Download Course_609_lecture_1 (Jan 18, 2017)

Course 609
(i) Climate Science
(ii) Integrated Assessment Models of Climate Change
(iii) DICE/RICE Models
Climate vs Weather
• Weather – conditions of the atmosphere (e.g.,
temperature, humidity) over a short period of time
• Climate – how the atmosphere behaves over
relatively long periods of time (e.g., decadal average
temperature)
• In other words climate is the distribution of weather
events
• Climate change (CC) – change in the parameters of
the distribution (e.g., mean or variance)
Representing Climate Change
• Complete global description of climate infeasible
• Key state variable describing climate – global mean
surface temperature (other variables – sea level…)
• Control variable – emissions of greenhouse gases (GHGs)
• Climate change – change in the state variable
• T(t) = increase in global mean temperature (0C) compared
to the pre-industrial (circa 1750) steady state
• Initial condition T(0) = 0 – ‘steady state’ last 10,000 years
• T(300) = temperature increase by year 2050
• Goal: T(∞) = 2 0C – we shall have more to say on this later
• Is this the real goal?
Estimate of the Earth’s annual and global mean energy balance
Over the long term, the amount of incoming solar radiation absorbed by the Earth and atmosphere is balanced by the Earth and atmosphere releasing the same amount of
outgoing longwave radiation. About half of the incoming solar radiation is absorbed by the Earth’s surface. This energy is transferred to the atmosphere by warming the air in
contact with the surface (thermals), by evapotranspiration and by longwave radiation that is absorbed by clouds and greenhouse gases. The atmosphere in turn radiates
longwave energy back to Earth as well as out to space. Source: FAQ 1.1, Figure 1. http://www.ipcc.ch/pdf/assessment-report/ar4/wg1/ar4-wg1-faqs.pdf.
The Greenhouse Effect (1)
• The warming of the atmosphere by heat reflected
from the earth is called the greenhouse effect.
• The greenhouse effect actually makes the earth
habitable. Without the greenhouse effect, the
earth would be much colder (- 180oC)!
• Main greenhouse gases (GHGs) in the atmosphere
include CO2 , CH4, N2O, CFCs.
• Increased concentration of GHGs causes more
heat to be retained in atmosphere, more heat to
be reflected back to the earth surface and rise in
average global temperatures (global warming).
The Greenhouse Effect (2)
 The ‘natural’ greenhouse effect warms the
temperature of the atmosphere to 15 oC at the
Earth’s surface.
 This natural warming allows water to exist on the
Earth’s surface, the basis of life support.
 The problem is of “too much” warming due to
human interference/activities.
 Also, the earth goes through cooling/warming
cycles, but again the pace and scale of human
interference is the problem.
Intergovernmental Panel on Climate Change (IPCC)
• Formed by United Nations Environment Programme
(UNEP) and World Meteorological Organization
(WMO) in 1988.
• Conduct ‘assessments’ of state of knowledge of CC,
vulnerabilities and consequences of CC, options to
avoid, prepare for, and respond to changes
• All countries that signed UNEP or WMO convention
are members of IPCC
IPCC: ‘scientific’ basis for climate change
“Scientific, technical and socioeconomic information
relevant for the understanding of the risk of human-induced
climate change."
Though IPCC organized within political institutional
framework, basically scientific body of leading scientists
from around the world. To keep to its mandate and maintain
objectivity IPCC does not make policy recommendations (it
is ‘policy relevant’ not ‘policy prescriptive’).
IPCC Assessments (five so far) most comprehensive
evaluations of climate change on which climate policy is
based (AR1, AR2, etc.)
IPCC Structure
Working Group 1 (WG 1):
The Physical Science Basis
(What is happening vis-à-vis CC?)
Working Group 2 (WG 2):
Impacts and Adaptation
(How CC will impact regions, how do we cope?)
Working Group 3 (WG 3):
Mitigation
(What should/can we do about it?)
