Environmental Economics

1. Environmental Economics Prof. Dr. Claudia Kemfert Humboldt University http://www.wiwi.hu-berlin.de/kemfert/

2. International Environmental Problems

3. Acid Rain • Ozone: Montreal Protocol • Greenhouse Effect: global warming

4. Montreal Protocol

5. The Global Warming Problem

6. The Climate System

7. Per Capita Emissions

8. Climate Negotiations

9. IPCC Report • Main Findings of the 2nd IPCC Assessment Report: • There is a continued increase in greenhouse gas emissions caused by man. • The average global temperature (and sea level) has increased: The past years have been the warmest since 1860. • Climate models for simulating these observed effects have been strongly improved. • There is a noticeable human impact on climate change. • The end of the 21st century will see a probable 2° C increase in global temperature (this estimation lies between 1 - 3.5° C). This will increase due to human impacts, and stabilize if human impacts are reduced. • Sea level will increase 50 cm by the year 2100 (15-95 cm) and will continue to rise. • Many “zero cost” possibilities for reducing emissions are available in many countries. • But: The estimable risks of climate change demand measures to reduce greenhouse gases.

10. IPCC Report • The Science Report of Climate Change confirms that human activities are responsible for climate change: • CO2 emissions have increased by 30% from 280 parts per million volume (ppmv) in pre-industrial time to 358 ppmv in 1994; some CO2 is absorbed by oceans, etc., while the rest remains for up to 100 years in the atmosphere. CO2 is the “main greenhouse gas” (GHG) and responsible for 70% of all damage. • Nitrous oxide (N2O, laughing gas) has increased by 15%. • Methane, the 2nd most influential greenhouse gas has increased by 50%. It, however, exists in the atmosphere for a shorter time than CO2. Source: Farming, rice fields, coal mines. • Halocarbons (for example flourohydrocarbons) have also strongly increased since the stagnation of the Montreal Protocol.

11. IPCC Report • IPCC agrees that climate change exists: • The global average temperature has increased by 0.3-0.6° C since the end of the 19th century. • The past years have been the warmest since 1860 despite the cooling effects caused by aerosols. • Global sea level has increased by 10-25 cm since the end of the 19th century. It is likely that a large part of the rise is sea level is due to an increase in global temperature. • Large fluctuations in climate have led to increased occurrences of natural disasters. Discussions regarding whether these effects are caused by man agree that it is “unlikely that the observed global warming is ONLY due to natural causes.”

12. IPCC Report • Improved modeling (aerosols) can make better predictions • IPCC models calculate an increase in global temperature of 2° C by the year 2100 (this estimation lies between 1-3.5° C). • The average global warming will be greater than in the last 10,000 years. • Even if greenhouse gas emissions were stabilized today, temperature would increase due to deceleration caused by oceans. • If greenhouse gases are stabilized by the year 2100, only 50-90% of temperature change goals would be achieved, and sea level would rise by 50 cm. • Impacts on the “North Atlantic Stream” (Gulf Stream). Continued warming patterns in a northern direction will have the following consequences: A halt in the oceanic natural biological flow due to increased greenhouse gases, and the “flip-flop” effect in Europe (i.e. very quick changes between cold and warm phases).

13. IPCC Report • IPCC Working Group II was responsible for evaluating the field of research dealing with the effects of climate change on ecosystems, health, socioeconomic influences and the examination of possibilities for reducing greenhouse gases. • Biodiversity reduction • Large changes in forest composition • Increased desert temperatures; irreversible desertification • Melting of 1/3 of the ice caps • Greater coastal erosion and floods • Changes in oceanic circulation Changes in water cycles will most heavily impact regions with limited water supplies: East Africa, Central Asia, and the Middle East. Poorer regions (those dependant on farming and having limited possibilities for imports) will be hit hardest. Increased sea levels will cause flooding, and many countries will lose land (Bangladesh, island nations, the Netherlands, Silt).

14. Climate Change- Reasons to Concern

15. Climate Change • Heat waves and decreased supplies of fresh water will cause increased sicknesses (e.g. malaria, yellow fever). • IPCC WG II: Measures for reducing greenhouse gases and increased sinks (CO2 absorption). • IPCC WG III: Analysis of socioeconomic effects and possibilities for reductions. • Costs and benefits estimated according to various economic models: “Bottom-up” (energy techniques) versus “top-down” (macroeconomics). • Many “no regret” possibilities. • Costs of stabilizing CO2 emissions: 0.5-2% of world GDP annually. • Equity aspects: “Fair” cost allocation for emissions (emissions per person).

16. Climate Change Human Influence on Climate Change is Observable: • Global average temperature has increased by 0.3 –0.6 °C since the end of the 19th century. • The past years have been the warmest since 1860 despite the cooling effect of aerosols. • Global sea levels have risen between 10-25 cm since the end of the 19th century. It is likely that this is mostly caused by increasing temperatures. • Large climate fluctuation: Natural catastrophes are increasingly common. • Climate models for simulation of observed effects have strongly improved. • The foreseeable risks of climate change necessitate reduction of greenhouse gases.

17. IPCC TAR:

20. Source: IPCC

21. Source: IPCC

22. From Emissions to Impacts Human activities Emissions Emission concentrations Feedback Effects Radiative Forcing Temperature/ Climate Change Impacts

23. Effects of Climate Change Costs • Reduction of breeding grounds in most tropical and subtropical regions/reduced biodiversity. • Increased desert temperature; irreversible desertification/melting of 1/3 of the ice caps/greater coastal erosion and flooding. • Changes in oceanic circulation. • Reduced water availability in dry regions. • Large changes in forest composition. • Increased illnesses due to unsanitary water and increased heat. • Increased risk of flooding due to increased rainfall and rising sea level. • Increased energy demand for cooling spaces due to increased summer temperatures.

