Integration and Decision-Making Frameworks for Climate Change Policy MS&E 290 Public Policy Analysis February 27, 2003

Overview One More Key Concept –Discounting From the Future to The Present –Extending the Concept Across Generations Elements of Integrated Assessment Two Types of Integrated Assessment Models –Policy Optimization –Policy Evaluation Uses of Integrated Assessment Models Decision Making Frameworks –Deterministic (Optimization, Simulation, Tolerable Windows) –Decision Analysis –Game Theory

The Discount Rate: What is a Dollar Tomorrow Worth Today Current Generation –Discount Rate Strongly Ties Into the Market Rate of Return on Capital –Current Rate of Return on Capital May Be Imperfect Measure –Even if Not Perfect Movement Away Would be Gradual Intergenerational –Much More Complicated –Current Rate of Return on Capital May Be Imperfect Measure –Options Approach May be Preferred

Two Kinds of Integrated Assessment Models Policy Optimization Models –Focused on Finding Optimal Level of Emissions –Usually Include Impacts at the Aggregate Level Policy Evaluation Models –Focused on Simulating Effects of Policies –Usually More Detailed Impacts –Can be Run Backwards - Tolerable Windows Approach

Types of Integrated Assessment Models Deterministic Policy Optimization Models Deterministic Policy Evaluation Models Decision Making Under Uncertainty Models Stochastic Policy Optimization Models Deterministic Models Stochastic Policy Evaluation Models

Uses Of Integrated Assessment Models Deterministic Policy Optimization Models Deterministic Policy Evaluation Models Decision Making Under Uncertainty Models Stochastic Policy Optimization Models Stochastic Policy Evaluation Models Deterministic Models - Compute Optimal Carbon Taxes, Control Rates, etc. - Calculate Costs of Meeting Emission/ Concentration/Climate/Impact Targets - Insure Consistency in Assumptions - Assess Interactions and Feedbacks - Identify Critical Gaps in Research - Assess Optimal Policies Under Uncertainty -Compute Value of Information/Research - Compute Probabilities of Cost/Benefits of Climate Policies - Compute Probabilities of Meeting Targets

Deterministic Policy Optimization Models: Balancing the Costs of Controlling Carbon Emissions Against the Costs of Climate Impacts Over Time Carbon Emissions Time Optimal With No Impacts Incremental Value/Cost Time Optimal With No Impacts Optimal With Impacts Optimal With Impacts

Simple Example of Uncertainty in Policy Optimization Models

Game Theory Formulations Look at Incentives for Countries to Take Action on Their Own or in Coalitions Can Be Either Formulated Either Deterministically or Under Uncertainty May Lead to Over-Estimating Rationality and Propensity of Nations to Act Only in Their Own Self Interest

A Revealed Preference Study of Climate Change Policy Analyses

“And these children that you spit on as they try to change their world are immune to your consultations… they’re quite aware of what they’re going through” -David Bowie Possible Moral for This Story

“The differences in experiences between people in the North and people in the South are so great that the environmental economics to be found in the North do not much resonate in the South” -Partha Dasgupta, Cambridge University (From invited address at 45th anniversary of Resources for the Future) Alternative Moral For Story