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Impact of uncertainty in economic projections for stabilization scenarios

Impact of uncertainty in economic projections for stabilization scenarios. Nir Krakauer nir@ce.ccny.cuny.edu. How important is assumed future economic growth for climate policy modeling?. Actual/assumed growth in world economic product, %/year:.

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Impact of uncertainty in economic projections for stabilization scenarios

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  1. Impact of uncertainty in economic projections for stabilization scenarios Nir Krakauer nir@ce.ccny.cuny.edu

  2. How important is assumed future economic growth for climate policy modeling? Actual/assumed growth in world economic product, %/year: “Ultimately I think economic forecasting is more guess work than people realize. In times when you don't have a fundamental change, you can extrapolate curves, and people do that pretty well. But right now I don't trust extrapolation.” -- Robert Schiller, 11/08 4.9 actual, 1950-1973 4.0 actual, 1973-2007 1.8-3.0 IPCC SRES (2000) scenarios, 2010-2100 1.1-2.2 5th-95th percentiles of IPCC SRES database of previous scenarios, 2010-2100 0.40 actual, 1000-1950

  3. Model framework: FREE (Feedback-Rich Energy-Economy Model) (Fiddaman 1997) Energy resource (fossil fuel & renewable) Energy-providing sector Investment Economic production Energy price GHG emissions Carbon cycle Consumption/welfare GHG in atmosphere Warming Climate damage (T)2

  4. Testing sensitivity to future growth: vary productivity growth over 2010-2100 Factor productivity (log scale) Growth rate fixed, in these cases at 0.5% or 2%/year After 2100, return to default growth rate

  5. Model intervention: carbon tax • Revenue goes to subsidizing renewable energy (a feed-in tariff or production tax credit); this helps renewable energy production costs come down faster (learning curve) • Phased in linearly over 2010-2015

  6. 2100 pCO2 and warming as a function of economic growth (no carbon tax) 1000 2100 pCO2 (ppm) 550 4 2100 warming (K) 3 0 4 2010-2100 production growth (%/year)

  7. Economic damage due to warming as a function of economic growth 2100 Loss of production (%) 4 3 7 Cumulative welfare loss by 2100 (trillion 1990$ consumption equivalent) 1 0 4 2010-2100 production growth (%/year)

  8. 2100 fossil fuel emissions as a function of economic growth and carbon tax Carbon tax ($/ton) - ramped up from 0 over 2010-2015 GT C 2010-2100 production growth (%/year)

  9. 2100 pCO2 as a function of economic growth and carbon tax Carbon tax ($/ton) ppm 2010-2100 production growth (%/year)

  10. Welfare gain from carbon tax (to 2300) Carbon tax ($/ton) Trillion $ equivalent consumption 2010-2100 production growth (%/year)

  11. What if coal resources are limited? • In the FREE runs shown, recoverable oil and gas are limited, so prices rise and peak production is ~2010; however, there’s much more coal, and without a carbon tax peak production is ~2350 • Dave Rutledge’s estimate of recoverable coal is 95% lower (12000 --> 700 GT), so peak production with no tax is ~2020

  12. 2100 pCO2 as a function of economic growth and carbon tax - low coal reserves Carbon tax ($/ton) ppm 2010-2100 production growth (%/year)

  13. Welfare gain from carbon tax (to 2300) Carbon tax ($/ton) Trillion $ equivalent consumption 2010-2100 production growth (%/year)

  14. Conclusions: climate policy in an uncertain economic outlook • If growth is slower than in the IPCC scenarios, reducing emissions still makes economic sense - in fact, the welfare gain is greater • A large tax on fossil fuels, in the presence of uncertainty about economic growth and about fossil fuel reserves, is good no matter what • if fossil fuel reserves are large, it will substantially reduce warming damages • if fossil fuel reserves are small, it will have less impact on warming but (especially if appropriately invested) smooth the transition to renewable energy

  15. Implications for stabilization requirements • Given where we are now, even reducing fossil fuel use from business-as-usual by 80-90% (e.g. through a substantial global carbon tax reinvested in renewable energy) will result in ~500 ppm peak CO2 and ~2.5 K peak warming over the next 1-2 centuries • Getting below 450-500 ppm CO2 and 2-2.5 K warming (cf. Jim Hansen) will require stopping fossil fuel burning altogether, not just taxing it, plus other interventions to reduce atmospheric CO2 (reforestation, soil-building organic agriculture, biochar, reaction with limestone)

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