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Economic Modelling
of Climate-Change Impacts
Kollegger – Sommer – Wallner
Eco
no
mic
s o
f C
lim
ate
Ch
ang
e
22.04.08
Chapter 6
1. Introduction
2.What existing models calculate and include
3.Do the existing models fully capture the likley cost of climate change?
4.Calculating the global cost of CC: an „expected-utility analysis
5.Overall welfare cost
Programm for today
Introduction
Difficulties
• Large uncertainties
• Still many limitations
• Monetary values on health & environment
Why do we need formal models?
• Estimate monetary cost of climate change (CC)
•Modeling Risks and uncertainty
Introduction
All three are combined in a single metric of damage
“Modelling over many decades, regions and possible outcomes demands that we make distributional and ethical judgements systematically and explicitly.” (p.143)
Models have focus on three dimensions:
• Income/Consumption
• Health
• Environment
Introduction
Total costs using Integrated Assessment Models
Average reduction in global per-capita consumption of 5%, at minimum
Increase still further up to around 20%:
• 1.’Non-market’ impacts & ‘socially contingent’ impacts. At least from 5% to 11%
• 2. Climate system more responsive to GHG emissions - amplifying feedbacks From 11% to 14%
• 3. Disproportionate burden on poor regions Stronger relative weight: + ¼ higher costs
What existing models calculate and include
Key Features 1
• Difference between income growth with and without CC impacts
• Correct treatment of negative effects
• Monetary loss – income loss
• ‘Market’ and ‘non-market’ sectors
• Consideration of risks of higher temperatures
What existing models calculate and include
Key Features 2
• Regional impacts aggregated on population or output
• Acceleration of costs
• Chance of triggering abrupt and large-scale changes
What existing models calculate and include
Three Main Models
• Mendelsohn (1998, output)
• Tol (2002, output, equity)
• Nordhaus (2000, output, population)
What existing models calculate and include
Beyond 2 – 3°C of warming:
• All three Models: CC will reduce global consumption • Disagreement on size of cost: Small to 10% or more
Up to 2 - 3°C of warming:
• Disagreement about global impact of CC• Clear consensus: Any benefits are temporary and confined to rich countries
What existing models calculate and include
Results depend on key modelling decisions
• Valuation of costs to poor regions• Assumtions about societies’ ability to reduce costs by adapting• ‘Values of life’ based on willingness to pay
Higher Income – more value Some authors use other concepts of weighting
Do the existing models fully capture the likley cost of climate change?
2. Possible interactions between sectors
Water-sector and agriculture, agriculture and the rest: no food no labor no production
food is a basic product of the economic system
1. ‘Socially contingent’ responses
Investment decisions, productivity, labor supply, political and social instability…
Existing models omit many possible impacts e.g.:
Calculating the global cost of climate change: an ‚expected-utility‘ analysis
Model of monetary cost of climate change
• Cost simulation – widest range of possible impacts
• Theoretical framework - analysing changes – large, uncertain, unevenly distributed – very long period of time.
How to take account of
• risk of very damaging impacts and
• uncertain changes - over very long periods
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002 Integrated Assesment Model
FEATURES
• Modelling approach based on probabilities
• ‚Monte Carlo‘ Simulation
- Each scenario many times
- Each time chossing a set of uncertain parameters from pre-determined ranges of possible values
Generation of a probability distribution (PD) of results:
“PD of future income under climate change, where climate-driven damage and
the cost of adapting to climate change are subtracted from a baseline GDP growth projection.”
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002 Integrated Assesment Model
Probability distribution (PD)
• PD for the climate sensitivity parameter – range of estimates across a number of peer-reviewed scientific studies
• In the past production of mean estimates of the global cost of CC – close to the centre of a range of peer-reviewed studies
• Capable of incorporating results from a wider range of studies
o Flexible enough to include market impacts and non-market impacts
o Catastrophic climate impacts
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002 Integrated Assesment Model
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002 Integrated Assesment Model
LIMITATIONS
• Rely on sparse or non-existent data and understanding at high temperatures
• Faces difficulties in valuing direct impacts on health and the environment
• Does not fully cover the ‘socially contingent’ impacts
RESULTS
• Indicative only and interpretion with great caution!
