1. 1 Economics 331b Spring 2011 Economics of Climate Change: Impacts

2. Agenda This week: Impacts Week 10: Mitigation Week 11: Discounting and optimal policies Week 12: Alternative policies ? Week 13: International agreements ? 2

3. 3 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

4. 4 Consumption Basics of impacts analysis Time Impacts or damages C=F(K,L,A,T) C=F(K,L,A,T’)

5. 5 Impacts Analysis Impacts are the reason we care about climate change. Major areas of concern: market economy (agriculture, manufacturing, housing, …) non-market sectors (health, recreation, …) non-human systems (ecosystems, species, oceans, …)

6. What is climate? Consider the complex system as a stochastic process: d x (t)/dt = h[ x (t); α, ρ, …] x (t) is temperature, precipitation, ocean currents, etc. α, ρ, etc. are parameters. Weather is the realization of this process. Climate is the statistics of the process (mean, higher moments, extremes). It is usually calculated as moving averages (e.g., 30-year “normals”). 6

7. Basics of Impact Analysis 1. Start with a production function: Q j,t = F(K j,t ; W j,t, T j,t ), t in future, j sector. where Q j,t = output; K j,t = capital and other conventional inputs; W j,t = weather (realization); T j,t = climate 2. We often have data on the impact of weather changes, ∂Q j,t /∂W j,t. 3. But, we need to understand climate impacts, ∂Q j,t /∂ T j,t 4. “Climate” is really a vector of important climatic variables (temperature, precipitation, soil moisture, snow pack, …), often at detailed geophysical resolution. 5. Impacts analysis requires estimating the production function in the distant future, at which time the impacts will occur. 6. Finally, we need to discount back the impacts to the present. 7

8. 8 Shares of economy by vulnerability, US

9. Some important sectors or issues -Agriculture -Sea-level rise -Hurricanes -National security -Ocean acidification -Species losses -Health -Tipping points and singularities 9

10. Example from Agriculture Long history of agricultural production functions in which weather is a variable. Remember: Q j,t = F(K j,t ; W j,t ) This produced first set of estimates of impact of global warming; led to very large estimates of losses. 10

11. Diagram used to show disastrous effects of climate change 11 Why is this completely wrong for understanding the impact of climate change on agriculture?

12. Example from Agriculture Long history of agricultural production functions in which weather is a variable. - This produced first set of estimates of impact of global warming; led to very large estimates of losses. Problem: The temperature-output relationship does not take into account adaptation of farmers to climate. This is the “dumb farmer” v. “smart farmer” controversy. Ricardian methods are attempt to look at equilibrium effect of climate by looking at cross-sectional impact of climate on farm values (Mendelsohn key figure here) - This produced much smaller estimates because of farmer adaptation. 12

13. Short-run v. long-run productivity 13

14. The tricky issue of declining share of agriculture 14

15. Can there be “negative damages”? 15

16. Summary of studies on Rice from IPCC 16 IPCC, Fourth Report, Impacts, p. 286. “Responses include cases without adaptation (red dots) and with adaptation (dark green dots). Adaptations+ represented in these studies include changes in planting, changes in cultivar, and shifts from rain-fed to irrigated conditions”

17. Agenda for today 1.Finish agriculture 2.Calculation of marginal damages 3.Sea-level rise 4.Return to adaptation 5.Summary of damages 17

18. 18 Estimates of Impacts on Agriculture late in the 21 st C Impacts on net value of agriculture as percent of national or global income: MendelsohnCline North American + 0.4 %+ 0.5 % Africa- 5.0 % - 4.0 % Global average- 0.2 % - 0.1 to -.05% Estimated effect of ag on output is small because (1) agriculture is small, (2) farmers can adapt, (3) CO 2 is a fertilizer. Source: Mendelsohn et al.; Cline

19. 19 Price of carbon emissions Marginal Damages The basic analytical structure Abatement P carbon * Marginal Cost 0 Abatement* Market!

20. Where does the marginal damage function come from? 1. Recall that we estimate the damage function: D t = D(ΔT t ) = f(K t, L t, A t ; T t +ΔT t ) - f(K t, L t, A t ; T t ) 2. We also relate temperature change to past emissions Δ T t = g( E 0, E 1, E 2, …, E t ) 3. From which we get the marginal damage function. The marginal damage is sometimes called “social cost of carbon, SCC, which you will calculate soon. 20

21. Global Warming and Sea Level Rise (SLR) Major variations in geological history (-150 to +40 meters) Sources in future: - Thermal expansion (up to 2 meters in next 500 years) - Small glaciers (0.5 meters) - Greenland (up to 6 meters) - Antarctic (56 meters), but major unstable is West Antarctic Ice Sheet (7 meters) - Arctic Sheet (very likely to disappear, 0 meters) Major issues are stability and irreversibility 21

22. 22 18 cm rise since 1900 Current rate: 3.3 cm per decade IPCC Satellite Altimeter Tide Gauges Observed Sea Level Rise (SLR) Rahmstorf, Cazenave, Church, Hansen, Keeling, Parker and Somerville (Science 2007)

23. 23 Recent Global Sea Level Rise (SLR) Estimates Delta Comm. WBGU Data Data: Church and White (2006) Scenarios 2100: 50 – 140 cm (Rahmstorf 2007) 55 – 110 cm (“high end”, Delta Committee 2008) Scenarios 2200: 150 – 350 cm (“high end”, Delta Committee 2008) Scenarios 2300: 250 – 510 cm (German Advisory Council on Global Change, WBGU, 2006) Rahmstorf at http://www.ozean-klima.de/

24. SLR = 0 meters 24 Econ 331 Impact of SLR on New Haven http://flood.firetree.net/

25. SLR = 3 meters 25

26. SLR = 9 meters 26

27. SLR = 13 meters 27

28. Adaptation again as applied to SLR Suppose that the capital stock is: 10% irreplaceable treasures (art, rare books, …) 30% structures (lifetime ~ 100 yrs.) 30% mobile equipment like planes and cars (lifetime ~ 10 yrs.) 30% short-lived equipment like computers (lifetime ~ 2 yrs.) Now consider adaptation in terms of a warning time for a 7-meter SLR: Tsunami (30 minutes) Asteroid (20 years) Global warming (200 years) What would you do (say for Yale) with each warning time? 28

29. 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.)

30. Central message For adaptive systems, need to consider adaptations to climate change (farmers, skiers, swimmers, trees, coral reefs, …) But must consider the costs of adaptation as one of the costs of climate change (costs of moving, snowmaking machinery, new crops, …) 30

31. 31 First Generation Estimates of Aggregate Monetized Damages of CO2 Doubling, U.S., for present economy Source: IPCC, Second Assessment Report

32. 32

33. Damage summary from Tol survey: global 33 Dots from Tol survey IPCC estimate

34. Damage summary: global 34 Line is Yale DICE/RICE model Dots from Tol survey

35. 35 Early studies contained a major surprise: Modest impacts for gradual climate change, market impacts, high- income economies, next 50-100 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