MIT OpenCourseWare http://ocw.mit.edu

15.023J / 12.848J / ESD.128J Global Climate Change: Economics, Science, and PolicySpring 2008

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• The reference or BAU projection: its uses– Understand the climate problem, its magnitude– Basis for analyzing mitigation measures

• Methods & puzzles in construction– “Horses for courses”– Underlying assumptions

• How the analysis is done– Simple growth models, myopic & forward-looking– Add an energy sector, and multiple regions– Multiple goods and energy types– Multiple regions & trade in goods & permits

• Sample results from a 3-model study

Growth, Technology & Emissions

• For MIT–––

• For the USA–––

Emissions Projections(Say, CO2 to 2020)

Market-Based vs. Technology Cost

• General equilibrium– Full economy

• Goods, capital, labor

– Prices endogenous– Factors driving growth– International trade

• Sacrifice technological detail– Production technology– Aggregation of sectors

• Engineering cost– Technical detail– Zero-cost opportunities

• Partial equilibrium– Key prices exogenous– Omit interactions

• Direct costs, ignoring– Consumer surplus loss– Industrial structure– Transactions costs

Top-Down vs. Bottom-up

Hybrids

CO2 = Pop ∗ GDP/Pop ∗ E/GDP ∗ CO2/E

The Origin of CO2 Emissions(An accounting identity)

Population

Per-capita standard of living

Energy efficiency ofproduction

Carbon intensity of

energy

• CH4– Coal, gas and oil production– Landfills, livestock, rice production

• N2O – Agricultural soils, chemical production

• Industrial gases– HFCs (air conditioning, foam blowing, solvents) – PFCs (semiconductor production, aluminum)– SF6 (Insulator in electrical switchgear)

• Black carbon (aerosols)– Diesel engines, biomass burning

• Sox (aerosol precursor)– Coal burning

Non-CO2 Human Emissions

• Represent the production process• Drivers of growth

– Population– Productivity change– Growth in the capital stock

• Economic decisions (e.g., savings rate, consumer choice)

• Carbon emissions– Energy use– Carbon content of energy

• Calibrate to base year data

Components of a Projection Model

Technology: Cutting GrassK, E

L,M

Power Mower

20 acres per day

10 acres per day

With Several Technologies

K, E

L,M

Push Mower

Power Mower

Riding Mower

2-person Power Mower

10 acres per day

Technology ChoiceK, E

L,M

Push Mower

Power Mower

Riding Mower

Prices 1

Prices 2

Technology ImprovementK, E

L,M

Push Mower

Power Mower

Riding Mower

New Riding Mower

How Flexible Is the Economy?Constant Elasticity of Substitution

CES:KLKLKL

LaKaX LKttρρρα

1)( +=

KLKL ρσ

−=

11

K

L

XK L

X

σ>0

K L

X

σ=0X

Extended Production FunctionOther Input Factors to Production:

q = f (K, L, E, M, FF)

Technical Change:Multi-factor Productivity: q = a(t) f (K, L, E, M)Labor Productivity: q = f (K, a(t)L, E, M)Energy Efficiency: q = f(K, L, a(t)E, M)Endog. Tech. Change: q = f(K, L, a(t, PE)E, M)

Output

Capital Labor Energy Materials Fixed Factor

• Simplifications– One output good (X)– One country (no trade)– “Parameterized” energy sector– No government (no taxes or transfers)– Recursive-dynamic (myopic): economic agents

don’t anticipate future prices– CO2 only

• Relax these as we go forward

Simple “Top-Down” Model

A Recursive Dynamic ModelProduction function

Labor force growth

Productivity change

Capital accumulation

Accounting Identity

Saving/investm’t equilibrium

Savings behavior

Carbon emissions

KLKLL

KLKtt )LbKb(aX ρρρ

1

+=t

t )(LL γ+= 10

( )tt ga += 1

( ) ttt IKK +−= −11 δ

ttt SCX +=

tt IS =

)XY(sYS tt ≡=

( )t,XfE tt =

A Forward-Looking ModelProduction function

Labor force growth

Technical change

Capital accumulation

Accounting Identity

Saving/invest equilibrium

Maximize welfare (W)

