Download Folie 1

Economics of Climate Change
22.04.08
Chapter 6
Kollegger – Sommer – Wallner
Programm for today
1. Introduction
2. What existing models calculate and include
3. Do the existing models fully capture the likley
cost of climate change?
4. Calculating the global cost of CC: an „expectedutility analysis
5. Overall welfare cost
Introduction
Why do we need formal models?
• Estimate monetary cost of climate change (CC)
•Modeling Risks and uncertainty
Difficulties
• Large
uncertainties
• Still many limitations
• Monetary values on health & environment
Introduction
Models have focus on three dimensions:
• Income/Consumption
• Health
• Environment
All three are combined in a single metric of damage
“Modelling over many decades, regions and possible
outcomes demands that we make distributional and
ethical judgements systematically and explicitly.” (p.143)
Introduction
Total costs using Integrated Assessment Models
Average reduction in global per-capita
consumption of 5%, at minimum
Increase still further up to around 20%:
• 1.’Non-market’ impacts & ‘socially contingent’ impacts.
 At least from 5% to 11%
• 2. Climate system more responsive to GHG emissions
- amplifying feedbacks
 From 11% to 14%
• 3. Disproportionate burden on poor regions
 Stronger relative weight: + ¼ higher costs
What existing models calculate and include
Key Features 1
• Difference between income growth
with and without CC impacts
• Correct treatment of negative effects
• Monetary loss – income loss
• ‘Market’ and ‘non-market’ sectors
• Consideration of risks of higher temperatures
What existing models calculate and include
Key Features 2
• Regional impacts aggregated on population or output
• Acceleration of costs
• Chance of triggering abrupt and large-scale changes
What existing models calculate and include
Three Main Models
• Mendelsohn
(1998, output)
• Tol
(2002, output, equity)
• Nordhaus
(2000, output, population)
What existing models calculate and include
Up to 2 - 3°C of warming:
• Disagreement about global impact of CC
• Clear consensus: Any benefits are temporary and
confined to rich countries
Beyond 2 – 3°C of warming:
• All three Models: CC will reduce global consumption
• Disagreement on size of cost: Small to 10% or more
What existing models calculate and include
Results depend on key modelling decisions
• Valuation of costs to poor regions
• Assumtions about societies’ ability to
reduce costs by adapting
• ‘Values of life’ based on willingness to pay
 Higher Income – more value
Some authors use other concepts of weighting
Do the existing models fully capture the
likley cost of climate change?
Existing models omit many possible impacts e.g.:
1. ‘Socially contingent’ responses
Investment decisions, productivity, labor supply, political
and social instability…
2. Possible interactions between sectors
Water-sector and agriculture, agriculture and the rest:
no food  no labor  no production
 food is a basic product of the economic system
Calculating the global cost of climate change:
an ‚expected-utility‘ analysis
How to take account of
• risk of very damaging impacts and
• uncertain changes - over very long periods
Model of monetary cost of climate change
• Cost simulation – widest range of possible impacts
• Theoretical framework - analysing changes –
large, uncertain, unevenly distributed –
very long period of time.
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002
Integrated Assesment Model
FEATURES
• Modelling approach based on probabilities
• ‚Monte Carlo‘ Simulation
- Each scenario many times
- Each time chossing a set of uncertain parameters
from pre-determined ranges of possible values
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002
Integrated Assesment Model
Generation of a probability distribution (PD) of results:
“PD of future income under climate change,
where climate-driven damage and
the cost of adapting to climate change
are subtracted from a baseline GDP growth projection.”
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002
Integrated Assesment Model
Probability distribution (PD)
• PD for the climate sensitivity parameter – range of estimates across
a number of peer-reviewed scientific studies
• In the past production of mean estimates of the global cost of CC –
close to the centre of a range of peer-reviewed studies
• Capable of incorporating results from a wider range of studies
o Flexible enough to include market impacts and non-market
impacts
