Economy Wide Impacts of Climate Change: A Joint Analysis for Sea Level Rise and Tourism A. Bigano °, F. Bosello* , R. Roson’, R.S.J. Tol” Chronic Risk of Global Climate Change to Urban Coasts and Economies Stevens Institute of Technology, NJ, 15-16 November 2007 °Fondazione Eni Enrico Mattei *Università di Milano e Fondazione Eni Enrico Mattei ’Università di Venezia e Fondazione Eni Enrico Mattei ”Free University of Amsterdam, Hamburg University, Carnegie Mellon University, ESRI Dublin

Introduction: future temperature + SLR How much SLR is due to different causes IPCC FAR (2007)

Introduction: impacts IPCC FAR (2007)

Initially one category of impact at a time Objectives Evaluate economically climate change impacts with a general equilibrium perspective (first and higher order welfare costs  substitution mechanisms + market interdependencies  changes induced by changes in relative prices) Initially one category of impact at a time Then jointly (this study tourism + SLR) Calibrate a climate change damage function accounting for “autonomous economic adaptation” Use and development of a CGE model/approach

This approach is innovative Damage = (“price”) x (“quantity”) Objectives This approach is innovative The predominant approach in climate change impact assessment is that of “direct costing”  Partial equilibrium: Damage = (“price”) x (“quantity”) This method is usually applied in “SLR studies” see e.g. Nichols et al. (2007) for discussion -> but also in other domains (e.g. health, agriculture etc.) and to calibrate cc damage functions in global studies (see e.g. Nordhaus (1995, 1999), Manne and Richels (1995, 2004), Tol (1995 – 2002)) This disregards rebounds and feedback: social economic systems adapt and “shocks” propagate

(households, government) Output markets Goods and Sketching a CGE model Consumers (households, government) Maximise welfare from consumption supply demand Demand and supply functions “mimic” observed economic systems: parameters are calibrated on “real” data. All markets are Interdependent. Constrained by income Income Output markets Goods and services Input markets K, L, Land, NR Constrained by technology Income demand supply Producers (firms, government) Minimise cost of production

(Extended Version of GTAP-E Burniaux and Truong 2002) The CGE Model GTAP-EF (Extended Version of GTAP-E Burniaux and Truong 2002) 16 Regions: USA: United States CAN: Canada WEU: Western Europe JPK: Japan and Korea ANZ: Australia New Zealand EEU: Eastern Europe FSU: Former Soviet Union MDE: China and India CAM: Rest of the World SAM: South America SAS: South Asia SEA: South East Asia CHI: China NAF: North Africa SSA: Sub-Saharan Africa SIS: Small Island States 17 Sectors: Rice Wheat Cereal Crops Vegetable Fruits Animals Forestry Fishing Coal Oil Gas Oil Products Electricity Water Energy Intensive industries Other industries Market Services Non-Market Services Calibrated in 1997

The CGE Model: consumption “tree” Using Income (from endowment ownrship) in fixed (C-D) shares for: Households max. Armington

The CGE Model: production “tree” Min. production cost Leontieff CES Armington CES CES Armington CES CES Armington

The CGE Model Investment 1) Investment is Endogenous. Redistribution mechanism based on the equalization of regional return to capital. Households save a constant share of their income. REG. 1 REG. 1 D A “World Bank” REG. 2 REG. 2 E B …….. …….. C F REG. n REG. n 1) Investment is Endogenous. 2) A,B,C flows ≠ D,E,F flows. 3) A region can run a foreign debt or credit.

“Benchmarking” the model in the future Starting point: core model calibrated in 1997. Necessary to get a future reference case “without climate change” (“Pseudo-calibration” ) This refers to obtaining a picture of the future world economy. In practice, long-run estimates of primary inputs (land, labour, capital and natural resources) stocks and productivity used to: Shock the model 1997 calibration equilibrium to obtain future benchmark equilibria ( 2050).

Data sources for the benchmark - Population: World Bank. - Capital stock: G-Cubed model Version48E (McKibbin, 2001). - Labour stock: G-Cubed model Version48E (McKibbin, 2001). - Labour productivity: G-Cubed model Version48E (McKibbin, 2001). - Crops’ productivity: IMAGE 2.2, B1 Scenario (RIVM, 2001).

