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Impact of uncertainty in economic projections for stabilization scenarios

This study analyzes the importance of future economic growth assumptions in climate policy modeling and the implications for stabilization requirements. It examines the relationship between economic growth, energy consumption, greenhouse gas emissions, and climate damage.

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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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