(1) Baseline Climate scenario
• Outputs consistent with range of assumption of the IPCC TAR
• Mean temperature increase
3.9°C in 2100 (relative to pre-industrial) and 90% confidence intervall of 2.4 - 5.8°C (IPCC 3.0 - 5.3°C)
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002 Integrated Assesment Model
(2) High Climate scenario
• Addition of natural feedbacks in the climate system
• Weakened carbon sinks and Increased natural methane releases
• Mean temperatur increase
4.3°C and higher probability of larger temperature changes 90% confidence intervall of 2.6 - 6.5°C
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002 Integrated Assesment Model
PAGE2002 IAM
Policy Analysis of the Greenhouse Effect 2002 Integrated Assesment Model
Categories of economic impact
• Only Impacts of ‚gradual climate change‘ on market sector
• Risk of catastrophic climate impacts at higher temperature (market sector)
• Non-market impacts on human health and the environment
Clim
ate
• High climate
• Market impacts
• Baseline climate
• Market impacts
• High climate
• Market impacts
+ risk of catastrophe
• Baseline climate
• Market impacts
+ risk of catastrophe
• High climate
• Market impacts
+ risk of catastrophe
+ non-market impacts
• Baseline climate
• Market impacts
+ risk of catastrophe
+ non-market impacts
Impacts
matrix of scenarios
-0.2 -0.9
-13.4
-0.6
PAGE2002 IAM
-17.9
-0.9
PAGE2002 IAM
- 5.3 BL scenario
-35.2
-2.9
PAGE2002 IAM
- 7.3% High Climate scenario
(3) ‚High+‘ climate scenario
• 20% chance that the climate sensitivity > 5°C
• Combination of natural feedback with a higher probabilitiy distribution for the climate sensitivity parameter.
(3) ‚High+‘ climate scenario• 20% chance that the climate sensitivity > 5°C
• Natural feedback with a higher probabilitiy distribution for the climate sensitivity parameter.
► ‚High+‘ scenario with market impacts and the risk of catastrophe:
Mean loss in global per-capita GDP
0.4% in 2060; 2.7% in 2100; 12,9% in 2200
►Addition of non-market impacts
1,3% in 2060; 5.9% in 2100; 24.4% in 2200
-24.4
-12.9
‚High+‘ Climate (market impacts + risk of catastrophe)
‚High+‘ Climate + non market impacts
PAGE2002 IAM
Amplification of natural feedbacks
In 2100 – mean temperatur increase
Baseline scenario: 3.9°C
High scenario: 4.3°C
In 2200 – mean temperatur increase
Baseline scenario: 7.4°C
High scenario: 8.6°C
2200
2100
Overall welfare costs
Problem of aggregating:
• across different possible outcomes
• over different points of time
Key assumptions:
• basic welfare economics
• diminishing marginal utility
• varying growth
• utility discount
--> calculate expected utility
How to express the loss?
balanced growth equivalent - BGE
„measures the utility generated by a consumption path in terms of the consumption now that, if grew at a constant rate, would generate the same utility“
Overall welfare costs
Expected utility analysis:
baseline GDP growth less costs of CC 1000 runs probability distribution GDP consumption per capita
Overall welfare costs
• consumption to utility
• if η=1
• discount utility
1CU(t)
1
U(t) lnC(t)
t
t 1
W N(t)U(t)e dt
2200
t tT T T2
t 2001
N lnC N gW N(t) lnC(t)e e
Overall welfare costs
Results:
Overall welfare costs
Q: What are the reasons for and against one single metric of damage?
Q: The three main models are based on scientific evidence – but from what time they originate ?
Q: Can you name some of the sudden shifts of regional weather patterns, that could occure besides ice-meltung and the gulf- stream?
Q: Why can only a small proportion of the cost
of climate change between now and 2050 be realistically avoided?Q: Why should some numbers beyond 2100 in
the model-approch be treated as indicative?Q: What climate scenario is the most realistic one?
Q: How does the Stern Review argue, that the BGE costs of climate change increase by one quarter or higher after including value judgements for regional distribution?
Q: Which possibility distribution for the risk of eliminating society is used for the modell? Do you know any other that could be used?