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CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
1
Dottorato
Climate Change and Policy Modelling Assessment
An introduction to Integrated assessment modelling
Francesco Bosello
2CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Is Climate Change a Problem?
Yes if even though independently upon human contribution some negative consequences for our welfare may arise
Is this an economic problem?
Yes if we decide to act alleviating these adverse consequences given scarce resources
In addition in the presence of a human contribution
Costs and benefits of ADAPTATION strategies
We may decide to intervene to reduce CC causes given scarce resources
Costs and benefits of MITIGATION strategies
Harmonizing MITIGATION ADAPTATION
3CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
When we come to economics the issue is to providing:
A measure (through some indicators) of the “welfare” impact of climate change
(possibly) indication on and “rank” of solutions (policies or policy mix) in term of effectiveness, efficiency, equity
Information on the costs and benefits of different climate change mitigation and adaptation policies
4CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Social economic environmental systems are integrated
EnvironmentalSystem
Contribution to Global Warming and to Climate Change and
Variability
Sea level rise , air, water, land quality and availability,
ecosystems’ change etc.
Envir. impacts
Change in production andconsumption patterns and
welfare
Econ. impacts
Vulnerability
PoliciesMitigationAdaptation
Socioeconomic System
Climatic impacts
Econ. Pressures
Changes in emissions and land
cover
Changes in quality/quanti
ty of prod. factors
Envir. Pressures
5CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
The object of the evaluation: “areas” of impact
Water resources
Agricultural and food security
Terrestrial and freshwater ecosystems
Coastal zones and marine ecosystems
Human settlements
Energy and industry
Insurance and other financial services
Human health
STRESSES
RESPONSES
Source: IPCC, Climate Change 2001, “Impacts and Vulnerabilities”
Climate Change
6CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
=>
Climate system dynamics
Environmental system dynamics
Social-economic system dynamics
And of their interdependences
is needed
Integrated Assesment“philosophy” and modelling approach
(increasingly used since the beginning of the ’90)
Some representation of:
7CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Given this complexity
We need to simplify: Using models simplified “pictures” of the true state of the world, but sufficiently representative.
We need to adopt an integrated approach: all the different “components” of the problem should be represented .
Integrated Assessment Models: Integrated Assessment (IA) is a process aimed at combining, interpreting and communicating knowledge from diverse scientific fields in order to tackle an environmental problem comprehensively by stressing its cause-effect links in their entirety. (Rotmans, Dowlatabady,1995)
8CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Peculiarities of CC impact assessment and modeling
UNCERTAINTY: the knowledge of environmental and socio-economic dynamics, and of the feedback between the two is still affected by a large amount of uncertainty.
GEOGRAPHICAL SCALE: climate change is a global phenomenon affecting the whole world, at the same time environmental and socio-economic impulses and responses are highly differentiated across regions.
TIME SCALE: climate change is a long-term phenomenon. Assessing impacts on environmental and socio-economic systems requires a long-run perspective.
9CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Peculiarities of CC impact assessment and modeling
EFFECTS INVOLVING INTERACTING SYSTEMScharacterized by:• Non linearity (in environmental and economic systems) • Discontinuity (“Jumps”, abrupt changes of state e.g. extreme
events, catastrophes, new technologies), • Irreversibility (non-return point e.g. species extinction,
irreversible investments high sunk costs).
WELFARE MEASUREMENT (ethical judgements): • Inter-personal utility comparison (is it possible to compare and
aggregate utility?) • Inter-temporal utility comparison (is it legitimate to discount and
what discount rate has to be used?)• Existence of NON market values which unit of measurement
(money, loss of human life, multi-criteria approach)?
10CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Aggregating welfare through “space”
i
ii WW nii ,....,11
ni
i ...1 1
Examples of social welfare functions
Any choice involves a subjective or ethical judgment!
min( ) 1,...,
max lowesti
i
W W i n
W
Utilitarian (Benthamite)
Utilitarian equity weighted
Rawlsian, maximin
11CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Aggregating welfare through time
The “traditional” role of time and discounting
Reasons to discount Pure time preference (uncertainty)Distributional issues (equity)
t
drtDF
1
1)(
dr = 0 => present = futuredr > 0 => present more important than future
NB
Time
NB1(dr1)
NB2(dr2)
NB3(dr3)
dr1 < dr2 < dr3
T*T°
Any choice involves a subjective or ethical judgment!
12CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Welfare and non market values
Total econ. value (TEV)
Use Value (UV)
Non Use
Value (NUV)
Direct Use Value (DUV)
Indirect Use Value
(IUV)
Option Value (OV)
Bequest Value (BV)
Existence Value (EV)
Direct economic benefits: e.g. tourism
or production
Functional benefits: e.g. protection vs
geological risk
Possible future use
Heritage for future generations
Intrinsic value of existence
Travel cost
Hedonic pricing
Production function
Averting behavior
CV
SCE
Revealed preferences
Stated preferences
13CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Aggregating welfare and units of measure
Good reasons in favour of “money”
Nevertheless “irreversibility” is present, e.g.: extinction of ecosystem or species, biophysical limits, risk to human life
Add to or substitute for money: number of species lost, increase in mortality, land area (see e.g.: ecological footprint) etc.
Multi-criteria, multi-metric approaches
14CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
The climatic information can be seldomly used directly for an economic assessments
Most likely, it has to be “mediated” by environmental impacts which on their turn have to be suitably translated into changes of meaningful economic variables
Summarising, also at this preliminary stage, it is clear that…
i.e. “items” to which, directly and/or indirectly, an economic “value” can be associated.
The whole process is affected by large uncertainties
15CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A temperature change can be associated to an economic assessment as long as:
Example:
the good or service produced by that activity (say food/rice) has a market value ( direct cost or change in preferences)
the factor of production used (say land) has a market value associated to its productivity and the link between the two is clearly identifyied or modelled (production function approach)
It can be linked to an impact on an “activity” relevant for human “welfare” e.g. agriculture and changes in agricultural productivity
and
16CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: hard vs soft link
Hard-linked climate-economic models
Economic system
Climatesystem
Emissions
Damages
Climate and economics treated as a “unified” system represented by a consistent set of differential (climatic + economic) equations. Emissions from economic activity build CO2 concentration stock and temperature. A (more or less refined) damage
function translates temperature increase into GDP losses.
Mitgation
Adaptation
17CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: hard vs soft link
Soft-linked climate-economic models
Climate System
Environm.impact
module(s)
Economic Impact
module(s)
Economic Assessment
O OI I
Climate, environment and economics treated separately. Outputs of climate models are inputs to environmental impact modules. Outputs of environmental impact modules are inputs to economic impact modules these provide final economic assessment. Inputs and outputs need to be “translated” into the different “languages” or “formats” used by different models/disciplines
O
OIMitgation
Adaptation
18CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Hard and soft link, examples
(Some) Hard linked integrated assessment models: “first generation” DICE (Nordhaus, 1991), RICE (Nordhaus, Yang, 1995), CETA (Peck, Teisberg, 1992), “second generation” MERGEII (Manne, Richels, 2004)), RICE 99 (Nordhaus, Boyer, 2001), FEEM-RICE (Buonanno et al., 2002), “third generation”, MIND (Edenhofer et al, 2006), WITCH (Bosetti et al., 2007)
(Some) Soft linked integrated assessment models: AIM (Morita et al. 1994 and updates), IMAGE II (Image team, 2002 and updates), ASF (Sankowsky et a., 2000 and updates), MESSAGE (Riahi and Roherl, 2000 and updates), MARIA (Mori, 2000 and updates), MINICAM (Edmonds et al., 1996 and updates) all used by IPCC to produce emission scenarios.
Other: SGM (MIT), ICES (FEEM) exercise
19CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Examples of Soft Linked Models
20CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Hard vs Soft Link: pros and cons
Hard-linked Soft-linked
Climateenvironmental
economic details
“Time treatment”
Policy perspective
Necessarily “simplyfied”“high” aggregation
Can be very high“high” disaggregation
“Refined” usually full intertemporal optimization
“Simplyfied” usually (comparative) static or
recursive-dynamic
Links and feedback
Better suited for policy optimisation
Better suited for policy evaluation
Fully consistent and integrated
The feedback loops are not necessarily closed
21CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: static vs dynamic
Static Models Dynamic Models
They provide a snapshot of economic systems in a given
(present or future) time.Adjustments to shocks (from the old to the new equilibrium) are
instantaneous.No time no transition
Time appears explicitly.Recursive dynamic: sequence of static equilibria (usually) linked by capital accumulation process. Myopic nature of (agents’ decision) the adjustment.- Myopic “strict sense”: exogenous investment. - “Adaptive expectations”: investment driven by the equalisation of rate of returns with “mistakes”- Fully dynamic: the equilibrium is irtertemporally consistent. Perfectly rational and fore sighting agent decides.No sistematic errors. - OLG CGE
22CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: static vs dynamic
RK
KCYKts
dteC
N
MM
t
..