Climate Change Then…
IPCC 4th Assessment (2007)
“Warming of the climate system is unequivocal, as
is now evident from observations of increases in
global average air and ocean temperatures,
widespread melting of snow and ice, and rising
global average sea level”
Climate Change Now…
IPCC 5th Assessment (2014)
• Warming of the climate system is unequivocal - many
of the observed changes unprecedented over decades
to millennia
• The atmosphere and ocean have warmed, the amounts
of snow and ice have diminished, sea level has risen
• Concentrations of greenhouse gases have increased
• Each of the last three decades has been successively
warmer at the Earth’s surface than any preceding
decade since 1850
• In the Northern Hemisphere, 1983–2012 was likely the
warmest 30-year period of the last 1400 years
Changes in global average surface temperature
Period
100 years
Rate / decade
0.074oC
50 years
0.128oC
Eleven of the last twelve years rank among the twelve warmest years in
the instrumental record of global surface temperature
Source: IPCC
Global average sea level has risen by 1.8mm/year since
1961 and by 3.1mm/year since 1993
Anthropogenic activities are increasing
concentration of greenhouse gases
• Main sources of GHG emissions:
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•
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•
• Burning of fossil fuels (coal, oil, natural gas, shale)
• Industrial activities
• Burning and exploiting forests
• Food production (methane), cattle
• Waste landfills (methane)
Concentration of CO2 in the atmosphere increased from
295 ppm in 1870 to 405 ppm in Dec 2016.
CO2 versus Carbon? (12+16+16 = 44)/12 = 3.67
CO2e = 490 ppm (Global Warming Potential…)
CO2 emissions (2010) approx. 36GtCO2 (1 Gt = 1 billion
tons)
The bottomline about stabilization
1. In order to stabilize concentration of GHGs (a
‘stock’) emissions (‘flow’) need to peak and decline
thereafter.
2. Tighter the stabilization target more quickly this
peak and decline would need to occur.
3. Delaying emission reductions:
i. makes it harder to achieve low stabilization
concentration; and/or requires faster and deeper
cuts in future
4. Climate system has inertia (like stopping a
supertanker) global avg. temp at equilibrium NOT
global avg. temp at time of stabilization!
Source: IPCC, Climate Change 2001 - Synthesis Report
The cost of delay
• (Nicholas) Stern Review in 2006 proposed stabilizing
CO2-eq concentration at or below 550 ppm.
• At 550 ppm, about 0.5 probability of < 30C rise by 2100,
and unlikely that rise > 40C (relatively to pre-industrial).
• Under “business as usual” (BAU) there is a 0.5
probability of 50C rise.
• Assuming emissions peak in 2020, can achieve 550 ppm
with annual emission cuts of 1- 3% thereafter.
• 10 year delay doubles annual rate of emissions decline
required.
UN Framework Convention on Climate
Change (UNFCCC)
Non binding convention but lays down the
architecture of global negotiations (which is now
under threat)
Objective: “stabilization of greenhouse gas
concentrations in the atmosphere at a level that
would prevent dangerous anthropogenic
interference with the climate system”
UNFCCC Principles
• Industrialised countries have historical responsibility
for climate change and are more developed (Annex
1 countries)
• Thus, they are to take the lead in emissions
reductions
• Principle of common but differentiated
responsibilities (CBDR)
• Commitment to transfer financial resources and
technology to developing countries (non-Annex 1
countries)
Conference of Parties under UNFCCC
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Annual meeting – COP1 in 1995
COP3 at Kyoto (1997) “Kyoto Protocol”
COP8 at New Delhi (2002)
COP15 at Copenhagen (2009)
COP20 at Lima
COP21 at Paris (2015)
and so on…
International agreement: desirable features
• Effective (deep cuts… sooner than later)
• Inclusive of major contributors to stock of GHGs in
atmosphere
• Cost-effective in achieving its goals
• Equitable for all parties involved
• Fundamental paradigm shift required from current
trajectory
Options available for mitigating GHG atmospheric
concentrations
Two ways to move towards a goal of reducing the rate of
growth of atmospheric GHG concentrations:
• Increase the capacity of sinks that sequester CO2 and
other GHGs from the atmosphere -- geo-engineering
such as afforestation, carbon capture and storage (CCS),
solar radiation management (SRM) and ocean
fertilization.
• Decrease emissions of GHGs below business as usual
(BAU) thereby reducing GHG inflows into the atmosphere
– aka ‘mitigation’ (distinct from adaptation).
Climate Change – Distinctive Features
•GHG emissions – an externality and thus there is market failure
• Distinctive features
– global public bad [abatement = global public good]
– stock not a flow – stock externality – implications…
– long-term view
– uncertainties regarding timing and scale of damages and
costs of abatement (huge scale of possible damages)
• Implications for economic analysis
– ethical treatment of values within & between generations
– incentives for global cooperation
– treatment of risk
– non-marginal changes
Attaining GHG emissions or Atmospheric
Concentration Targets: Key Takeaways (1)
1. Cost of achieving a given target in terms of levels of
allowable GHG emissions or stabilised GHG
concentrations increases as magnitude of emissions or
concentration target declines.
