The Impact of Climate Change and Climate Policy on the Canadian Economy

Jim DaviesJim MacGeeJacob Wibe

Questions

What is the net economic impact of climate change and global climate change policy on the Canadian economy? Costs and benefits from different emissions

reduction targets Implications of migration and population growth

Canada is different:1. More energy intensive than OECD average2. High immigration3. Northern climate

Modeling Approach

Adopt Nordhaus’ DICE Model (2007)

Model Canada as a small open economy

Take as given World path of carbon emissions Climate Relative price of carbon energy

Main Findings

Benchmark calibration: Reducing CO2 emissions in Canada more costly than Nordhaus (2007) world average

Canadian immigration policy increases world output but raises Canadian abatement cost

Contribution: Dynamic model to compare alternate CO2 emission time paths

Static CGE models used to examine impacts of climate policy on Canada: Hamilton and Cameron (1994), Jaccard and Montgomery

(1996), ab Iorwerth et al. (2000), Dissou (2005), Wigle and Snoddon (2007), Boehringer and Rutherford (2008)

Sectoral models: Jaccard and Montgomery (1996), Jaccard et al. (2000), Loulou

et al. (2000) Jaccard and Rivers (2007)

Selected Literature: Canada

DICE-2007

Dynamic Integrated model of Climate and Economy

Neoclassical Growth Model – Maximize a Social Welfare Function for the World

Consumption constrained by economic and geophysical relationships

Decision variables: Savings rate for capital and emissions-control rate

Production

DICE functional forms assumed

Parameters differ for Canada:

1. Damage coefficient: Ωt

2. Abatement cost function: Λt

1]1[ tttttt LKAQ

Abatement Cost Function: Λt

Cost of controlling GHG emissions μ = % reduction in industrial emissions

Calibrate to two points: Nordhaus (2007) backstop price schedule NRTEE (2009):

3.3% GDP in 2020 to reduce emissions to 31% below BAU 4.8% GDP in 2050 to 78% below BAU

2,1

ttt

Canadian Abatement Costs

Alternative estimates of abatement costs:

Dissou (2005): $15.4 billion (1.15% of GDP) to reach Kyoto target in 2010

Jaccard et al (2003): $45 billion to reach Kyoto target in 2010 (cumulative costs 2000-2022)

Abatement Cost Function for Canada

Share of Controlled Emissions

0 0.050.10.150.20.250.30.350.40.450.50.550.60.650.70.750.80.850.90.95 10

0.02

0.04

0.06

0.08

0.1

0.12

0.14

Canada 2020DICE 2020

Share

of

Outp

ut

Damage coefficient: Ωt

Nordhaus (2007) models damages as quadratic in global mean temperature

Calibrate: Use regional damage estimates for U.S. from

Mendelsohn (2001) Fit quadratic using estimated damage at T=2.5°

and T=5 °

,1

1

tt D 2

,2,1 ttttt TTD

Matching Regions

CanadianRegion

U.S. Region(Mendelsohn)

Atlantic North-East

Quebec North-East

Ontario North-East,Mid-West

Prairies Northern Plains

B.C. Pacific North-West

Damage Function, Dt

Degrees C°

00.

30.

60.

91.

21.

51.

82.

12.

42.

7 33.

33.

63.

94.

24.

54.

85.

15.

45.

7 66.

36.

66.

97.

27.

5

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

DICECanada

Share

of

Outp

ut

Benefits to Canada from Reduced Global Warming?

NPV 2005 - 2095, billions of dollars.

CanadianPolicy

Global Policy

BAU Nordhaus Fast&Deep

BAU AbatementDamagesTotal

5.9-56.8-50.9

5.9-59.1-53.2

5.9-56.6-50.7

Nordhaus AbatementDamagesTotal

351.1-56.8294.3

351.1-59.1292.0

350. 6-56.6294.0

Fast&Deep

AbatementDamagesTotal

1096.8-56.8

1040.0

1097.0-59.1

1037.9

1094.2-56.6

1037.6

Policy Question

Should immigrant receiving countries receive additional “emission credits” if they accept immigrants from countries worst hit by global warming?

Impacts on Canada from Immigration

Immigration Path

Change in .. Low Medium High

Gross Output 4862.6 5985.8 7345.8

Climate Damage - 6.3 -7.9 -9.7

Abatement Cost 42.3 52.4 64.8

NPV 2005 - 2095, billions of dollars.

Conclusions

Global climate change policy has a significant impact on Canadian Economy High abatement costs associated with

optimal global policy Global abatement effort is of little

benefit to Canada in economic terms

Conclusions

Canadian Immigration policy increases world output but raises Canadian abatement cost Immigration increases economic

burden on Canada in meeting emission targets

Abatement Cost Function: Λt

0 0.16 0.320000000000001 0.48 0.640000000000001 0.8 0.9600000000000010

0.01

0.02

0.03

0.04

0.05

0.06

Nordhaus Global Abatement Cost Function

20052055

Share

of

Worl

d O

utp

ut

Share of Controlled Emissions

Mendelsohn’s Regions