1. 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, 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

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

3. Introduction: impacts
IPCC FAR (2007)

4. 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

5. 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

6. (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

7. (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

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

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

10. 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.

11. “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).

12. 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).

13. Benchmark Assumptions
% changes

14. Baseline GDP
% changes

15. 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.

16. Climate Change Scenarios and Models
T = °C. in 2050 wrt
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))

17. 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

18. 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.

19. 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.

20. 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.

21. 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.

22. Thank You!