2. Other things equal, cost of achieving any given target
increases the higher are baseline emissions.
3. The cost of achieving any given target varies with the
date (speed) at which targets are to be met, but does so
in quite complex ways.
4. It is not possible to say in general whether early (fast)
control measures are ‘better’ than late (slow) controls –
“climate policy ramp”
Key Takeaways (2)
5. Some scope for GHG emissions to be reduced at
zero or negative net social cost. Magnitude is
uncertain, depends on the size of three kinds of
opportunities and extent to which barriers limiting
their exploitation are overcome:
a. overcoming market imperfections (and so
reducing avoidable inefficiencies);
b. ancillary or co-benefits of GHG abatement (such
as reductions in traffic congestion) aka ‘win-win’
c. double dividend effects
Key Takeaways (3)
6.
Abatement costs are lower the more cost-effectively abatement is
obtained. Thus:
a. Costs lower for strategies that focus on all GHGs, rather than just CO2 and
are able to find cost-minimising abatement mixes among the set of GHGs.
[It is not just carbon emissions or concentrations that matter.]
b. Costs lower for strategies that focus on all sectors, rather than just one
sector or a small number of sectors. E.g., while reducing emissions in
energy production is of great importance, the equimarginal principle
suggests cost minimisation requires a balanced multi-sectoral approach.
c. The more ‘complete’ is the abatement effort in terms of countries
involved, the lower will be overall control costs. This is just another
implication of the equimarginal cost principle, and it is also necessary to
minimise problems of carbon (or other GHG) leakage.
d. Thus, in principle achieving targets at least cost can happen through
uniform global GHG taxes. Alternatively, use could be made of a set of
freely tradable emissions permits (one set for each gas, with tradability
between sets at appropriate conversion rates), with quantities of permits
fixed at the desired cost-minimising target levels.
Key Takeaways (4)
7. Climate-change decision-making is essentially a sequential process under
uncertainty. The value of new information is likely to be very high, and so
there are important quasi-option values that should be considered.
Option value/price - value placed on private willingness to pay for preserving a
public good/service even if there is little or no likelihood of the individual actually
ever using it. It’s not related to current use - the value attached to future use
opportunities.
Quasi-option value – (in the context of irreversibility and uncertainty)
• Costs and benefits are not known with certainty, but uncertainty can be reduced
by gathering information.
• Any decision made now and which commits resources or generates costs that
cannot subsequently be recovered or reversed, is an irreversible decision.
• In this context of uncertainty and irreversibility it may pay to delay making a
decision to commit resources.
• The value of the information gained from that delay is quasi-option value.
What is the economic bottomline?
• The fundamental problem is the climate-change
externality – a “global public good”
• Economic participants (millions of firms, billions of
people, trillions of decisions) need to face realistic
carbon prices if their decisions about consumption,
investment, and innovation are to be correct
• To be effective, we need a market price of carbon
emissions that reflects the social costs (SCC)
• Moreover, to be efficient, the price must be
universal and harmonized across every sector and
country.
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This is also the IPCC view
• An effective carbon-price signal could realise
significant mitigation potential in all sectors.
• Modelling studies show global carbon prices
rising to 20-80 US$/tCO2-eq by 2030 are
consistent with stabilisation at 550 ppm CO2-eq
by 2100.
• Induced technological change may lower these
prices ranges to 5-65 US$/tCO2-eq in 2030.
Source: Newbery, D.M. (2003). Sectoral dimensions of sustainable development: energy & transport. Economic
Survey of Europe 2.
Central questions for climate policy
• How sharply should countries reduce CO2 and other GHG
emissions?
• What should be the time profile of emissions reductions?
• How should the reductions be distributed across industries
and countries?
• Should there be a system of emissions limits imposed on
firms, industries, and nations?
• Should emissions reductions be primarily induced through
taxes on GHGs?
• Should we subsidize green industries?
• What should be the relative contributions of rich and poor
households or nations?
• Are regulations an effective substitute for fiscal instruments?
Economic modeling of climate change
• Integrate geophysical stocks and flows with economic
stocks and flows.
• The major difference between IAMs and geophysical
models is that economic measures include not only
quantities but also valuations, which for market or
near-market transactions are prices.
