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Transcript
Flexible Global Climate Change Policy ESD.71 Application Portfolio: December 2009 Nidhi R. Santen Ph.D. Student, 2nd Year Engineering Systems Division [email protected] © 2009 Nidhi R. Santen Presentation Outline Problem Overview (1) Application System (1) Sources of Uncertainty (3) Fixed and Flexible Designs (1) Decision Tree Analysis (2) Lattice Analysis (2) Conclusions (2) Questions? © 2009 Nidhi R. Santen Problem Overview Current climate change policy decisions are based on deterministic views of the future events, dominated by considerations of a single optimal carbon emissions path. Many aspects of the future remain highly uncertain, creating the need for flexible climate policies. Implementing an R&D-inducing carbon tax policy today provides a form of “insurance” against future carbon-emissions related climate damages, representing a important form of flexibility. The following project examines the opportunities that flexible global climate change policy can have on the overall net present welfare of the global economy. © 2009 Nidhi R. Santen Application System Key Components of System Aggregated Global Economy, includes Production = f(Capital, Labor, Fossil-Fuel Energy Sector) Physical Environment Population’s Utility Function (Preferences for Consumption v. Investment) Dynamic Integrated model for Climate and the Economy (DICE-99) is used as the evaluation model for system performance Timeframe is 2015 through 2335 © 2009 Nidhi R. Santen Sources of Uncertainty (1 of 3) Total Factor Productivity Growth Rate: TPF is the contribution to economic output not accounted for by inputs such as labor and capital; level of technology in the economy Histogram: Total Factor Productivity 60 40 30 20 10 0 16.00% 16.06% 16.11% 16.17% 16.23% 16.29% 16.34% 16.40% 16.46% 16.51% 16.57% 16.63% 16.69% 16.74% 16.80% 16.86% 16.91% 16.97% 17.03% 17.09% 17.14% Percent Per Decade 50 Frequency Data: MIT Joint Program © 2009 Nidhi R. Santen Sources of Uncertainty (2 of 3) Emissions Intensity Growth Rate: Emissions intensity is the trend in CO2-equivalent emissions per unit of output without a carbon-reducing policy in place Histogram: Growth Rate of Sigma 50 45 40 30 25 20 15 10 5 0 -0.09 -1.08 -2.08 -3.07 -4.07 -5.07 -6.06 -7.06 -8.06 -9.05 -10.05 -11.04 -12.04 -13.04 -14.03 -15.03 -16.02 -17.02 -18.02 -19.01 -20.01 Frequency 35 Percent Per Decade Data: MIT Joint Program © 2009 Nidhi R. Santen Sources of Uncertainty (3 of 3) Climate Feedback A cloud-related parameter that represents the sensitivity of the climate to GHGs Histogram: Climate Feedback 600 Frequency 500 400 300 200 100 0 1.65 4.10 6.54 8.98 11.42 Climate Feedback Data: MIT Joint Program © 2009 Nidhi R. Santen Fixed and Flexible Designs Fixed Design In both studies: Business-as-usual case with no carbon-tax policy Flexible Designs Investigation 1 (2 Period): High or low carbon tax policy implemented in Period 1 with an option to change tax level in Period 2. Investigation 2 (6 Period): Option to implement a medium carbon tax at any period. © 2009 Nidhi R. Santen Decision Analysis (1 of 2) Policy Design Alternatives and Uncertainties Design Fixed “No” Policy (“Business-as-Usual”) Flexible Policies (Carbon Taxes) Uncertain Parameter Emission Intensity Growth Rate (σt) Climate Feedback Parameter (λt) Emissions Reduction (µt) ($ Tax) No Control ($0 per ton) Both Decision Points 2015: High ($30) / 2065: High ($80) 2015: High ($30) / 2065: Low ($30) 2015: Low ($10) / 2065: High ($80) 2015: Low ($10) / 2065: Low ($30) High Medium Low P(σ=-30.055) = 0.185 P(σ=--15.885) = 0.63 P(σ=-1.082) = 0.185 P(λ=4.682) = 0.185 P(λ=2.908) = 0.63 P(λ=1.134) = 0.185 Decision Analysis Components Stages: 2 (2015-2055 and 2065-2335) Decision in Period 1: Tax High, Tax Low, or No Tax Uncertainties Considered: Emission Intensity Growth Rate and Climate Feedback Payoff Value: NPV Welfare © 2009 Nidhi R. Santen Decision Analysis (2 of 2) Decision Tree Solution Optimal Strategy: Tax Low in Period 1; Tax High in Period 2 Decision Tree Analysis VARG Curve 1 0.9 0.8 Probability 0.7 0.6 0.5 0.4 Risk Assumption Preferred Period 1 Design 0.3 P10 Tax Low 0.2 P15 Tax High 0.1 P50 No Tax (Inflexible Case) P75 No Tax (Inflexible Case) P90 No Tax (Inflexible Case) 0 966.6 966.8 967 967.2 967.4 967.6 967.8 968 NPV Tax High Tax Low 968.2 968.4 No Tax (No Flexibility-Fixed) Decision Tree Analysis VARG Curve © 2009 Nidhi R. Santen Lattice Analysis (1 of 2) Policy Design Alternatives BAU No-Tax Case Option to Begin Implementing a $45 per ton Carbon Tax in any Period (Modeled as a “Call Option”) Uncertainty Considered: TPF Growth Rate “How long should we wait to implement a carbon tax?” Probability Density Function 35.0% 30.0% Probability 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 4.1797 4.0374 3.8999 3.7671 3.6388 3.5149 3.3952 Total Factor Productivity Growth Rate (%) © 2009 Nidhi R. Santen Lattice Analysis (2 of 2) Dynamic Programming Decision Analysis Optimal Strategy: Always Decide to Implement $45 per ton Carbon Tax t=0 NO t=1 YES t=2 YES t=3 YES t=4 YES t=5 YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES YES t=6 VARG curves - Carbon Tax Implementation Option 100.0% 90.0% 80.0% Risk Assumption Preferred Period 1 Design P10 Flexible Case P25 Flexible Case P50 Flexible Case P75 Flexible Case P95 Flexible Case Cumulative Probability Period Exercise CALL OPTION? 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% NPV ($) Flexible Inflexible © 2009 Nidhi R. Santen Conclusions Investigation 1 (Decision Tree Analysis): The value of flexibility was $0.019316 trillion for the optimal strategy. Investigation 2 (Lattice Analysis): the value of the call option to implement a carbon-tax when deemed appropriate was $0.51 trillion. Flexible policy strategies are chosen over inflexible policy strategies in both investigations. © 2009 Nidhi R. Santen Conclusions Total Carbon Emissions by Strategy 20 18 16 14 GtC 12 10 8 6 4 2 0 Year No Tax (Inflexible Policy) Decision Tree Analysis Optimal Strategy Lattice Decision Analysis Optimal Strategy © 2009 Nidhi R. Santen Conclusions Atmospheric Temperature Increases by Strategy 5 Degrees Celsius Above 1900 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Year No Tax (Inflexible Policy) Decision Tree Analysis Optimal Strategy Lattice Decision Analysis Optimal Strategy © 2009 Nidhi R. Santen Thank You! Questions? [email protected] Acknowledgments Professor Richard de Neufville TA Michel-Alexandre Cardin © 2009 Nidhi R. Santen