Temporal Investment of Adaptation and Mitigation

Presenter: Bruce A. McCarlWeiwei Wang

Department of Agricultural EconomicsTexas A&M University

April 6, 2011

OutlineIntroductionConceptual FrameworkTechnical PartConclusionFuture Work

Climate Change and Political Strategies• IPCC (2007) ”Most of the observed increase in global average temperatures

since the mid-20th century is very likely (>90%) due to the observed increase in anthropogenic (human emission caused) greenhouse gas concentrations.”

• The future will depend on the choices we make aboutDo little and live with it

Plan to adapt Mitigate Emissions

?

Background on Adaptation and Mitigation

Policy Responses

MITIGATION

GHG Sources and Sinks

Atmospheric Processes and Global Climate

Climate Change

ExposureInitial Impacts

Autonomous Adaptation

Residual Damages

Planned Adaptation

Vuln

erab

ilitie

s

Source:Richard J.T. Klein (2007) “Links between Adaptation to and Mitigation of Climate Change” 3rd Workshop, Bonn, Germany.

Policy DirectionsEconomic Considerations

Effective climate policy involves a portfolio of adaptation and mitigation

Source IPCC Fouth Assessment Report WGII Ch 18

Investment AllocationEconomic Considerations

Activity Consequences

Consumption Current Utility

Conventional investment Future production and consumption benefits

Adaptation investment Avoided climate change damages to production now and possibly in future- more consumption

Mitigation investment Avoided extent of climate change with lessened to production in future- more consumption

Importance of Adaptation

• More societal robustness to climate change• Climate change cannot be totally avoided• Planned adaptation is likely to be more effective and

less costly than last-minute, emergency adaptation Droughts, heatwaves, increased hurricane intensity and new

disease vectors required forward-looking investment

• Immediate benefit can be gained from better adaptation to climate variability and extreme events

• Adaptation has a productive life

Limits and Barrier to Adaptation• There are significant knowledge gaps for adaptation

Absence of measurable outcomes or indicators

• Inability of natural systems to adapt to the rate and magnitude of climate change, as well as technological, financial, cognitive, behavioral, social and cultural constraints.

• Most adaptation involves private actions, public arrangements and national & international policies

• Funds competition• Uncertain returns

Links between adaptation and mitigation

• Trade-offs and synergies Not a zero-sum game Combined effects that both limit GHG emissions and reduce adverse

damages

• Timing of investments Substitute or complement

• Identifying the optimal mix of no action, mitigation and adaptation – significant policy challenge

Research Needs

• What are the relative contributions of adaptation and mitigation to climate change damage reduction?

• How mainstreaming climate policy would be most effective and cost-efficient?

• What are the social optimal allocations of investment in adaptation and mitigation over time?

Conceptual Framework

Optimal Control ModelModel I mitigation only

)()(Minm

mIMcqTCD

)(.. mgcts

TCD: Total climate change damages

q : losses as a function of realized climate change (c)

m: mitigation effort

IM(m) : mitigation cost

g(m) : climate change realized given mitigation effort m

Marginal Cost

Marginal Benefit

Abatement Level

Cost $

Model II Adaptation + Mitigation

)(..

)()(),(Minam,

mgcts

aIAmIMacqTCDA

a : the level of adaptation effortq(c,a): losses of realized climate change and the degree of adaptation effort IA(a): the cost of investment in adaptation

Literature Review on modeling adaptation and mitigation

Literature base rather small, yet very diverse and inconsistent in its conclusions

• PAGE (Policy Analysis of the Greenhouse Effect) model (Hope et al, 1993)– Explicitly treat adaptation as a control variable – modeling adaptation as a binary choice

• FUND (The Climate Framework of Uncertainty, Negotiation and Distribution) (Tol, 2007) – Adaptation is very important and have to be traded off with mitigation– adaptation cost is limited to coastal protection