Benchmark Assumptions % changes 1997-2050

Baseline GDP % changes 1997-2050

The Modeling Exercise SLR (No protection): Land loss is modeled as a negative “supply-side” shock on the endowment LAND (which is an exogenous variable in the model). Tourism: Changes in tourism demand are modeled as changes in the demand for recreational services (within the market service sector), income flows determined by additional foreign expenditure are modelled.

Climate Change Scenarios and Models T = + 1.2 °C. in 2050 wrt 1980 -1999 SLR= + 25 cm. in 2050 Environmental Impact Models Tourism -- > HTM model (Tol et al. 2002): changes in arrival, departures and expenditures, determined by socio-economic + environmental drivers (changes in temperature and coastal land availability) SLR -- > Data set on land loss wrt different sea-level rise scenarios (based on Delft Hydraulics GVA (1993), Beniston (1998 ), Nicholls (1995), Bijlsma et al. (1996))

Reference Year 2050: % changes wrt baseline Outputs from the CGE model Sea level rise alone Reference Year 2050: % changes wrt baseline 1) Direct effect negative, GE effect negative 2) Direct effect in term of negative supply shock differs from final GDP effect (this one is: smaller if compared to land, bigger or smaller if compared to value of land) 3) General equilibrium effects redistribute losses e.g. JPN bigger direct cost smaller GE cost; CHIND smaller direct cost, bigger GE cost 4) Developing regions more heavily penalised this is (a) Higher dependence on agriculture (b) more rigid economic systems: more difficult to substitute land with other production factor. Proof (a) the price of capital and labor decreases more than in the other regions. Proof (b) emissions, linked to the use of fossil fuels to energy and capital, decrease. 5) Finally amplifying effect of investment flows: lower price of capital implies capital outflows to equalise expected rates of return to capital Inputs to the CGE model Outputs from the CGE model

The difference between direct and general equilibrium cost Among adaptation policies, the costs of coastal protection policies are the more widely investigated, but usually only direct cost are considered and no benefit cost analysis are performed. The two studies, one in a recursive framework the other in a static one assume that coastal protection investment simply decreases capital stock i.e. It is a loss of productive capital. In our case we assume that investment in coastal protection is an additional investment demand (with possible positive multiplicative effects) and what i sreduced is private consumption.

Reference Year 2050: % changes wrt baseline Tourism Alone Reference Year 2050: % changes wrt baseline Among adaptation policies, the costs of coastal protection policies are the more widely investigated, but usually only direct cost are considered and no benefit cost analysis are performed. The two studies, one in a recursive framework the other in a static one assume that coastal protection investment simply decreases capital stock i.e. It is a loss of productive capital. In our case we assume that investment in coastal protection is an additional investment demand (with possible positive multiplicative effects) and what i sreduced is private consumption.

Tourism and sea level jointly Among adaptation policies, the costs of coastal protection policies are the more widely investigated, but usually only direct cost are considered and no benefit cost analysis are performed. The two studies, one in a recursive framework the other in a static one assume that coastal protection investment simply decreases capital stock i.e. It is a loss of productive capital. In our case we assume that investment in coastal protection is an additional investment demand (with possible positive multiplicative effects) and what i sreduced is private consumption.

Interactions among impacts are alslo non-negligible Conclusions Using a CGE approach to evaluate climate change impacts is important: huge difference respect to a partial equilibrium assessment Interactions among impacts are alslo non-negligible A lot to do: improve the quality of input data expand the set of impacts considered (on health, energy demand, physical capital, agriculture etc.) consider a dynamic setting Among adaptation policies, the costs of coastal protection policies are the more widely investigated, but usually only direct cost are considered and no benefit cost analysis are performed. The two studies, one in a recursive framework the other in a static one assume that coastal protection investment simply decreases capital stock i.e. It is a loss of productive capital. In our case we assume that investment in coastal protection is an additional investment demand (with possible positive multiplicative effects) and what i sreduced is private consumption.

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