• Values using a discount rate are deep issues in
economics.
• Economic welfare – properly measured – should
include everything that is of value to people, even if
those things are not included in the marketplace.
Integrated Assessment Models
• Environmental problems have strong roots in natural
sciences.
• For example, climate change involves a wide variety of
sciences such as atmospheric chemistry and other climate
sciences, ecology, economics, political science, game
theory, and international law.
• Integrated assessment models (IAMs) can be defined as
approaches that integrate knowledge from two or more
domains into a single framework. These are sometimes
theoretical but are increasingly computerized dynamic
models of varying levels of complexity.
Integrated
Assessment
ModelsininClimate
Climate
Change
Integrated
Assessment(IA)
(IA) Models
Change
Integrated Assessment Models (IAMs)
What are IAMs?
These are models that include the full range of cause
and effect in climate change (“end to end” modeling)
Major goals of IAMs
Project trends in consistent manner
Assess costs and benefits of climate policies
Estimate the carbon price and efficient emissions
reductions for different goals
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Why IAMs?
• The challenge of climate change particularly difficult because it spans
many disciplines and parts of society.
• This multi-faceted nature also poses a challenge to natural and social
scientists who must incorporate a wide variety of geophysical,
economic, and political disciplines into their diagnoses and
prescriptions.
• The task of integrated modeling is to pull together the different
aspects of a problem so that a decision or an analysis can consider all
important endogenous variables that operate simultaneously.
• The point emphasized in IAMs is we need to have at a first level of
approximation models that operate all the modules simultaneously.
• In other models there is no linkage from the climate models to the
economy and then back to emissions.
• This linkage is the purpose of integrating different parts of the climate
change nexus in IAMs.
History of IAMs
• Weyant et al. (1996) emphasized, the importance of
multiple approaches to development of IAMs because of
the difficulty of encompassing all the important elements in
a single model
• Policy evaluation vs. policy optimization
• Kolstad (1998) writes “nearly all the results have come from
the so-called policy optimization models, the top-down
economy-climate models. Virtually no new basic
understanding appears to have emerged from the policy
evaluation models…”
• Uncertainty remains outside the models
Precursors of IAMs
• Several of the current IAMs grew out of energy models of the
1970s and 1980s.
• The first IAMs in climate change were basically energy models
with an emissions model included and later with other modules
such as a carbon cycle and a small climate model.
• The earliest versions of the DICE and RICE models in Nordhaus
(1992, 1994) moved to a growth-theoretic framework similar to
the Manne and Manne-Richels energy models.
• Notable IAMs: PACE, IMAGE, MRN-NEEM, GTEM, MiniCAM,
SGM, IGSM, WITCH, ADAGE, GEMINI, POLES, IGEM, MESSAGE,
FUND, ETSAP-TIAM, MERGE, and DART.
The process of human-induced climate change
• Five key links
– from people to emissions
– from emissions to stocks
– from stocks to rising temperature
– from rising temperature to climate change
– from climate change to human impact
Fossil fuel use
generates CO2
emissions
The
emissionsclimateimpactspolicy nexus:
Carbon cycle:
redistributes around
atmosphere, oceans, etc.
Climate system: change
in radiative warming, precip,
ocean currents, sea level rise,…
Impacts on ecosystems,
agriculture, diseases,
skiing, golfing, …
Measures to control
emissions (limits, taxes,
subsidies, …)
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Optimising Models (top down)
• Economists typically derive policy recommendations via
optimisation.
• To analyse a stock pollution problem i.e., climate change we start
by defining an objective function (e.g., SWF).
• SWF usually PV of utility or stream of consumption over some
planning horizon.
• Functional form commonly used is constant intertemporal
elasticity of substitution (treat consumption at different points in
time as different goods – substitution in response to change in
relative prices) – more on this later.
• Relevant constraints identified and stated mathematically.
• One (or more) variables in optimal growth model are
instrumental/control (policy) variables.
• It is these that the policy maker can ‘control’
• Policy choices emerge from maximization of economic welfare
(e.g., SWF) subject to relevant constraints.
Optimising models continued
• The outputs of the optimisation exercise yield:
• A time path of quantities for the control or choice variable(s)
that maximise the objective function Policy choices emerge from
maximization of economic welfare (e.g., SWF) subject to
relevant constraints.
