Earth System Economics

Richard S.J. TolHamburg, Vrije & Carnegie

Mellon Universities

The Vision

• A predictive Earth System Model, that is, a model that dynamically links all major components of the earth system, and forecasts their behaviour with only current and past observations, that is, without scenarios

• This ESM should have current decisions as input, so that it can be used for policy advice

Whose Vision?

• After successfully coupling atmosphere, ocean and ice models, the CGCMs are thirsting for more, turning their immediate attention to terrestrial vegetation, lower trophic levels in the ocean, and atmospheric chemistry

• The „human dimension“ is lower down the list of priorities but will be steadily moving upwards, hitting the top in 5-10 years

Why Do We Care?

• The ESMs will bring pots of money and influence

• Initially, they will want interactive greenhouse gas emissions and land use scenarios, followed by detailed spatial patterns of other emissions to air, and variability

• For some of these things, we have some theoretical insight, but no applied models, and for others we have little clue: There is an intellectual challenge as well

Intermediate Steps

• We already have many simple ESMs, called integrated assessment models

• Many IAMs are „conditionally predictive“ partly coupled systems, but the crude spatial and temporal resolution makes many problems disappear

• People are now moving towards IAMs „of the next generation“ or ESMs of intermediate complexity

PopulationPopulationFertilityFertilityMortalityMortalityMigrationMigration

Economic SystemEconomic SystemEconomyEconomyEnergyEnergyOther gasesOther gases

Phys-Chem SystemPhys-Chem SystemOcean carbon cycleOcean carbon cycleClimateClimateOther gas cycleOther gas cycle

Biogeochem SystemBiogeochem SystemHydrologyHydrologyVegetationVegetationAgricultureAgricultureForestryForestry

InterfacesInterfacesWater useWater useLand useLand useRecreationRecreation

ImpactsImpactsSea level riseSea level riseHealthHealthTourismTourismEnergy demand & supplyEnergy demand & supply

Immediate Steps

• One field, in which I see short-term benefits as well as opportunities for long-term learning, is higher-order impacts of climate change

• To date, most economic impact studies are based on direct costs estimates, and a few on partial equilibrium models

• We clearly can do better than that and study the general equilibrium effects, the structural effects, and the growth effects

Growth

• Consider a Ramsey-Cass-Koopmans growth model (maximise utility, accumulate capital, labour and technology exogenous)

• Climate affects utility (no effect), output, depreciation, and labour

• Keep savings constant for the moment• Less output implies less capital accumulation• Faster depreciation implies less capital• Less labour implies more capital per worker

Growth -2

• Now make savings endogenous• Less output implies a lower return on capital• Less labour implies less need to invest• Faster depreciation may implies more

savings to make up or less to reflect the reduced returns

• However, net savings are unambiguously down

• Capital effect is negative unless black plague

0

0.05

0.1

0.15

0.2

0.25

2005 2025 2045 2065 2085 2105 2125 2145 2165 2185 2205

year

frac

tion

of G

DP

Mankiw

Romer

Ramsey

Solow

Direct Cost

Ramsey, depreciation

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2005 2025 2045 2065 2085 2105 2125 2145 2165 2185 2205

year

perc

ent

No Climate Change

Solow

Ramsey

Romer

Mankiw

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2005 2025 2045 2065 2085 2105 2125 2145 2165 2185 2205

year

perc

ent

No climate change

1%

5%

10%

15%

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2005 2025 2045 2065 2085 2105 2125 2145 2165 2185 2205

year

perc

ent

No Climate Change

1% Damage

5% Damage

10% Damage

15% Damage

General Equilibrium

• Most studies estimate the direct costs of climate change, that is, price times quantity

• This is a crude welfare measure• CGEs also estimate welfare change, so

that we cannot use direct cost studies as inputs to CGE modelling

• Inputs to CGEs can be changes in endowments, productivity, and demand but the last is a bit more complicated

Health impacts: selected results 2050

2050 Equivalent Variation

($ US million)

Gdp (% change w.r.t.

baseline)

Co2 Emissions (% change w.r.t.

baseline) USA -5052.14 -0.02 -0.005 EU -4227.32 -0.018 -0.004

EEFSU -795.954 -0.023 -0.007 JPN -649.416 -0.006 0.001

RoA1 -751.162 -0.015 -0.004 EEx -464.824 -0.003 0

CHIND -553.109 -0.01 0.001 RoW -822.113 -0.007 0

Implementing Climate-Change Impacts on Health in GTAP-EX

2050 Equivalent Variation

($ US million)

Gdp (% change w.r.t.

baseline)

Co2 Emissions (% change w.r.t.

baseline) USA -785.325317 -0.001263 0.002692 EU -841.421326 -0.001301 0.000811

EEFSU -93.030487 -0.000972 0.004347 JPN 88.591309 -0.000424 0.014146

RoA1 30.607679 -0.000270 0.004597 EEx -566.428589 -0.009059 -0.003644

CHIND -410.882568 -0.013259 -0.002694 RoW -726.667908 -0.008243 -0.009216

Sea-level rise: selected results 2050

Implementing Climate-Change Impacts on Sea Level Rise in GTAP-EX

The Immediate Challenge

• Land and water use are heavily affected by the climate, and affect the climate in return; the spatial pattern matters

• Land and water markets are distorted, regulated and location-specific package deals

• I think a lot can be done with spatial equilibrium models and risk-averse farmers; power weights in bargaining games; and Krugman‘s new economic geography, and ideas are being tested

Longer-Term Challenges

• The natural science components of Earth System Models have both short-term and long-term dynamics; variability and equilibrium

• The same thing will be asked from social science components

• Complex models are tested by reproducing the past – economic historians are still, by and large, data collectors, but their progress is amazing

Conclusions

• There will be a market for ESM-compatible economic models

• At the moment, no economic model supplies to that niche, but with a number of adjustment this can be arranged

• Filling the niche requires quite a bit more in theoretical and applied economics; and prospects are uncertain because of the differences in space, time and closure