Integrated Assessment Models: Modeling Mitigation (Abatement)

1. Integrated Assessment Models:Modeling Mitigation (Abatement) Economics 331b Spring 2011 Week of March 28

2. Agenda This week (Monday and Wednesday): - Review on term paper - How to calculate SCC - Final work on impacts - Mitigation Next Monday: Add last module to your little model: mitigation.

3. How to estimate SCC • Numerical derivative: - Calculate PV income - Recalculate PV income with 1 additional unit of E - Take difference - BE VERY CAREFUL WITH UNITS 2. Analytical: - Have Damage=D=f(T); T = g(RF); RF=h(C); C=z(E). - Therefore D’(E)=f’ g’ h’ z’

4. Model estimate

5. UNITS!!!

6. National Academy Report on Abrupt Climate Change “Illustration of difference between impacts with and without adaptation. The upper line shows the impact of climate change with full adaptation where farmers can change crops and irrigate…. The lower line shows the impacts without adaptation, as is likely to occur with abrupt climate change. Note that … the costs are likely to be lower with adaptation. We have also shown a break in the no-adaptation line to reflect the potential for sharp threshold effects, such as those due to floods or fire.” (National Academy, Abrupt Climate Change, 2002.)

7. Components of damages circa 2000

8. Damage summary: global Dots from Tol survey Line is Yale DICE/RICE model

9. Summary of Impacts Estimates Early studies contained a major surprise: Modest impacts for gradual climate change, market impacts, high-income economies, next 50-100 years: - Impact about 0 (+ 2) percent of output. - Further studies confirmed this general result. BUT, outside of this narrow finding, potential for big problems: • many subtle thresholds and tipping elements • abrupt climate change (“inevitable surprises”) • many ecological disruptions (ocean carbonization, species loss, forest wildfires, loss of terrestrial glaciers, snow packs, …) • stress to small, topical, developing countries • gradual coastal inundation of 1 – 10 meters over 1-5 centuries

10. Now on to mitigation (abatement) costs

11. The basic analytical structure Price of carbon emissions Marginal Cost Pcarbon* Social cost of carbon 0 Abatement Abatement*

12. Mitigation (abatement) • We have examined the damage side. • For a full cost-benefit analysis, we need the cost side. • “Mitigation” involves analyses of the policies involving the reduction of emissions CO2 and other GHGs There are four major issues involved: 1. Projecting the emissions 2. Estimating the costs of emissions reductions 3. Designing policies to reduce emissions 4. Encouraging low-carbon technological change • This set of tasks is generally much easier that impacts because we have extensive information on impacts of energy taxes, regulations, etc.

13. 1. Projecting emissions For this we need an integrated assessment model. As an example, the following shows the projected emissions to 2105 in the Yale-RICE model and in several other models examined in EMF-22.

14. Projections CO2 emissions various models (with no emissions reductions policies) EMF-22 and Yale-RICE model (with orange dots)

15. Scientific consensus Commonly heard. But what is a scientific consensus? Does scientific consensus = truth?

16. 2. Estimating Costs of Reducing Emissions Analysts use different strategies to model abatement: • Some use econometric analysis (“top-down”) • Some use engineering/mathematical programming estimates (“bottom up”) • Behavioral (uncharted territory … how to do this?) Bottom up: - Relies on individual technologies and processes from engineering studies - Aggregates these together to get a minimum cost mitigation function - Often has weak behavioral component.

17. Example from passenger cars

18. Example from passenger cars

19. Estimated cost of improvement, compact car Nat. Acad. Sci., Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards,2002.

20. Example from McKinzey Study

21. Impact of Japanese events on mitigation costs?

22. Nordhaus house survey

23. 2. Top-down (econometric) Top down or econometric: - Look for some kind of “experiment” in which energy or carbon prices vary. Then estimate impact of higher prices on carbon emissions: - Some examples of CO2 taxes or European Trading System. - More useful are energy taxes. - Some rely on production functions and simulations.

24. 250 200 150 100 Carbon price ($ per ton C reduction) 50 0 0 2 4 6 8 10 12 Percentage reduction Example of econometric (“top-down”) approach to mitigation Assume that the demand for gasoline is Q = Bp-λ Supply of gasoline is perfectly elastic with tax τ: p = q + τ CO2 emissions are proportional to consumption: E = kQ So we have: E = kB-λ (q + τ)-λ =c(q + τ)-λ [Numbers are calibrated to Actual US data.]

25. Further discussion There has been a great deal of controversy about the McKinsey study. The idea of “negative cost” emissions reduction raises major conceptual and policy issues. Most economic models rely on more econometric studies. The next set of slides shows estimates based on the IPCC Fourth Assessment Report survey of mitigation costs. The bottom line is that the cost using the top-down approaches are generally higher than bottom-up.

26. Survey of multiple models from IPCC FAR Source: IPCC, AR4, Mitigation.

27. Summary of estimates Source: IPCC, AR4, Mitigation, p. 77.

28. 100 Top down 80 Bottom up 60 Carbon price (p/t C) 40 20 0 - 20 0 10 20 30 40 Percentage reduction Summary from IPCC

29. Derivation of mitigation cost function in RICE model Start with a reduced-form cost function: (1) C = Qλμ where C = mitigation cost, Q = GDP, μ = emissions control rate, λ,  are parameters. Take the derivative w.r.t. emissions and substitute σ = E0 /Q • dC/dE = MC emissions reductions = Qλβμ-1[dμ/dE] =λβμ-1/σ Note that MC(0) = 0; MC(1) = λβ/σ= price of backstop technology*; and C/Q = λwith zero emissions. *”Backstop technology” is technology at which get 100 emissions reduction (say solar/nuclear/fusion/wind for everything).

30. What are your views on top down v. bottom up? There is a very lively controversy about the role of "negative cost" mitigation. The McKinsey report (Reducing US Greenhouse Emissions, p. xiii) has a very substantial number of such mitigation possibilities. Other modelers are sharply critical of the MK report and believe that (aside from external costs) there are very few negative cost options. You should think about this and have some pros and cons (for final exam?).