEnv loads

EPICRunoff

Sim.

Case Studies of Co-Effects: Case Studies of Co-Effects: Water QualityWater Quality

WaterQualityIndex

Reference: Pattanayak et al. 2002

Run ASMGHG at GHG prices of $25, and $50/tonne CE

Link NWPCAM to ASMGHG outputs

Run NWPCAM at elevated loadings corresponding to 2 GHG prices ($25 and $50)

Estimate WQI at two levels

ComputeGHG%WQI%

elasticity benefits-Co

NWPCAM

Regionalizing Model

Ag Census NRI State Annual Crop Acreage

CountyCrop Mix

and percent loads

15


Overall Results:

Economic Agricultural production declines (2-4%) and prices increase

(3-8%)

• CS decreases, PS increases, Export earnings fall (3 – 5%). GHG (not co-effects)

• National GHG emissions decline (89 and 156 MMTCE/yr under $25 and $50 /ton CE, respectively).

• Agriculture becomes a net sink at high GHG price.

• Low C price => Low/no till cropland management

• High C price => Biofuel offsets and afforestation Land use

• Traditionally cropped lands decline(0.1 – 6%)

• Irrigated lands decline(3 – 7 %)

• Afforestation increases(5 – 12 million acres)

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Change in WQIfrom Baseline

-40 to -101 to 56 to 100

Preliminary Results, at $25/tC

Source: Pattanayak et al. 2002

Co-Benefits: Water Quality Changes due to Changes in Cropland Management and Afforestation

17


Overall Results: Loadings

• N and P decline at low price

• All loadings decline at high price

• Erosion reductions most dramatic

National WQ increased nearly 2%

Future Extensions : Co-effects

• Monetized

• Multiple co-effects – biodiversity

Omitted loadings in forestry and livestock

Case Studies of Co-Effects: Case Studies of Co-Effects: Environmental benefitsEnvironmental benefits

EstimateLand Use

Get Acres ofAfforested

Land

DetermineC Seq.& Environ.Characteristics

Estimate Environ.Benefits

Empirical ProcedureEmpirical Procedure

Landik = fik (net return, population density, land quality )fik = logistic function using SUR procedure Net return to forest=> + effect on the forest but – on the agricultureNet return to Ag => – effect on the forest but + on the agriculture

Five values of subsidies are used to achieve conversion of 5%, 10%, 15%, 20%, and 25% of the baseline ag land. Average costs for afforestation rise from $200 (5% conversion) to $600 per acre (25% conversion).

Using Birdsey forest carbon function to estimate additional C seq. through afforestation. Using the Natural Resource Inventory (NRI) and the Soil Interpretation Record System (SOILS5) to predict locations, agricultural land conversion, and environmental characteristics (e.g. soil type, permeability).

Using estimation from previous studies to quantify environmental benefits. Under 25% conversion scenario => soil erosion benefits = 32-42% of cost of Cseq. program => wildlife habitat benefits = 25% of cost of Cseq. program => non-consumptive use benefits =25% of cost of Cseq. program

Reference: Plantinga and Wu 2003


Remarks:Remarks:

(1). Co-Benefits appear to be substantial.

Soil erosion + Wildlife habitat (Use Value)+Non-Use Value Cseq Cost

$42 M + $30 M + $31 M $101-132M

(under 25% conversion scenario)

(2). The number of potential co-benefits and co-costs are not included (e.g.

water quality improvement, negative effects on wildlife habitat).

(3). Unrealistic fixed prices assumption on timber and agricultural products

Case Studies of Co-Effects: Case Studies of Co-Effects: BiodiversityBiodiversity

Study of land use changes impacts on biodiversity in South Carolina, Maine, and Southern Wisconsin

Two types of land use => agricultural and Forestry lands

Two types of birds => farmland and forest birds (651 species)

Using an econometric model to estimate land use changes due to afforestation subsidies

Achieving a 10% reduction in agricultural land by giving afforestation subsidies as an incentive

Using an estimated land use change to estimate bird abundance

Reference: Matthews, O’Connor, and Plantinga 2002

Category Maine South Carolina Wisconsin

Percent ChangeForest Birds 3.2 2.5 21.8

Farmland Birds -10.8 -12.2 -11.7

Forest & Farmland Birds -2.0 -2.3 -1.1

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Negative the net Co-benefits (CB) Negative the net Co-benefits (CB)

