Economic Modelling of Climate-Change Impacts Kollegger – Sommer – Wallner Economics of Climate Change Chapter 6

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 „expected- utility analysis 5.Overall welfare cost Programm for today

Introduction Difficulties Large uncertainties Still many limitations Monetary values on health & environment Why do we need formal models? Estimate monetary cost of climate change (CC) Modeling Risks and uncertainty

Introduction 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) Models have focus on three dimensions: Income/Consumption Health Environment

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 Beyond 2 – 3°C of warming: All three Models: CC will reduce global consumption Disagreement on size of cost: Small to 10% or more Up to 2 - 3°C of warming: Disagreement about global impact of CC Clear consensus: Any benefits are temporary and confined to rich countries

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? 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 1.‘Socially contingent’ responses Investment decisions, productivity, labor supply, political and social instability… Existing models omit many possible impacts e.g.:

Calculating the global cost of climate change: an ‚expected-utility‘ analysis 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. How to take account of risk of very damaging impacts and uncertain changes - over very long periods

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

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

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!

( 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 °C (IPCC °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 °C PAGE2002 IAM Policy Analysis of the Greenhouse Effect 2002 Integrated Assesment Model

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 High climate Market impacts Baseline climate Market impacts High climate Market impacts + risk of catastrophe Baseline climate Market impacts + risk of catastrophe High climate Market impacts + risk of catastrophe + non-market impacts Baseline climate Market impacts + risk of catastrophe + non-market impacts Impacts matrix of scenarios

PAGE2002 IAM

PAGE2002 IAM BL scenario

PAGE2002 IAM - 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

‚High+‘ Climate (market impacts + risk of catastrophe) ‚High+‘ Climate + non market impacts PAGE2002 IAM

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

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

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

consumption to utility if η=1 discount utility Overall welfare costs

Results: Overall welfare costs

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 gulf- stream?

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: 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? Q: Which possibility distribution for the risk of eliminating society is used for the modell? Do you know any other that could be used?