Integration and Decision-Making Frameworks

for Climate Change Policy

MS&E 290

Public Policy Analysis

February 27, 2003

Overview• One More Key Concept

– Discounting From the Future to The Present

– Extending the Concept Across Generations

• Elements of Integrated Assessment• Two Types of Integrated Assessment Models

– Policy Optimization

– Policy Evaluation

• Uses of Integrated Assessment Models• Decision Making Frameworks

– Deterministic (Optimization, Simulation, Tolerable Windows)

– Decision Analysis

– Game Theory

The Discount Rate:What is a Dollar Tomorrow Worth Today

• Current Generation– Discount Rate Strongly Ties Into the Market Rate of Return on

Capital

– Current Rate of Return on Capital May Be Imperfect Measure

– Even if Not Perfect Movement Away Would be Gradual

• Intergenerational– Much More Complicated

– Current Rate of Return on Capital May Be Imperfect Measure

– Options Approach May be Preferred

Key Components of Integrated Assessment Models

ATMOSPHERIC COMPOSITION

HUMAN ACTIVITIES

CLIMATE & SEA LEVEL

ECOSYSTEMS

Atmospheric Chemistry

Ocean Carbon Cycle

Ocean* temperature* sea level

Climate

Terrestrial Carbon Cycle

Un-managed Eco-system

Energy System

Crops and Forestry

HydorlogyAgriculture, Livestock, &

Forestry

Other Human Systems

Coastal System

Two Kinds of Integrated Assessment Models

• Policy Optimization Models– Focused on Finding Optimal Level of Emissions– Usually Include Impacts at the Aggregate Level

• Policy Evaluation Models– Focused on Simulating Effects of Policies– Usually More Detailed Impacts– Can be Run Backwards - Tolerable Windows Approach

Types of Integrated Assessment Models

DeterministicPolicy Optimization Models

Deterministic Policy Evaluation Models

Decision Making Under Uncertainty Models

StochasticPolicy Optimization Models

Deterministic Models

Stochastic Policy Evaluation Models

Uses Of Integrated Assessment Models

DeterministicPolicy Optimization Models

Deterministic Policy Evaluation Models

Decision Making Under Uncertainty Models

StochasticPolicy Optimization Models

Stochastic Policy Evaluation Models

Deterministic Models

- Compute Optimal Carbon Taxes, Control Rates, etc.

-Calculate Costs of Meeting Emission/ Concentration/Climate/Impact Targets

- Insure Consistency in Assumptions- Assess Interactions and Feedbacks- Identify Critical Gaps in Research

-Assess Optimal Policies Under Uncertainty-Compute Value of Information/Research

- Compute Probabilities of Cost/Benefits of Climate Policies- Compute Probabilities of Meeting Targets

Global Cost/Benefits Circa 2070

0

50

100

150

200

250

300

350

400

450

500

1 2 3 4 5 6 7 8 9 10

Global Emission Reductions (BtC)

Car

bo

n T

ax (

$/to

n)

Marginal Cost

Marginal Benefit

North Costs/Benefits Circa 2070

0

50

100

150

200

250

300

350

1 2 3 4 5 6 7 8 9 10

Global Emission Reductions (BtC)

Car

bo

n T

ax (

$/to

n)

Marginal Cost

Marginal Benefit

Gain

South Costs/Benefits Circa 2070

0

50

100

150

200

250

1 2 3 4 5 6 7 8 9

Global Emission Reductions (BtC)

Car

bo

n T

ax (

$/to

n)

Marginal Cost

Marginal Benefit

Loss

Gain

Emission Reductions at Nash Equilibrium

0

1

2

3

4

5

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0 1 2 3 4 5 6 7 8 9

Emission Reductions by the South (Billion Tons C)

Em

issi

on

Red

uct

ion

s b

y t

he

No

rth

(B

illi

on

To

ns

C)

North's Reaction Function

South's Reaction Function

Deterministic Policy Optimization Models:Balancing the Costs of Controlling Carbon Emissions

Against the Costs of Climate Impacts Over Time

CarbonEmissions

2000 2100Time

Optimal WithNo Impacts

IncrementalValue/Cost

2000 2100Time

Optimal With No Impacts

OptimalWithImpacts

OptimalWithImpacts

Simple Example of Uncertaintyin Policy Optimization Models

Case ClimateSensitivity(Per CO2

Doubling)

Damage Function

(Per 2 Degrees C Increase)

90% Prob. 2.5 Degrees C 2% of GDP

10% Prob. 4.8 Degrees C 15% of GDP

Hedging Against Bad Climate Outcomes

0

5

10

15

20

25

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Year

Glo

bal

Car

bo

n E

mis

sio

ns

(GtC

)

Reference

90% Probability Scenario

10% Probability Scenario

Hedge/90% Scenario

Hedge/10% Scenario

Hedging Against Bad Climate Outcomes

0

200

400

600

800

1000

1200

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Year

Car

bo

n T

ax (

$200

0/m

etri

c to

n)

Reference

90% Probability Scenario

10% Probability Scenario

Hedge/90% Scenario

Hedge/10% Scenario

Game Theory Formulations

• Look at Incentives for Countries to Take Action on Their Own or in Coalitions

• Can Be Either Formulated Either Deterministically or Under Uncertainty

• May Lead to Over-Estimating Rationality and Propensity of Nations to Act Only in Their Own Self Interest

Emissions

AlternativeDevelopment Pathways

DevelopmentEquity, Sustainability

Environmental &Socio-Economic

Impacts

ClimatePolicy

SustainableDevelopment

Policy

Adaptation, Vulnerability

Mitigation

Finance, Technology,Livelihoods

Vision,Lifestyles

Figure 1.6: The Global Sustainability Perspective

Costsco-benefits

Some Stated Objectives forImpacts, Adaptation and Mitigation Parts of

IPCCs Third Assessment Report (TAR) Expand Scope of SAR to Include Development/ Developing Country

Perspective on Climate Change CC is Ultimately a Development/Developing Country Problem

Global Models Are Very Weak in Representing Developing Countries

Developing Countries Seem Resistant to CDM, emissions trading, etc.

Expand Scope of SAR to Include Insights From Social Sciences Other Than Economics In Part, Related to Developing Country Perspective

In Part, Realization That Any One Discipline is Insufficient

Review/Update Economic Analyses/Insights Contained in SAR

A Revealed Preference Study of Climate Change Policy Analyses

Class ofWorld Citizen

Typical OECD (AEA Member?)Analysis

ROW Analysis

2 Billion PeopleWithout Markets

What 2 BillionPeople?

High Priority:Reduce TheirVulnerability

2 Billion In or NearPoverty with FragileMarkets

They Don’t Countfor Much!

High Priority:Reduce TheirVulnerability

2 Billion PotentialDecaf LattéDrinkers

Half Are Stuck InTransition, But theRest We Can Help

They Can TakeCare ofThemselves

“And these children that you spit on as they try to change their world are immune to your consultations…they’re quite aware of what they’re going through” <and whose putting them through it>

-David Bowie

Possible Moral for This Story

“The differences in experiences between people in theNorth and people in the South are so great that the environmental economics to be found in the North do not much resonate in the South”

-Partha Dasgupta, Cambridge University (From invited address at 45th anniversary of Resources for the Future)

Alternative Moral For Story