Economic Modelling

of Climate-Change Impacts

Kollegger – Sommer – Wallner

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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?