o Catastrophic climate impacts
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002
Integrated Assesment Model
LIMITATIONS
• Rely on sparse or non-existent data and understanding
at high temperatures
• Faces difficulties in valuing direct impacts on health and
the environment
• Does not fully cover the ‘socially contingent’ impacts
RESULTS
• Indicative only and interpretion with great caution!
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002
Integrated Assesment Model
(1)
Baseline Climate scenario
• Outputs consistent with range of assumption of the IPCC
TAR
• Mean temperature increase
3.9°C in 2100 (relative to pre-industrial) and 90%
confidence intervall of 2.4 - 5.8°C (IPCC 3.0 - 5.3°C)
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002
Integrated Assesment Model
(2) High Climate scenario
• Addition of natural feedbacks in the climate system
• Weakened carbon sinks and Increased natural methane
releases
• Mean temperatur increase
4.3°C and higher probability of larger temperature changes
90% confidence intervall of 2.6 - 6.5°C
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002
Integrated Assesment Model
Categories of economic impact
• Only Impacts of ‚gradual climate change‘ on market
sector
• Risk of catastrophic climate impacts at higher
temperature (market sector)
• Non-market impacts on human health and the
environment
Climate
matrix of scenarios
• High climate
• High climate
• High climate
• Market impacts
• Market impacts
• Market impacts
+ risk of catastrophe
+ risk of catastrophe
+ non-market impacts
• Baseline climate
• Baseline climate
• Baseline climate
• Market impacts
• Market impacts
• Market impacts
+ risk of catastrophe
+ risk of catastrophe
+ non-market impacts
Impacts
PAGE2002 IAM
-0.6
-0.2
-0.9
-13.4
PAGE2002 IAM
-0.9
-17.9
- 5.3 BL scenario
PAGE2002 IAM
-2.9
-35.2
- 7.3% High Climate scenario
(3) ‚High+‘ climate scenario
• 20% chance that the climate sensitivity > 5°C
• Combination of natural feedback with a higher
probabilitiy distribution for the climate sensitivity
parameter.
(3) ‚High+‘ climate scenario
•
20% chance that the climate sensitivity > 5°C
•
Natural feedback with a higher probabilitiy distribution
for the climate sensitivity parameter.
► ‚High+‘ scenario with market impacts and the risk of
catastrophe:
Mean loss in global per-capita GDP
0.4% in 2060; 2.7% in 2100; 12,9% in 2200
►Addition of non-market impacts
1,3% in 2060; 5.9% in 2100; 24.4% in 2200
PAGE2002 IAM
-12.9
-24.4
‚High+‘ Climate (market impacts + risk of catastrophe)
‚High+‘ Climate + non market impacts
Amplification of natural feedbacks
In 2100 – mean temperatur increase
Baseline scenario: 3.9°C
High scenario:
4.3°C
In 2200 – mean temperatur increase
Baseline scenario: 7.4°C
High scenario:
8.6°C
2100
2200
Overall welfare costs
Problem of aggregating:
• across different possible outcomes
• over different points of time
Key assumptions:
• basic welfare economics
• diminishing marginal utility
• varying growth
• utility discount
--> calculate expected utility
Overall welfare costs
How to express the loss?
balanced growth equivalent - BGE
„measures the utility generated by a consumption path
in terms of the consumption now that, if grew at a
constant rate, would generate the same utility“
Overall welfare costs
Expected utility analysis:




baseline GDP growth less costs of CC
1000 runs
probability distribution GDP
consumption per capita
Overall welfare costs
1
C
U(t) 
1 
• consumption to utility
U(t)  ln C(t)
• if η=1

• discount utility
W
 N(t)U(t)e
t
dt
t 1
2200
W

t 2001
N(t) ln C(t)e
t
 N T ln CT N Tg  t

 2 e

 

Overall welfare costs
Results:
Q: What are the reasons for and against one
single metric of damage?
Q: The three main models are based on
scientific evidence – but from what time
they originate ?
Q: Can you name some of the sudden shifts
of regional weather patterns, that could
occure besides ice-meltung and the gulfstream?
Q: Why can only a small proportion of the cost
of climate change between now and 2050
be realistically avoided?
Q: Why should some numbers beyond 2100 in
the model-approch be treated as
indicative?
Q: What climate scenario is the most realistic
one?
Q: Which possibility distribution for the risk of
eliminating society is used for the modell?
Do you know any other that could be used?
Q: How does the Stern Review argue, that the
BGE costs of climate change increase by
one quarter or higher after including value
judgements for regional distribution?