What is the economic issue?

1. What is the economic issue? Bruce A. McCarl Distinguished Professor of Agricultural Economics Texas A&M University mccarl@tamu.edu http://agecon2.tamu.edu/people/faculty/mccarl-bruce/ ClimateChangeAdaptation Energy ClimateChangeEffects ClimateChangeMitigation

2. Theme + Climate Change + Emissions + Water =Socialand AgriculturalRisk + Energy Plan of presentation Sources of Risk Manifestation Decisions to be made

3. So what is the Economic issue Externality is the uncompensated impact of one group’s actions on the well-being of bystanders. If effect on bystanders is adverse, a negative externality. If effect is beneficial, a positive externality. Fossil fuel emissions can be a negative externality. Market failure Because buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply, the market equilibrium is not efficient when there are externalities. Income distribution - who gains/ who loses and where – high vs low latitudes Intergenerational equity -- Bystanders are those damaged by warmer climate now and in future Co-benefits some actions that can be undertaken also clean up air and water and enhance farm incomes and damage trade. How do we consider Policy issue - Do we act now to benefit those in future

4. PolicyAlternatives Wait for more information –do little and live with it Plan to adapt Try to reduce future change Mitigate emissions

5. PolicyAlternativesDecision space • Total burden of climate change consists of three elements: • costs of mitigation (reducing the extent of climate change), • costs of adaptation (reducing the impact of change), and • residual impacts that can be neither mitigated nor adapted to Schematic from Parry et al, 2009 Martin Parry, Nigel Arnell, Pam Berry, David Dodman, Samuel Fankhauser, Chris Hope, Sari Kovats, Robert Nicholls, David Sattherwaite, Richard Tiffin, Tim Wheeler: Assessing the costs of adaptation to climate change: A critique of the UNFCCC estimates http://www.iied.org/pubs/pdfs/11501IIED.pdf

6. Policy Challenge • Most effects in future • Mitigation and adaptation costs now • Exact nature of effects and effectiveness of adaptation and mitigation are uncertain + controversial • Unilateral action on mitigation not effective but collective no action means nothing gets done • Resource and investment competition between current production/R&D and needs for mitigation/adaptation So grand challenge is How much to invest now in mitigation and adaptation in interest of future parties at likely cost of current?

7. Economic Needs • Cost Benefit Analysis • Do damages merit action? • Vulnerability costing • How economic are mitigation actions • How costly are they – lost income • How beneficial are they – avoided climate change • How beneficial are adaptation actions • How costly are they – lost income • How beneficial are they – avoided climate change

8. Economic Needs • Income distribution Analysis • Who gains – who loses • Economic fairness D Price S P* Quantity Q*

9. Economic Needs • Income distribution Analysis • Who gains – who loses • Economic fairness D Price S’ S P’ P Q’ Quantity Q

10. Economic Needs • Income distribution Analysis • Who gains – who loses • Economic fairness Consumer welfare Before= a+b+e+f D Price Consumer welfare after= a S’ a Consumer welfare loss= -b-e-f S P’ b e f P d g c Q’ Quantity Q

11. Economic Needs • Income distribution Analysis • Who gains – who loses • Economic fairness Consumer welfare loss= -b-e-f D Producer welfare Before= c+d+g Price S’ a S Producer welfare after= b+c P’ b e f P d g Producer welfare Change= +b-d-g c Q’ Quantity Q

12. Economic Needs • Intergenerational equity analysis • Who gains – who loses • Economic fairness Suppose we have a 4% discount rate Suppose damages from 2052 on are $100 per year How much can you spend now to avoid?

13. Economic Needs • Intergenerational equity analysis • Who gains – who loses • Economic fairness Suppose we have a 4% discount rate Suppose damages from 2052 on are $100 per year How much can you spend now to avoid? NPV of $1 realized 40 years from now is (1/(1.04)^50)=$0.14

14. Economic Needs • Intergenerational equity analysis • Who gains – who loses • Economic fairness Suppose we have a 4% discount rate Suppose damages from 2052 on are $100 per year NPV of $1 realized 40 years from now is (1/(1.04)^50)=$0.14 NPV of 100 annuity is 2500 (100/0.04) So willingness to pay now is $351 (2500*0.14). Would you do it? Is it fair to those in the future?

