1

Economics 331bSpring 2010

Week of April 5

Integrated Assessment Models:Modeling Mitigation (Abatement)

AgendaThis week (Monday and Wednesday):

- Review on term paper- How to calculate SCC- Mitigation

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

2

How to estimate SCC1. Numerical derivative:

- Calculate PV income- Recalculate PV income with 1 additional unit of E- Take difference

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

3

Model estimate

4

6

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.

7

1. Projecting emissionsFor 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.

8

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

9EMF-22 and Yale-RICE model

0

5

10

15

20

25

30

35

40

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

CO2

emiss

ions

(10^

9 to

ns C

per

year

)

ETSAP-TIAM FUND

GTEM IMAGE

MERGE-O MESSAGE

Minicam POLES

SGM RICE

2. Estimating Costs of Reducing EmissionsAnalysts use different strategies to model

abatement:– Some use econometric analysis (“top-down”)– Some use engineering/mathematical

programming estimates (“bottom up”)

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.

10

11

Example from McKinzey Study

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 = kQ

So we have:E = kB -λ (q + τ)-λ =c (q + τ)-λ

[Numbers are calibrated toActual US data.]

12

0

50

100

150

200

250

0 2 4 6 8 10 12

Carb

on p

rice

(MC

redu

ction

)

Percentage reduction

Survey of multiple models from IPCC FAR

13Source: IPCC, AR4, Mitigation.

Summary of estimates

14Source: IPCC, AR4, Mitigation, p. 77.

Summary from IPCC

15

-20

0

20

40

60

80

100

0 10 20 30 40

Carb

on p

rice

(MC

redu

ction

)

Percentage reduction

Top down

Bottom up

16

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.

For the DICE/RICE models, we have generally relied on more micro and engineering 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.

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

17

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 take a specific example from the report. Make a case for whether the negative cost finding is correct or not. I will call on some of you at the beginning of class for a short report.

Nordhaus house survey

18

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

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).

19

The 2 °C target• Current policy has focused on a target of 2 °C rise

from pre-industrial times.• Copenhagen Accord of December 2009, which

“recognized … the scientific view that the increase in global temperature should be below 2 degrees Celsius.”

• Sources of “scientific view”:– Climate history over long run– Possible tipping points in climate system– Thresholds for ecosystems

20