Some co-effects are beneficial and can help offset the costs of producing practices from a social perspective – eg: Improving water quality from low tillage– eg.: Enhancing producer incomes from conversion of cropland to

grasslands

The co-benefits likely to be partially offset by co-costs – Expanded emissions in the energy sector vs. the offsets gained from CS

Co-effect are relevant in all sectors of the economy accounting needs to be evenhanded

)DISC1(*QGHGO

)CBGC*φMTCPAIC PDC (tonpercostSocial

Reference: McCarl.B.A , Tanveer A. B , Man,K. Kim, Cost of Carbon

22

Examples about potential ancillary benefits or costs Examples about potential ancillary benefits or costs

Particle pollution fossil fuel use Recreational sites reforestation programs Technological efficiency new technologies and unit costs fall Welfare carbon taxation Road-use related mortality public transport Congestion public transport Employment GHG projects with excess supply of labor

Higher electricity prices reductions in electricity reduce educational opportunities for children

Reduced electrification rates increases in household air pollution

Costs associated with ghg projects decreased economic activity decline in employment

23

Co-effects from Agriculture and Forestry SequestrationCo-effects from Agriculture and Forestry Sequestration

Watson 2000: co-benefits – soil productivity could be improved through

increased capacity to retain water and nutrients– long-lived valuable products (wood) are produced– marginal lands could be improved and riparian

ecosystems restored– Erosion reduction

Antle 2000– Reduced erosion, improved land quality, water

quality, recreation sites, bio-diversity, farmer income support .

24

AM: Assessed in monetary terms AP: Assessed in physical terms, possibly partly in monetary terms.

NA: Not assessed, they may be important. NE: No effect of significance is anticipated.1. SO2 and NOx include acid deposition impacts.2. Effects of PM10, NOx and SO2 on amenity arise with respect to visibility. In previous studies

these have not been found to be significance in Europe, although they are important in the US.

3. Routine operations generate externalities through mining accidents, transport accidents, power generation accidents, construction and dismantling accidents and occupation health impacts. All these involve mortality and morbidity effects.

4. Water pollution effects include impacts of mining (including solid wastes) on ground and surface water, power plant emissions to water bodies, acid deposition and its impacts on lakes and rivers (partly quantified).

25

Co-effects consider or not?Co-effects consider or not?

Consideration could speed up implementation– High cost of climate change mitigation might be

largely offset by ancillary benefits

Policy benefits of incorporating co-effects– Design policy on inclusive set of effects– Support GHG initiatives with broader environmental

co-effects (“no regrets”) – Justify interventions in favor of terrestrial activities

Safely ignored– If these effects are “small” relative to the other costs

or the benefits of reducing GHGs – Simplifies an already complex debate.

26

Co-effectsCo-effects

GHGE Mitigation Co-effects

Agricultural Involvement

Mitigation in Energy Sector

Co-effects Co-effects

Transportation

Co-effects

27

Ag vs Non Ag share of a given amount of emissions Ag vs Non Ag share of a given amount of emissions controlcontrol

CN CA

Q

CA is cost of abatement by Ag, CN is cost of abatement by Non Ag,

All agAll Non-ag

28


CN CA

Q

Ag co benefits only and ag share increases

Ag cobenefits

Q’ All agAll Non-ag

C’A

29


CN CA

Q

Ag and non ag co benefits and share depends on relative size

Ag cobenefits

Q’ All agAll Non-ag

Non Ag cobenefits

Q’’

C’N

C’A

30


Remarks:Remarks:

(1). Co-Benefits appear to be substantial.

Soil erosion + Wildlife habitat (Use Value)+Non-Use Value Cseq Cost

$42 M + $30 M + $31 M $101-132M

(under 25% conversion scenario)

(2). The number of potential co-benefits and co-costs are not included (e.g.

water quality improvement, negative effects on wildlife habitat).

(3). Unrealistic fixed prices assumption on timber and agricultural products

ChallengeChallenge

Complexity => multiple co-effects, double count, global

vs. local effects, etc.