Literature Review..• AD-DICE (Adaptation in Dynamic Integrated model of Climate

Change Economics) (de Bruin, 2009) – Adaptation is a powerful option in the first 100 years while mitigation

does so afterwards – adaptation costs are “instantaneous” rather than persistent and based

on coastal protection

• FEEM-RICE (Bosello, 2008)– Planned adaptation and mitigation are strategic complements – Calibration of adaptation costs was based on 1990’s surveys

• AD-WITCH (Adaptation- World Induced Technical Change Hybrid) (Bosello, 2010)– Mitigation started immediately while adaptation was delayed until

somewhere later when gross damages were higher– Follow the same calibration as what did in the extension of FEEM-RICE

Methodology • Explicitly adding the adaptation module into DICE

model• Modeling the stock nature of adaptation

investment• Incorporating a more broadly based damage

function that is from the economy wide assessment of adaptation cost from Parry et al (2009)

Technical Part

DICE (2007) – AD-DICE (2009) – AD-DICE++ (2011)

Rest is drawn from Wang, W.W., and B.A. McCarl, "Temporal Investment in Climate Change Adaptation and Mitigation", Draft Paper TAMU, 2011.

Adding explicit adaptation to DICE• Improving adaptation features

• Calibration of adaptation cost function

10IA(t)SA(t)β)(11)SA(t 10

221/

)1(1

10),1(*),(

TETEYGD

eA

AAGDAGDRD

ttt

rSAt

tttttt

t

investment adaptation ofstock :SA

investment adaptation annual offlow :IA

rate ondepreciati annual :0.1β where

output net total: Y

damages eunavoidabl of percentage :α

adaptation of level resulting normalized :A

damages Gross :GD

damages residual : RDwhere

Calibration of Adaptation Cost Function• Fit a function reflective of a statement in Parry et

al. (2009)

Figure 1. Portrayal of relationship between adaptation investment , residual damages and unavoidable damages

Figure 2. Fitted line

7/10,2.0

8.02.01 )7/(10

r

eA sat

• Add adaptation investment to DICE • Assume that decisions on the levels of adaptation and mitigation are

separable but compete for funds with consumption and traditional investment

ttttt IAIMICQ

Where Q: net output of goods and services net of climate change damages after abatement C: consumption I: “traditional” investment of production capital IM: mitigation investment IA: adaptation investment

Results and DiscussionsEffects of Planned Adaptation

Figure 1: Optimal mitigation investment with and without planned adaptation allowed

Figure 2: Benefits in terms of damages reduction from mitigation and adaptation in AD-DICE++ model

Effects of Adaptation

Figure 3. Total damages with and without planned adaptation

Figure 4. Gross world productivity with and without planned adaptation

Optimal Time Path of Adaptation and Mitigation Investment

Reasons for Differences:• The different mechanism of adaptation and mitigation

• The different timing of results from adaptation and mitigation

Figure 5. Optimal investment of adaptation and mitigation in the model with both allowed

Figure 6. Temporal investment distributions between adaptation and mitigation

Sensitivity AnalysisFigure 7. Adaptation investment decreases with the unavoidable damages

Figure 8.Stock of adaption investment decreases with the depreciation rates

Concluding Comments• Well planned adaptation is an economically effective

complement to mitigation and an important current policy option

• Adaptation investment tackles the short run reduction of damages in the first 250 years while mitigation dominates from thereon

• Effective political strategy is the immediate role for adaptation with a longer run transition to mitigation as the damages from GHG concentrations increases

Limitations

• We estimate the relative costs and benefits at a highly aggregated level

• There is no single optimal mix of adaptation and mitigation as this depends on local conditions, uncertainties and different preferences and values in society

• Research on the links between adaptation and mitigation needs to beyond economic and integrated assessment modeling

Future Work

• Modeling direct interaction between adaptation and mitigation in terms of their specific effectiveness and trade-offs

• Identifying the optimal strategy mix considering regional differences and climate change uncertainties

• Implementing extreme events and other risks

Thank you very much for your attention.