Carbon emissions

KLKLL

KLKtt )LbKb(aX ρρρ

1

+=t

t )(POPL γ+= 10

( )tt ga += 1

( ) ttt IKK +−= −11 δ

ttt SCX +=

tt IS =

( )t,XfE tt =

( )( )

∑+

=t t

t

r)C(fWMax

1

MIT Integrated Global System Model

Transactions In a Simple Economy

SectorsNon-Energy

AgricultureEnergy IntensiveOther IndustryServicesIndustrial TransportHousehold Transport

EnergyCrude & Refined oil,BiofuelShale oilCoalNatural gasSynthetic gas (from coal)Electricity

EPPA: Sectoral AggregationFor special studiesCrops Livestock ForestryFood processing

Technologies IncludedFossil (oil, gas & coal)IGCC with captureNGCC with captureNGCC without captureNuclearHydroWind and solarBiomass

For special studiesCrude sources & gasoline, diesel, petcokeheavy oil, biodiesel, ethanol, NGLs& explicit upgrading

Sample Production Structure

KLKLL

KLKtt )LbKb(a ρρρ

1

+=

Estimate σVA

Calibration of a’s

VA

The Base-Year DataSocial Accounting Matrix (SAM)

Commodities i

Factors f

Column Total

1

1

n

n

Labour

Capital

Resources

Net Taxes

Cons. Inv. Gov't Exp. Imp.

Row

Total

Final DemandsIndustries

dj

X

V

VL

VK

VF

G

τ τ

Yl

Yl

Yn

Yn

GC GGGI GX GM

Figure by MIT OpenCourseWare.

MIT (EPPA) ModelMulti-Regions and Trade

Annex BUSAEurope CanadaMexicoJapanAus. & N.Z.FSUE. Europe

Non-Annex BChinaIndiaPersian GulfIndonesiaAfricaLatin AmericaEast AsiaRest of World

EPPA: Regional Aggregation

For special studies:Finland France Germany Britain Italy Holland Spain Sweden Hungary Poland Other

p. 61

p. 64

Scenarios of Emissions & ConcentrationsThe three models (U.S. CCSP pp. 47-48)

Feature IGSM/EPPA MERGE MiniCAMStructure General

equilibriumGeneral equilibrium

Partial equilibrium

Solution Recursive dynamic

Forward looking

Recursive dynamic

Population Exogenous Exogenous Exogenous

Labor force Proportional to population

Proportional to population

Population demographics

Main growth driver

Exog. Labor productivity

Exog. Labor productivity

Exog. Labor productivity

Structure of final demand

Sectors shown earlier

Single prod’nsector (GDP)

Buildings, transport,industry

Global Population

0

2

4

6

8

10

12

2000 2020 2040 2060 2080 2100Year

Bill

ion

EPPA_REF

MERGE_REF

MINICAM_REF

Global Primary Energy per Capita

0

40

80

120

160

200

2000 2020 2040 2060 2080 2100Year

Gig

ajou

les/

Cap

ita

EPPA_REF

MERGE_REF

MINICAM_REF

U.S. Primary Energy Intensity (Per GDP)

0

0.2

0.4

0.6

0.8

1

2000 2020 2040 2060 2080 2100Year

Inde

x

EPPA_REF

MERGE_REF

MINICAM_REF

CO2 Emissions Per Primary Energy

0.000

0.005

0.010

0.015

0.020

0.025

2000 2020 2040 2060 2080 2100Year

GTC

/Exa

joul

e

EPPA_REFMINICAM_REFMERGE_REF

Energy Prices: Reference Scenario

0.00.51.01.52.02.53.03.54.04.55.0

2000 2020 2040 2060 2080 2100Year

Inde

x 20

00=1

Minemouth Coal Price

Gas Producer PriceWorld Oil Price

Global Industrial CO2 Emissions

0

5

10

15

20

25

30

2000 2020 2040 2060 2080 2100

Year

GTC

/Yea

r

EPPA_REF

MERGE_REF

MINICAM_REF

Global Primary Energy: Reference

0

200

400

600

800

1,000

1,200

1,400

1,600

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100Year

Exaj

oule

s/Ye

ar

Non-Biomass RenewablesNuclearCommercial BiomassCoalNatural GasOil