Introducing land use in OECD’s ENV-Linkages model

1. Introducing land use in OECD’s ENV-Linkages model Rob Dellink OECD Environment Directorate 9 February 2011, OECD Expert Meeting on “Climate change, Agriculture and Land use”, Paris

2. 2 GE modelling at the OECD in historical perspective JOBS ENV-Linkages Linkages WALRAS GREEN GREEN Time 2004 2011 1997 2000 1987 1990 1992 MIT-EPPA

3. The ENV-Linkages model • Computable General Equilibrium (CGE) model • Full description of economies • Simultaneous equilibrium on all markets • Structural trends, no business cycles • All economic activity is part of a closed, linked system • World divided into 29 regions (15 for modelling analysis) • Each economy divided into 26 sectors (with focus on energy) • Recursive-dynamic: horizon 2005-2050; vintages of capital • Link from economy to environment • Greenhouse gas emissions linked to economic activity • Damages from climate change not assessed: model only assesses the costs of policies, without valuing their environmental benefits • Working on feedback link from climate to economy (impacts)

4. Regional aggregation

5. Sectoral aggregation • 5 agriculture related sectors • Rice cultivation, other crops, livestock, forestry, fisheries • 4 primary energy related sectors • Crude oil, coal, gas, petroleum refineries • 5 electricity related technologies (‘sectors’) • Fossil fuel, hydro/geothermal, nuclear, solar/wind, biomass/waste • 6 energy intensive industries • Non-ferrous metals, iron & steel, chemicals, fabricated metal products, paper and paper products, non-metallic minerals • 6 other sectors • Food products, other mining, other manufacturing, transport services, services, construction & dwellings

6. Describing economic activity: production • Smooth production functions describe how producers can choose among different technologies • Multi-level constant elasticity of substitution (CES) functions • Works well because sectors are aggregated across many different firms • Adjustments of the generic production function or specific sectors • Land input in Agriculture and Forestry sectors • Some other sectors have ‘natural resource’ (capacity constraints) • Fertilizer in crops production • Feed in livestock sector • Primary energy sources in fossil fuel electricity • Alternative technologies for electricity are almost perfect substitutes

7. Data sources • Socio-economic data • GTAP 7.1 database; UN Population projections; World Bank, IMF macro projections • Environmental data • CO2 emissions harmonized with IEA • Agricultural emissions: CO2 from energy use; CH4 from rice cultivation, enteric fermentation and manure; N2O from manure and soils – only CH4 from rice linked to land use, others to production level • Projections for non-CO2 GHG and LULUCF emissions (CO2) in the process of harmonization with IMAGE • Land use data • FAO for historic land use cover and deforestation rates • IMAGE for land cover projections and conversion (deforestation, afforestation) emission/sink rates • OSIRIS REDD marginal abatement cost curves

8. Creating a baseline projection • Projecting future trends in socio-economic developments until 2050 • Not a prediction of what will happen! • Be humble: we know very little about long-term future economic activity • Based on a “conditional convergence” methodology • Based on recent growth theory • Countries further from their potential are expected to grow faster • No direct convergence in levels of e.g. GDP, but convergence in drivers of growth: total factor productivity, labour productivity • Conditionally converging drivers plus exogenous trends in e.g. population create an internally consistent set of future projections • Methodology has been discussed and accepted at EPOC’s ad-hoc expert meeting on the Outlook in November

9. Drivers of GDP growth Source: ENV-Linkages model projection

10. Projections for emissions of CO2 from fossil fuel combustion Source: draft ENV-Linkages model projection ; still to be harmonized with IMAGE

11. Approach to introducing land use (ongoing) • Step by step • First focus on CO2 emissions from deforestation and afforestation • Later expand agricultural sector and include bioenergy • Modelling land use change • Multi-level CET structure for governing land use conversion • Supply elasticity for managed land endogenously depends on land availability (so-called land supply curve) • Distinguish intensive vs. extensive margin response to climate policy • Introducing carbon pricing policies • No emissions associated with land that stays in same category (apart from agricultural GHG emissions) • Carbon subsidy for afforestation • Carbon tax for deforestation

12. Nesting structure land use

13. Land use in agriculture Source: draft ENV-Linkages model projection ; still to be harmonized with IMAGE

14. Applications with the extended model • OECD Environmental Outlook • Wide range of policy simulations focus on Climate change, Biodiversity, Water, and Health & Environment • Collaboration with IMAGE suite of models • Economic analysis of the Copenhagen Accord / Cancun Decisions emission pledges • Explicit treatment of REDD+ for non-Annex I parties • Explicit treatment of land accounting rules rules for Annex I parties • Foreseen future policy analyses (to be determined) • Energy subsidy reform: fossil fuels, bioenergy, renewables • Integrated climate change and biodiversity policies • Possibilities for REDD+ in fragmented carbon markets

15. Contact • Rob Dellink • OECD Environment Directorate • rob.dellink@oecd.org • +33 (0) 1 45 24 19 53