Quantifiability => methodologies

Policy Design

Distributional effects => CDM

Uncertainty

CCCCMitigation

WaterQuality

AirQuality

HumanHealth

32

ReferenceReference

Antle J.M., “Economic Feasibility of Using Carbon Sequestration Policies and Markets to Alleviate Poverty and Enhance Sustainability of the World’s Poorest Farmers”, Presened at the Expert Workshop on “Carbon Sequestration, Sustainable Agriculture and Poverty Alleviation, World Meteorological Organization, Geneva Switzerland, August 31, 2000

Antle, J.M. and S. Mooney. 2002. Designing Efficient Policies for Agricultural Soil Carbon Sequestration. Chapter in Agriculture Practices and Policies for Carbon Sequestration in Soil, edited by J. Kimble, CRC Press LLC, Boca Raton, FL, pp. 323-336

Burtraw, D., “Innovation Under the Tradable Sulfur Dioxide Emission Permits Program in the U.S Electricity Sector.” Resources for the Future Discussion Paper No. 00-38, 2000.

Burtraw, D. Krupnick, A., Palmer K.,Pul, A., Toman M., Bloyd, C., “Ancillary Benefits of Reduced Air Pollution in the U.S. from Moderate Greenhouse Gas Mitigation Policies in the Electricity Sector”. Resources for the Future. Discussion paper No. 99-51. 1999.

Elbakidze, L., and B.A. McCarl, "Sequestration Offsets versus Direct Emission Reductions: Consideration of Environmental Co-effects", Ecological Economics, Volume 60, 564-571, 2007.

Energy Information Administration, Electricity Generation and Environmental Externalities: Case Studies, Office of coal nuclear and Alternative Fuels, Coal and Electric Analysis Branch, U.S. Department of Energy, Washington D.C. 20585, 1995.

International Panel on Climate Change, “Climate Change 2001: The Scientific Basis”. IPCC Third Assessment Report. 2001. http://www.ipcc.ch/

Matthews, S., O’Connor, R., and A., J., Plantinga. Quantifying the Impacts on Biodiversity of Policies for Carbon Sequestration in Forests. Ecological Economics. 40(1): 71-87. 2002.

Krupnick A., Dallas B. and Anil M. “The Ancillary Benefits And Costs Of Climate Change Mitigation: A Conceptual Framework” http://www.airimpacts.org/documents/local/M00007466.pdf

McCarl, B.A. and U.Schneider, (2000). “Agriculture's Role in a Greenhouse Gas Emission Mitigation World: An Economic Perspective”. Review of Agricultural Economics 22:134-159.

http://www.ipcc.ch/

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Reference McCarl.B.A , Tanveer A. B , Man,K. Kim “How much would Carbon Cost a Buyer?” Working Paper 2004 McCarl, B. A., B. Murray, and J. Antle, “Agricultural Soil Carbon Sequestration: Economic Issues

and Research Needs”. Working Paper #0875, Department of Agricultural Economic, Texas A&M University, College Station, TX

Meyer, J. L.,M. J. Sale, P. J. Mulholland,and N. L. Poff, “Impacts of climate change on aquatic ecosystem functioning and health” Journal of the American Water Resources Association, 35(6), pp.1373-1386,1999.

National Assessment Synthesis Team “Climate Change Impacts on the United States:The Potential Consequences of Climate Variability and Change” US Global Change Research Program,400 Virginia Avenue,SW Suite 750 Washington DC,20024 www.usgcrp.gov

Pattanayak, S.K., B.A. McCarl, A.J. Sommer, B.C. Murray, T. Bondelid, D. Gillig, and B. de Angelo, "Water Quality Co-effects of Greenhouse Gas Mitigation in US Agriculture", Climatic Change, 71, 341-372, 2005.

Plantinga, A. J., “Modeling the Impacts of Forest Carbon Sequestration on Biodiversity.” Department of Agricultural and Resource Economics, Oregon State University.

Plantinga A. J., and J. Wu, Co-Benefits from Carbon Sequestration in Forests: Evaluating Reductions in Agricultural Externalities from and Afforestation Policy in Wisconsin. Land Economics, 79(1), 74-85, 2003

Stavins, R.N., "Transaction Costs and Tradable Permits", Journal of Environmental Economics and Management, 29:133-148,1995.

Watson, R.T., “report to the Sixth Conference of the Parties of the United Nations Framework Convention on Climate Change”, IPCC, http://www.ipcc.ch/press/speech.htm Nov.13, 2000

Watson, R.T. and the Core Writing Team (Eds.), IPCC Third Assessment Report: Climate Change 2001: Synthesis Report, IPCC, Geneva, Switzerland, September 2001. http://www.ipcc.ch/pub/un/syreng/spm.pdf

Wietzman, M., L., “Prices vs. Quantities” Review of Economic Studies. 41 (4): 447-91, 1974

http://www.usgcrp.gov/

http://www.ipcc.ch/pub/un/syreng/spm.pdf

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