• A time path of ‘shadow prices’ which are the dual of the
optimising quantities – usually interpreted as ‘efficient’ tax rates,
such in a decentralised market their imposition would lead
economic agents to behave in a way that would generate the
socially efficient (optimal) outcome.
• IAMs such as DICE/RICE are examples of such models.
DICE Model Overview (1)
• DICE (Dynamic Integrated model of Climate and the Economy) is a globally
aggregated model.
• RICE (Regional Integrated model of Climate and the Economy) essentially
same except that output and abatement have 12 regions.
• The DICE model views the economics of climate change from the perspective
of neoclassical economic growth theory.
• Economies make investments in capital, education, and technologies, thereby
reducing consumption today, in order to increase consumption in the future.
• The DICE model extends this approach by including the “natural capital” of the
climate system as an additional kind of capital stock.
• It views concentrations of GHGs as negative natural capital, and emissions
reductions as investments that raise the quantity of natural capital.
• By devoting output to emissions reductions (abatement), economies reduce
consumption today but prevent economically harmful climate change and
thereby increase consumption possibilities in the future [TRADEOFF!]
DICE/RICE Model Overview (2)
• Optimal growth models augmented by a science component
that models emissions paths into GHG atmospheric
concentrations, and then into implied time paths for global
mean temperature changes.
• An inter temporal optimisation model of CC policy.
• Objective function = PV of global consumption/utility.
• DICE is estimates a global efficient emissions reduction
schedule (time path) and rates and time path of carbon tax
that would bring about an efficient outcome i.e., maximised
PV of global consumption net of GHG damage and abatement
costs - aka ‘optimal policy’.
• It is an application of a stock pollution model to the problem of
global climate change [Perman ch.16]
DICE/RICE Model Structure
• Assume economic and climate policies should be designed to
optimize the flow of consumption over time.
• Consumption – “generalised consumption” - includes not only
traditional market goods and services but also non-market
goods and services – leisure, health, clean air, water (env svcs)
• Mathematically – policies chosen to max a SWF, W, discounted
sum of population weighted utility of per capita cons, c.
• 𝑊0(𝑐0, 𝑐1, 𝑐2, … ) =
𝑇𝑚𝑎𝑥
𝑡=1 𝑈
𝑐 𝑡 , 𝐿 𝑡 𝑅(𝑡)
• DICE/RICE assume utility represented by constant elasticity
utility function.
• 𝑈 𝑐 𝑡 , 𝐿 𝑡 = 𝐿 𝑡 𝑐 𝑡 1−𝜂 1 − 𝜂
• Let’s just use Ct – population/LF weighted pcc (by time/region)
Utility Function (CIES)
• Constant elasticity of MU of consumption
𝜕𝑀𝑈
𝜕𝐶
𝐶
( )
𝑀𝑈
•
= -η < 0
• Elasticity is a parameter that represents the extent of
substitutability of the consumption of different generations.
• If η close to zero, then consumption of different generations
are close substitutes.
• When η = 0, MU does not change with consumption, U(C) is a
straight line.
• Or in other words social planner is indifferent between
different consumption time profiles.
• Note: inverse of formula above gives the intertemporal
elasticity of substitution of consumption.
• So when η = 0 willingness to substitute consumption
intertemporally is infinite.
Utility Function
• If η is high then the consumptions of different generations are
not close substitutes.
• So when η = ∞ cannot substitute consumption intertemporally.
η represents the curvature of the utility function
Inequality Aversion
• Can also think of η as inequality aversion parameter (Atkinson
Index or Atkinson inequality measure).
• When η = 0 no aversion to inequality.
• When η = ∞ high (infinite) aversion to inequality.
Specification of W
• Assumes value of consumption in period t is proportional to
population (growth rate follows logistic function)
• Well being/utility of of future generations is discounted.
• 𝑅 𝑡 = 1 + 𝜌 −𝑡 [e. g. , 𝜌 = 0.02]
Results of DICE-2007 simulations
• Net present value (NPV) benefit of the optimal policy, relative to a
business as usual or ‘uncontrolled’ baseline is $3.1 trillion. This and
other characteristics of the optimal policy are shown in the second
row of the table (the row labelled ‘Optimal’).
• Global temperature rises over its 1900 level by 2.6°C in 2100 and by
3.4°C in 2200.
• Despite the fact substantial amounts of climate change mitigation
are taking place, the PV of climate change damages still very large
at $17.3 trillion. But those damages would be $22.6 trillion in the
uncontrolled baseline case, and so are cut by $5.3 trillion.
