1 Economics 331b Spring 2011 Week of March 28 Integrated Assessment Models: Modeling Mitigation (Abatement)

Agenda This week (Monday and Wednesday): - Review on term paper - How to calculate SCC - Final work on impacts - Mitigation Next Monday: Add last module to your little model: mitigation. 2

How to estimate SCC 1.Numerical derivative: - Calculate PV income - Recalculate PV income with 1 additional unit of E - Take difference - BE VERY CAREFUL WITH UNITS 2. Analytical: - Have Damage=D=f(T); T = g(RF); RF=h(C); C=z(E). - Therefore D’(E)=f’ g’ h’ z’ 3

Model estimate 4

UNITS!!! 5

National Academy Report on Abrupt Climate Change “Illustration of difference between impacts with and without adaptation. The upper line shows the impact of climate change with full adaptation where farmers can change crops and irrigate…. The lower line shows the impacts without adaptation, as is likely to occur with abrupt climate change. Note that … the costs are likely to be lower with adaptation. We have also shown a break in the no-adaptation line to reflect the potential for sharp threshold effects, such as those due to floods or fire.” (National Academy, Abrupt Climate Change, 2002.)

Components of damages circa

Damage summary: global 8 Line is Yale DICE/RICE model Dots from Tol survey

9 Early studies contained a major surprise: Modest impacts for gradual climate change, market impacts, high- income economies, next years: - Impact about 0 (+ 2) percent of output. - Further studies confirmed this general result. BUT, outside of this narrow finding, potential for big problems: -many subtle thresholds and tipping elements -abrupt climate change (“inevitable surprises”) -many ecological disruptions (ocean carbonization, species loss, forest wildfires, loss of terrestrial glaciers, snow packs, …) -stress to small, topical, developing countries -gradual coastal inundation of 1 – 10 meters over 1-5 centuries Summary of Impacts Estimates

10 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

Now on to mitigation (abatement) costs 11

12 Price of carbon emissions Social cost of carbon The basic analytical structure Abatement P carbon * Marginal Cost 0 Abatement*

Mitigation (abatement) We have examined the damage side. For a full cost-benefit analysis, we need the cost side. “Mitigation” involves analyses of the policies involving the reduction of emissions CO2 and other GHGs There are four major issues involved: 1. Projecting the emissions 2. Estimating the costs of emissions reductions 3. Designing policies to reduce emissions 4. Encouraging low-carbon technological change This set of tasks is generally much easier that impacts because we have extensive information on impacts of energy taxes, regulations, etc. 13

1. Projecting emissions For this we need an integrated assessment model. As an example, the following shows the projected emissions to 2105 in the Yale-RICE model and in several other models examined in EMF

Projections CO2 emissions various models (with no emissions reductions policies) 15 EMF-22 and Yale-RICE model (with orange dots)

Scientific consensus 16 Commonly heard. But what is a scientific consensus? Does scientific consensus = truth?

2. Estimating Costs of Reducing Emissions Analysts use different strategies to model abatement: –Some use econometric analysis (“top-down”) –Some use engineering/mathematical programming estimates (“bottom up”) –Behavioral (uncharted territory … how to do this?) Bottom up: - Relies on individual technologies and processes from engineering studies - Aggregates these together to get a minimum cost mitigation function - Often has weak behavioral component. 17

Example from passenger cars 18

Example from passenger cars 19

Estimated cost of improvement, compact car 20 Nat. Acad. Sci., Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards,2002.

21 Example from McKinzey Study

Impact of Japanese events on mitigation costs? 22

Nordhaus house survey 23

2. Top-down (econometric) Top down or econometric: - Look for some kind of “experiment” in which energy or carbon prices vary. Then estimate impact of higher prices on carbon emissions: - Some examples of CO 2 taxes or European Trading System. - More useful are energy taxes. - Some rely on production functions and simulations. 24

Example of econometric (“top-down”) approach to mitigation Assume that the demand for gasoline is Q = Bp -λ Supply of gasoline is perfectly elastic with tax τ: p = q + τ CO 2 emissions are proportional to consumption: E = kQ So we have: E = kB -λ (q + τ) -λ =c (q + τ) -λ [Numbers are calibrated to Actual US data.] Carbon price ($ per ton C reduction) Percentage reduction

26 Further discussion There has been a great deal of controversy about the McKinsey study. The idea of “negative cost” emissions reduction raises major conceptual and policy issues. Most economic models rely on more econometric studies. The next set of slides shows estimates based on the IPCC Fourth Assessment Report survey of mitigation costs. The bottom line is that the cost using the top-down approaches are generally higher than bottom-up.

Survey of multiple models from IPCC FAR 27 Source: IPCC, AR4, Mitigation.

Summary of estimates 28 Source: IPCC, AR4, Mitigation, p. 77.

Summary from IPCC Carbon price (p/t C) Percentage reduction Top down Bottom up

Derivation of mitigation cost function in RICE model Start with a reduced-form cost function: (1) C = Qλμ  where C = mitigation cost, Q = GDP, μ = emissions control rate, λ,  are parameters. Take the derivative w.r.t. emissions and substitute σ = E 0 /Q (2) dC/dE = MC emissions reductions = Qλβμ  -1 [dμ/dE] = λβμ  -1 /σ Note that MC(0) = 0; MC(1) = λβ/σ = price of backstop technology*; and C/Q = λ with zero emissions. *”Backstop technology” is technology at which get 100 emissions reduction (say solar/nuclear/fusion/wind for everything). 30

What are your views on top down v. bottom up? 31 There is a very lively controversy about the role of "negative cost" mitigation. The McKinsey report (Reducing US Greenhouse Emissions, p. xiii) has a very substantial number of such mitigation possibilities. Other modelers are sharply critical of the MK report and believe that (aside from external costs) there are very few negative cost options. You should think about this and have some pros and cons (for final exam?).