15. Economic Needs • Co benefit analysis • Direct gains from actions • Indirect gains Weighing them off • Incentive design analysis • Tax, Subsidy, Market, Quota • Accepting proposals

16. Economic Needs Share of a given amount of emissions control CN CA All Non-ag All ag Q CA is cost of abatement by Ag, CN is cost of abatement by Non Ag,

17. Economic Needs Global perspectiveCommon property atmosphere and climateFree riderWho should paySheer size of market

18. Economic Needs Ag perspectiveinelastic vs elastic demand who gains D S’ Price S’ S S D P’ P Q’ Quantity Q Q’ Quantity Q

19. Action on Mitigation Limiting emissions

20. Mitigative Actions Reduce emissions Capture Switch fuels Natural Gas Biofuels Nuclear Hydrogen Alter consumption Increase absorption Mechanical sequestration Oceans Mines Aquifers Biological Sequestration Forest Soils

21. 1- Per-capita fossil-fuel CO2 emissions, 2005 World emissions: 27 billion tons CO2 AVERAGE TODAY STABILIZATION Source: IEA WEO 2007 and Socolow presentation at Americas Climate Choices

22. Who Emits

23. Who Emits

24. Why Mitigate Greenhouse Gas Forcing and Climate Change As above Lagged time between action and response Compliance with International Agreements Domestic Policy Bush Rose Garden an 18 percent reduction in emissions intensity between now and 2012 - will allow actual emissions to increase 12 percent. International attitudes toward US emission levels Need for cheap emission offsets Linkage to other goals for agriculture and environmental impacts Potential emergence of a market Industry Attitudes

25. Types of Adaptation Actions

26. Adaptation can be “autonomous” or “planned.” • Autonomous adaptations are actions taken voluntarily by decision-makers (such as farmers or city leaders) • Planned adaptations are interventions by governments to address needs judged unlikely to be met by autonomous actions • Public sector plays important roles in both cases. • Support autonomous adaptation by providing information, shaping market conditions and developing technologies • Act more directly by developing plans and strategies, providing resources, and undertaking projects (such as infrastructure development).

27. MeanstoAdapt • Investment to facilitate adaptation • Research • Extension • Capital investment • Ag Adaptation • Irrigation • Drought resistant varieties • Tolerant breeds and varieties • Crop and livestock mix • Tree rotation age • Abandonment • McCarl, B.A., Adaptation Options for Agriculture, Forestry and Fisheries, A Report to the UNFCCC Secretariat Financial and Technical Support Division, 2007. http://unfccc.int/files/cooperation_and_support/financial_mechanism/application/pdf/mccarl.pdf

28. Why Adapt - Inevitability Characteristics of stabilization scenarios IPCC WGIII Table SPM.5: Characteristics of post-TAR stabilization scenarios WG3 [Table TS 2, 3.10], SPM p.23 [1] The best estimate of climate sensitivity is 3ºC [WG 1 SPM]. [2] Note that global mean temperature at equilibrium is different from expected global mean temperature at the time of stabilization of GHG concentrations due to the inertia of the climate system. For the majority of scenarios assessed, stabilisation of GHG concentrations occurs between 2100 and 2150. [3] Ranges correspond to the 15th to 85th percentile of the post-TAR scenario distribution. CO2 emissions are shown so multi-gas scenarios can be compared with CO2-only scenarios.

29. Why Adapt Greenhouse Gas Forcing and Climate Change Lagged time between action and response Inevitability of climate change Slow mitigation action

30. Policy Implementation Choices Carbon Mkt Like for SO2 Govt Carbon Program Adaptation Investment Farm Program Green aspects

31. Adaptation versus MitigationInvestmentAllocationEconomic Considerations Next few pages based on Wang, W.W., and B.A. McCarl, "Temporal Investment in Climate Change Adaptation and Mitigation", 2010.

32. Optimal Time Path of Adaptation and Mitigation Investment Figure 5. Optimal investment of adaptation and mitigation in the model with both allowed Figure 6. Temporal investment distributions between adaptation and mitigation Reasons for Differences: • The different mechanism of adaptation and mitigation • The different timing of results from adaptation and mitigation