• However, the PV of abatement costs are $2.2 trillion. When this
figure is deducted from the $5.3 trillion fall in climate change
damages, we arrive at the NPV of $3.1 trillion mentioned above.
• $3 trillion approx 0.15% of discounted world GDP.
[Values in constant 2005 $ aggregated over countries using PPP exchange rates.]
Time path of carbon prices (or taxes) for various mitigation strategies
2005 U.S. $ per ton of carbon (tC)
1. Level of carbon prices (or taxes) over time indicates tightness of policy
restraint being imposed on emissions for any particular control strategy.
2. Table shows carbon tax under ‘optimal’ policy at 2 points in time, 2010 and
2100. A complete profile of carbon prices over next 100 years for the
optimal path in next slide.
3. These are tax rates which if globally imposed on each ton of carbon
emissions, would generate the economically ‘optimal’ path.
4. By construction, along an optimal path MC of abatement equal to MB of
carbon abatement, with each being equal to the carbon tax.
5. Optimal carbon price follows a gradually rising path from initial value of
about $27/tC to approx. $200/tC in 2100.
6. Trajectory of optimal carbon prices rises sharply over time as a result of
rising marginal damages and the need for increasingly tight restraints.
7. To what level would carbon price need to rise eventually? Depends on the
cost at which a zero-carbon backstop technology becomes available in
sufficient quantity to replace carbon-based fuel in all uses. It is evident from
the graph that such a price is likely to exceed $ 200/tC.
Note:
1. While $200/tC is a large tax rate, by 2100 under an optimal
mitigation strategy the intensity of control would be such that
carbon emission flows will have been driven down to low levels
so total carbon tax payments need not be large [convert carbon
prices into CO2 prices?]
2. If a backstop technology were to become available at both low
cost and in large volume in not too distant future would be
enormous gains in net economic welfare. The whole carbon tax
profile would shift down in response to the reduced costs of
abatement. As a result, there are potentially very large returns
to investment in R&D in ‘promising’ backstops, perhaps
including nuclear fusion technology.
3. Slides also show a number of other mitigation strategies and
their associated carbon tax profiles.
Structure of DICE (1)
Economic module:
- Standard economic production structure
- Ramsey-Cass-Koopmans model with labor, capital, carbon
capital, GHG abatement, damage
- GHG emissions are global externality
- 12 regions, multiple periods
CO2/Climate module:
-
Emissions = f(output (Q), carbon price, time)
Concentrations = g(emissions, diffusion: 3 C reservoirs)
Temperature change = h(GHG forcings, time lag)
Economic damage = F(output, T, CO2, sea level rise)
Structure of DICE (2)
• DICE employs an optimal economic growth modelling
framework, integrated with a science component which
comprises a carbon cycle and a system of climate equations.
• The carbon cycle is based on a three-reservoir model
calibrated to existing carbon-cycle models and historical data.
• The three reservoirs are the atmosphere, the upper oceans
and the biosphere and the deep oceans.
• Carbon flows in both directions between adjacent reservoirs.
The mixing between the deep oceans and other reservoirs is
extremely slow.
Structure of DICE (3)
• The climate equations include an equation for radiative forcing
and two equations for the climate system.
• The radiative-forcing equation calculates the impact of the
accumulation of GHGs on the radiation balance of the globe.
• The climate equations calculate the mean surface temperature
of the globe and the average temperature of the deep oceans
for each time-step. These equations draw upon and are
calibrated to large-scale general circulation models of the
atmosphere and ocean systems.
• Only GHG subject to controls is industrial CO2 since CO2 is the
major contributor to global warming, and because other GHGs
are likely to be controlled in different ways. Other GHGs (CO2
emissions from land-use changes, other well-mixed GHGs, and
aerosols) included as exogenous trends in radiative forcing.
Structure of DICE (4)
• CO2 emissions depend on:
1. total output
2. a time-varying emissions-output ratio
3. an emissions-control rate.
• The emissions-output ratio is estimated for individual regions, and then
aggregated to the global ratio.
• The emissions-control rate is determined by the climate-change policy
being examined.
• The emissions abatement cost function is parameterized by a log-linear
function calibrated to recent studies of the cost of emissions
reductions.
• Projected damages from the economic impacts of climate change rely
on estimates from earlier syntheses of the damages, with updates in
light of more recent information.