1
1max
0
1
0)(and
)][()(
0)(with
][)(
,,
,,,,
,,
,,,
itit
itktititktktktktit
itit
ititktktit
IE
XIXEXXXE
IE
IXEXE
RE Structure
Perfect foresight =>
ktktit XXE )(,
Typically originated from
23CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: static vs dynamic
AE Structure
])[(][)(, tttktit XEXXEXE
)]([ wwCr
Crrrr rRrRrgdpi
“AE” In the dynamic recursive structure of ICES
Investment decisions determining future (next period) capital stock are taken only on the base of current (previous) period information.
One piece of information is thus missing, that related to future (expected) rates of return to capital
24CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: partial vs general equilibrium
Partial Equilibrium Models General Equilibrium Models
All assessments and modelling approaches where the feedback inside the economic system are
not taken into account.“Rebound effects” are neglected.
Typical nature of bottom-up models, non market valuation exercises and direct costing
evaluations.
All markets are interdependent. Input and output re-locate
inter-nationally/sectorally responding to price signals:
(AUTONOMOUS ADAPTATION) This allows:
- to study how initial shocks propagate- to highlight the difference between
initial and final impacts
The two approaches are not in opposition: PE basis for GE analysis (in addition remember the scale issue)
25CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: the technology
Top-Down Models Bottom-Up Models
Phylosophy Economic Engineering
Economic view GE PE
Main variables Elasticity of substitution
Technical progress: Exogenous AAEI or “backstop approach”
Initial cost, installed capacity residual life, penetration of different technologies technological adoption/diffusion is thus endogenous
Detail Geographically/sectorally high, economically high, technologically low
Geographically high, economically low, technologically (energy sectors) high
Energy demand Typically endogenous Typically exhogenous
Energy substitution and emissions
“Pessimistic” (high costs)
Rebounds & lower cost options not usually accessible
“Optimistic” (low costs)
No rebounds & lower cost options accessible
26CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
Hybrid approaches,MARKAL-MACROWITCH
Connections between the
two approaches are possible
27CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: the technology
BARROSO
28CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: the technology
Exogenous Dynamics
> Population (World Bank)> Labor stock (ILO)> Labor productivity G-Cubed model version 48E (McKibbin, 2001)> Land productivity IMAGE 2.2, B1 Scenario (RIVM, 2001)
> World Oil Price (61€/barrel) in line with EU assessment (2008)> Energy (Coal, Oil, Oil Products and Gas) autonomous
improvement (2% Per Year) in line with EU assessment (2008)
> Tfp has been adjusted to move GDP closer to IPCC B2 scenario
29CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
A model taxonomy: the technology
CO2 Emissions (Mton of CO2)
GTAP-E EU assessment (EC, 2008)
2020 Baseline scenario 4577 4294
2020 Reduction scenario 3609 3468
EU Policy Impacts GTAP-EEU assessment
(EC, 2008)
CO2 reduction wrt 2020 BAU -21.15% -19%
Carbon price€/ton of CO2 39.33 39 (GEME3)
GDP loss -0.75% -0.35%
Employment -0.23% -0.04%
Electricity price 1.44% 10-15% (PRIMES)
Oil imports -9% < 0
Gas imports -31% < 0
Output En. Int. Ind. -2% -2%
30CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
An assessment taxonomy
Policy Evaluation Exercises Policy Optimization Exercises
IF - THEN - What are the economic consequences (e.g. in terms of international/intersectoral trade, GDP, welfare etc.) of a specific perturbation (e.g. a tax levied on the production or consumption of a given good, a change in factor productivity and endowment) imposed on a system?- What is the tax or subsidy required to accomplish a given policy target?
What is the path of a given control variable (e.g. the tax, or investment, or abatement rate) allowing to reaching a given target minimising cost or maximising welfare?
31CENTRO EURO-MEDITERRANEO PER I CAMBIAMENTI CLIMATICI
HANDS ON THE IMAGE MODEL