24. Effects of Climate Change Benefits • Positive effects on breeding grounds in some regions. • Potential global forest increases through improved forest management. • Decreased mortality and reduced energy demand in winter due to increased temperatures.

25. Source: OECD 2004

26. Climate Change will cause direct and indirect economic impacts Example: Hurricane Katrina

28. Hurricane Katrina: August 2005 Economic Impacts Direct economic impacts: Indirect economic impacts: • Oil price increase: increase of energy costs: 0.4 % GDP • Economic growth effects of reconstruction: 0.1 % of GDP • Crowded out investments: growth decline: 0.6 % • Damages in buildings, infrastructure: Insured (MunichRe: 30 Bill US $, US Department: 200 Bill US $ (1.6 % GPD)) • Expenditure increase for evacuation, health costs increases • Loss of income • Adaptation costs Economic losses of 2-3 % of US GDP (450 billion US Dollar)

29. Assessment of Costs of Action/ Inaction of Climate Change

30. Integrated Assessment Modelling Economy: CGE /Growth Models Climate Models Data: GTAP- Land Use Data

31. Integrated Assessment Model

32. Integrated Assessment Model CGE Model: GTAP-E-L 25 world regions/ 14 Sectors Trade between all sectors Energy: fossil-non fossil Climate Model: ICM CO2, N2O, CH4, other GHGses Temperature Radiative Forcing Impact function (regional): Overall temperature change Economic Change Pop.change Vulnerability X X X Adaptation Costs Economic Damages (stochastic) + +

33. Regions in the model

34. Impacts of climate change Damages Adaptation Energy Costs • Buildings • Infrastructure • Agriculture • Health • Insurances • Tourism • Agriculture • Health • Households • Energy • Energy (supply disruptions, price variation) • Households • Energy intensive firms • Transportation

35. Interrelations between Induced and Endogenous Technological Change in WIAGEM

36. Affected Sectors

37. Energy Costs: • Supply disruption (not enough cooling water, hurricane, ice,) • Price variations • Increase CO2 free technologies (late start- higher costs) • Increase of R&D expenditures

38. Policy Options • Climate Protection: • Emissions trading/Eco Taxes • Motor vehicle tax (CO2) • Promotion renewable energy /CHP • International climate protection: Inclusion USA/China • Adaptation: • Coastal Zone Management • Different cultivation methods in agriculture • Tourism (from ski to hike etc) • Heath funds

39. Economic Damages of Climate Change

40. Uncertainties: • Climate System: Temperature change/overshooting /Climate Sensitivity • Increase of extreme climate events: when and where • Type of extreme event: flood, drought, hurricane • Damages: developed /developing region • Indirect Economic Impacts: difficulties of quantification /type of extreme climate event

41. Kyoto Protocol • Quantified emissions reduction of GHG: • 5 year commitment periods setting “assigned amounts” • First period defined for 2008-2012 total 5 % reduction: • USA - 7; Canada - 6; EU - 8; Japan - 6; Russia and Ukraine: 0; Other EITs: most -8 % , base year adjustment; Canada: - 6 %, Australia: +8 % • Basket of six GHG • Allowances of Sinks /Land use changes

42. Kyoto Protocol • Domestic actions versus flexible, Kyoto mechanisms: • JI (Art.6): Joint Implementation: Project level crediting: ERU (emissions reduction units) by GHG reduction projects or sinks enhancement • ET (Art.17) Emissions trading between Annex I • CDM, (Art.12): Project Level crediting between Annex I and developing countries

43. Kyoto Protocol • Quantified emissions reduction of GHG: • 5 year commitment periods setting “assigned amounts” • First period defined for 2008-2012 total 5 % reduction: • USA - 7; Canada - 6; EU - 8; Japan - 6; Russia and Ukraine: 0; Other EITs: most -8 % , base year adjustment; Canada: - 6 %, Australia: +8 % • Basket of six GHG • Allowances of Sinks /Land use changes

44. Kyoto Protocol • Domestic actions versus flexible, Kyoto mechanisms: • JI (Art.6): Joint Implementation: Project level crediting: ERU (emissions reduction units) by GHG reduction projects or sinks enhancement • ET (Art.17) Emissions trading between Annex I • CDM, (Art.12): Project Level crediting between Annex I and developing countries

45. Emissions reduction

46. Quota Volume Target Emissions projections Hot Air

47. Hot Air • Emissions reduction in Russia of 40 % by 1997 • Russia could sell the surplus which is the difference between their actual emissions in 2008 –2012 and the target that they adopted in Kyoto • Windfall „Hot air“ could undermine the credibility of international effort to control carbon and incentive to invest in new and innovative technologies • Capital flows by permit purchase not necessarily used in new emissions reduction programmes

48. Kyoto Protocol • Supplemenarity: flexible mechanisms only supplemental to domestic action: cap on Emissions trading • By limiting emissions trading through the „supplementarity criteria“ : Hot Air not necessarily avoided • Windfall emissions permits will be sold, with and without cap on ET • Restriction of intertemporal ET: only banking, no borrowing

49. Post Kyoto • Bush: “…climate change needs to be taken seriously [but] Kyoto is unfair to America” • Bush: “As you know, I oppose the Kyoto protocol because it exempts 80 % of the world…” => voluntary cuts • “keep the parts we like”; but without targets no engine for mechanisms • China important • G8: USA/China: binding emissions reduction targets