– The basic assumption is that the damages from gradual and small
climate changes are modest, but the damages rise nonlinearly with
the extent of climate change.
Baseline case using DICE
• Using consensus estimates of values for the key driving
variables (such as growth of labour force, capital stock,
technical change, emissions-to-output ratios, and so on)
and assuming that no significant additional emissions
reductions are imposed, one can use DICE to generate
predictions about GDP, climate change, and the impacts of
climate change over some suitable future span of time.
• These model inputs and outputs define what is called the
baseline case.
• Although Nordhaus does not use this term, such a baseline
simulation is also known as a “Business As Usual” or BAU
case.
Safe minimum standard
(precautionary approach)
•
•
•
The large uncertainties which exist in climate change modelling regarding the
damages that climate change could bring about lead many to conclude that
mitigation policy should be based on a precautionary principle.
This would entail that some ‘safe’ threshold level of allowable climate change is
imposed as a constraint on admissible policy choices.
Support for a safe minimum standard approach in the climate change context has
grown in recent years for two main reasons.
– First, the science increasingly points to non-linearities in the dose-response
function linking temperature change to induced damages, with damages rising
at increasingly large marginal rates at higher levels of global mean
temperatures, and possibly discontinuously.
– Secondly, positive feedbacks in the linkage between GHG concentration rates
and temperature responses are increasingly likely to kick-in as atmospheric GHG
concentrations rise, so that the climate sensitivity coefficients rise
endogenously.
The Kyoto Protocol
• Attempts to secure internationally coordinated reductions in
GHG emissions have taken place largely through a series of
international conventions organised under the auspices of the
United Nations.
• 1992 ‘Earth Summit’: Framework Convention on Climate
Change (FCCC) was adopted, requiring signatories to conduct
national inventories of GHG emissions and to submit action
plans for controlling emissions.
• By 1995, parties to the FCCC had established two significant
principles: emissions reductions would initially only be
required of industrialised countries; second, those countries
would need to reduce emissions to below 1990 levels.
The Kyoto Protocol (2)
• Kyoto Protocol: the first substantial agreement to set country-specific GHG
emissions limits and a timetable for their attainment.
• To come into force and be binding on all signatories, the Protocol would
need to be ratified by at least 55 countries, responsible for at least 55% of
1990 CO2 emissions of FCCC ‘Annex 1’ nations.
• The key objective set by the Protocol was to cut combined emissions of
five principal GHGs from industrialised countries by 5% relative to 1990
levels by the period 2008–2012.
• The Protocol did not set any binding commitments on developing
countries.
Subsequent activity
• Since 1997, there have been annual meetings of the parties that signed the
Kyoto Protocol.
• Initially, those meetings were largely concerned with the institutional
structures and mechanisms and ‘rules of the game’ required to implement
the protocol, such as how emissions and reductions are to be measured,
the extent to which CO2 absorbed by sinks will be counted towards Kyoto
targets, and compliance mechanisms.
• The twin conditions required for the Protocol to become operational were
met in early 2005. While the Kyoto Protocol came into force at that time, it
did so without the participation of the USA, thereby significantly
weakening its potential impact.
• The first phase of the Kyoto Protocol will end in 2012.
• Recent meetings of the parties have been concerned with making
preparations for its second phase.
The Kyoto Protocol’s flexibility mechanisms
•
These generate incentives for control to take place in sources that have the lowest
abatement costs, and so create the potential for greatly reducing the total cost of
attaining any given overall policy target.
– Emissions Trading: Allows emissions trading among Annex 1 countries;
countries in which emissions are below their allowed targets may sell ‘credits’
to other nations, which can add these to their allowed targets.
– Banking Emissions targets do not have to be met every year, only on average
over the period 2008–2012. Moreover, emissions reductions above Kyoto
targets attained in the years 2008–2012 can be banked for credit in the
following control period.
– Joint Implementation (JI) allows for bilateral bargains among Annex 1
countries, whereby one country can obtain ‘Emissions Reduction Units’ for
undertaking in another country projects that reduce net emissions, provided
that the reduction is additional to what would have taken place anyway.
– Clean Development Mechanism (CDM): By funding projects that reduce
emissions in developing countries, Annex 1 countries can gain emissions
credits to offset against their abatement obligations. Effectively, the CDM
generalises the JI provision to a global basis. The CDM applies to sequestration
schemes (such as forestry programmes) as well as emissions reductions.