1 Economics 331b Spring 2009 Integrated Assessment Models of Economics of Climate Change

2 Fossil fuel use generates CO2 emissions Carbon cycle: redistributes around atmosphere, oceans, etc. Climate system: change in radiation warming, precip, ocean currents, etc.. Impacts on ecosystems, agriculture, diseases, skiing, golfing, … Measures to control emissions (limits, taxes, subsidies, …) The emissions -climate- impacts- policy nexus

DICE and RICE models DICE: global aggregate (like Y-Econ models). Excel version as well as GAMS (math programming) version. Simple and transparent; reduced form modules. Latest full version 2007 in readings (Question of Balance) RICE: 12 regions Most recent version only Excel; earlier GAMS as well. Better regional resolution, but difficult to use and understand. Latest full version 2010 in readings (Proc Nat Acad Sci US). (Both models available on my website DICE and RICE models.) 3

Screenshot of DICE: parameters 4 DICE2010_091410b.xlsx

Screenshot of DICE: baseline 5

6 Screenshot of DICE: optimal carbon tax

7 Screenshot of DICE: GAMS program

Reprise on computational complexity Climate models: Linear in NT (variables x time periods) Economic models (LP/DICE): Polynominal ≈ (NT )3 Choice of technologies/student travel/ backpack problem/: NP or ≈ 2 NT 8

9 1. Baseline. No emissions controls. 2. Economic cost-benefit “optimum.” Emissions and carbon prices to maximize discounted economic welfare. 3. Limit to 2 °C. Climatic constraints with global temperature increase limited to 2 °C above Copenhagen, all countries. Uses US emissions targets joined by other rich countries, with developing countries entering after 1 -3 decades. 5. Copenhagen, rich only. Uses US emissions reductions joined by other rich countries, with developing countries staying out. Scenarios for Analysis in RICE-2010

Structure of policies Kyoto Protocol: Rich countries only, 7 percent average cuts, only for first “budget period”: 2008 – Minimal global cuts. Copenhagen Accord: Deep cuts for rich countries (see next slide for US). In principle, developing countries follow soon. Copenhagen, rich countries only: Same as Accord, with developing countries not participating till Key issue of whether have the “trade” in “cap-and-trade” 10

Rate of growth of CO2-GDP ratio: History and Congressional proposals

Structure of policies Assumption for Copenhagen Accord: 12

Structure of policies Assumption for Copenhagen Accord: Rich countries only 13

Emissions 14

Global Mean Temperature 15

Carbon Price 16

Carbon Price 17

Carbon Price 18 Actual equivalent global carbon price = $4/tC

19 Net impacts by region to 2050 of Copenhagen proposal with generous allocations to developing countries and full trading

Abatement cost by region Copenhagen Accord 20

Environmentalist critique Stern/Krugman critique* of the DICE model approach: 1.Uses too high a discount rate 2.Ignores the uncertainty and the “fat tail” of low- probability catastrophic outcomes 3.Uses a temperature sensitivity coefficient of 3 °C per CO 2 doubling instead of more realistic 6 °C Next slide shows the sensitivity of the emissions control rate if we introduce these sequentially. Which are most important? *Stern Review : treasury.gov.uk/sternreview_index.htm Krugman, “Building a Green Economy,” NYT Magazine, 2010, 21

Emissions Controls for Environmentalist Assumptions 22

From Science to Implementation 1.Understand the basic science 2.Weigh costs and benefits to determine a “reasonable policy ” for emissions, economic, and climate trajectory 3.Design an approach for translating the policy into actual steps (taxes, regulations, subsidies, …) 4.Negotiate both among nations (e.g., Copenhagen) and in national decision-making bodies (Congress, CCP, EU bodies,…) 23