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Economics 331bSpring 2011

Week of March 28

Integrated Assessment Models:Modeling Mitigation (Abatement)

Agenda

This week (Monday and Wednesday):

- Review on term paper- How to calculate SCC- Final work on impacts- Mitigation

Next Monday: Add last module to your little model: mitigation.

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How to estimate SCC

1. Numerical derivative:

- Calculate PV income- Recalculate PV income with 1 additional unit of E- Take difference- BE VERY CAREFUL WITH UNITS

2. Analytical:- Have Damage=D=f(T); T = g(RF); RF=h(C); C=z(E).- Therefore D’(E)=f’ g’ h’ z’

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Model estimate

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UNITS!!!

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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.)

Components of damages circa 2000

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Damages in billions of 2000 $

Low HighMarket or near-market

Agriculture 1.1 17.5Forest 0.0 43.6Sea level rise 4.0 8.4Electricity 1.1 11.2Hurricanes 0.2 0.8Water supply 7.0 15.6Urban infrastructure 0.0 0.1

Non-marketHuman amenity 0.0 12.0Human mortality 9.4 37.4Migration 0.5 1.0Leisure 0.0 1.7Air pollution 3.5 59.8Species loss 4.0 8.4

Total 55.5 139.2

Percent of GDP 1.0 2.5

Source: IPCC, Second Assessment Report

Damage summary: global

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Dam

ages

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per

cent

of o

utp

ut

Global mean temperature increase (°C)

Line is Yale DICE/RICE model

Dots from Tol survey

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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

Now on to mitigation (abatement) costs

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Price of carbon emissions

Social cost of carbon

The basic analytical structure

Abatement

Pcarbon*

Marginal Cost

0Abatement*

Mitigation (abatement)

• We have examined the damage side.• For a full cost-benefit analysis, we need the cost side.• “Mitigation” involves analyses of the policies involving the

reduction of emissions CO2 and other GHGs

There are four major issues involved:1. Projecting the emissions 2. Estimating the costs of emissions reductions3. Designing policies to reduce emissions4. Encouraging low-carbon technological change

• This set of tasks is generally much easier that impacts because we have extensive information on impacts of energy taxes, regulations, etc.

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1. Projecting emissions

For this we need an integrated assessment model.As an example, the following shows the projected

emissions to 2105 in the Yale-RICE model and in several other models examined in EMF-22.

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Projections CO2 emissions various models (with no emissions reductions policies)

15EMF-22 and Yale-RICE model (with orange dots)

0

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2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Glo

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Scientific consensus

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Commonly heard. But what is a scientific consensus? Does scientific consensus = truth?

2. Estimating Costs of Reducing Emissions

Analysts use different strategies to model abatement:– Some use econometric analysis (“top-down”)– Some use engineering/mathematical

programming estimates (“bottom up”)– Behavioral (uncharted territory … how to do this?)

Bottom up:

- Relies on individual technologies and processes from engineering studies

- Aggregates these together to get a minimum cost mitigation function

- Often has weak behavioral component.17

Example from passenger cars

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Example from passenger cars

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Estimated cost of improvement, compact car

20Nat. Acad. Sci., Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards,2002.

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Example from McKinzey Study

Impact of Japanese events on mitigation costs?

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Nordhaus house survey

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Feature Cost Savings Rate of returnAir Sealup Seal air leaks $979 $360 37%Duct Sealing Seal ducts $987 $349 35%Insulation storage $391 $113 29%Floor Insulation - Laundry Insulate to R 30 $421 $117 28%Floor Insulation - Rear Crawl $514 $111 22%Duct pipe insulation $836 $175 21%

*** Door insulation (3) $300 $35 12%13 Medium Window(s) Replace with double-pane, low-e $4,576 $394 9%20 Small Window(s) Replace with double-pane, low-e $5,500 $350 6%Attic insulation -- storage $541 $32 6%Attic insulation -- original $605 $31 5%

*** Basement window panels $250 $10 4%*** Stair window panels $550 $8 1%*** Downstairs windows -- high e $15,000 $150 1%

ALL PROPOSED $31,450 $2,235 7%

Nordhaus house survey*** recommended by contractor

2. Top-down (econometric)

Top down or econometric:

- Look for some kind of “experiment” in which energy or carbon prices vary. Then estimate impact of higher prices on carbon emissions:

- Some examples of CO2 taxes or European Trading System.

- More useful are energy taxes.

- Some rely on production functions and simulations.

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Example of econometric (“top-down”) approach to mitigation

Assume that the demand for gasoline isQ = Bp-λ

Supply of gasoline is perfectly elastic with tax τ: p = q + τ

CO2 emissions are proportional to consumption:

E = kQSo we have:

E = kB -λ (q + τ)-λ =c (q + τ)-λ

[Numbers are calibrated toActual US data.]

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0

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0 2 4 6 8 10 12

Carb

on p

rice

($ p

er to

n C

redu

ction

)

Percentage reduction

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Further discussion

There has been a great deal of controversy about the McKinsey study. The idea of “negative cost” emissions reduction raises major conceptual and policy issues.

Most economic models rely on more econometric studies.

The next set of slides shows estimates based on the IPCC Fourth Assessment Report survey of mitigation costs.

The bottom line is that the cost using the top-down approaches are generally higher than bottom-up.

Survey of multiple models from IPCC FAR

27Source: IPCC, AR4, Mitigation.

Summary of estimates

28Source: IPCC, AR4, Mitigation, p. 77.

Summary from IPCC

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Carb

on p

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Percentage reduction

Top down

Bottom up

Derivation of mitigation cost function in RICE model

Start with a reduced-form cost function:

(1) C = Qλμ

where C = mitigation cost, Q = GDP, μ = emissions control rate, λ, are parameters.

Take the derivative w.r.t. emissions and substitute σ = E0 /Q

(2) dC/dE = MC emissions reductions

= Qλβμ-1[dμ/dE] = λβμ-1/σ

Note that MC(0) = 0; MC(1) = λβ/σ = price of backstop technology*; and C/Q = λ with zero emissions.

*”Backstop technology” is technology at which get 100 emissions reduction (say solar/nuclear/fusion/wind for everything).

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What are your views on top down v. bottom up?

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There is a very lively controversy about the role of "negative cost" mitigation. The McKinsey report (Reducing US Greenhouse Emissions, p. xiii) has a very substantial number of such mitigation possibilities. Other modelers are sharply critical of the MK report and believe that (aside from external costs) there are very few negative cost options. You should think about this and have some pros and cons (for final exam?).