4/23/2015 1 1 Costs and Benefits of Mitigating Global Climate Change Some slides adapted from: Maureen Cropper, University of Maryland and William D. Nordhaus, Yale University 1. Assessments of climate change 2. Costs of mitigation ▫ What factors drive estimates of the costs of mitigation and why do estimates differ? ▫ How costly is it to stabilize at 450 vs. 550 ppm? 3. Benefits of mitigation ▫ Overview of benefits estimation ▫ How benefits vary geographically 4. Balancing costs and benefits ▫ How to deal with timing issues, uncertainty? What does this imply about the optimal stabilization level? 2 “Most of the observed increase in global average temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations.” (IPCC 2007)
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Costs and Benefits of Mitigating Global Climate Change
Some slides adapted from: Maureen Cropper, University of Maryland and William D. Nordhaus, Yale University
1. Assessments of climate change2. Costs of mitigation
▫ What factors drive estimates of the costs of mitigation and why do estimates differ?
▫ How costly is it to stabilize at 450 vs. 550 ppm?
3. Benefits of mitigation▫ Overview of benefits estimation▫ How benefits vary geographically
4. Balancing costs and benefits▫ How to deal with timing issues, uncertainty? What does
this imply about the optimal stabilization level?
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“Most of the observed increase in global average temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations.” (IPCC 2007)
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IPCC AR4 Model Results: History and Projections
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Sources of GHG Emissions
Source: IPCC (2007)
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What Determines Fossil Fuel Emissions?
• Emissions = Population x (GDP per capita)
x (Energy/GDP) x (CO2/Energy)
• Policies to reduce emissions must reduce:▫ Energy per unit of GDP (become more energy efficient)
▫ Carbon intensity of energy (switch from coal to gas; fossil fuels to renewables and nuclear)
• Carbon tax or other explicit policies are needed to promote move to a low carbon economy
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How Economists Model Mitigation Costs
• “Top-down” computable general equilibrium models ▫ Divide the world into economically important regions▫ Model demand and supply for commodities in all sectors of
the economy
• Estimate costs of mitigation by imposing a worldwide carbon tax.▫ Tax causes substitution of low carbon fuel.▫ The cost of doing this represents the cost of mitigation.
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What Determines the Cost of Reaching Particular GHG Targets?• Business-as-usual concentrations of GHGs
• Ease of substituting energy for other inputs
• Ease of substituting low-carbon for high-carbon fuels
• Assumptions about rate of technical progress
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Estimated Mitigation Costs
Source: den Elzen et al. (2007)
Pathways: default (black), delayed (red) and early action (green); envelopes (set of grey lines)
Miti
gatio
n co
sts
as %
of G
DP
450 ppm 450 ppm
550 ppm 550 ppm
A1b (Moderate Growth) B1 (Low Growth)
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What Are the Benefits of Mitigating GHG Emissions?• Stabilizing at 550 ppm implies:
▫ 99% chance of exceeding 2°C
▫ 69% chance of exceeding 3°C
▫ 24% chance of exceeding 4°C
▫ 7% chance of exceeding 5°C
• What does this mean in terms of impacts?
• Benefits of mitigation = value of avoided damages
1°C 2°C 5°C4°C3°C
Sea level rise threatens major cities
Falling crop yields in many areas, particularly developing regions
Food
Water
Ecosystems
Risk of Abrupt and Major Irreversible Changes
Global temperature change (relative to pre-industrial)0°C
Falling yields in many developed regions
Rising number of species face extinction
Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system
Significant decreases in water availability in many areas, including Mediterranean and Southern Africa
Small mountain glaciers disappear – water supplies threatened in several areas
Extensive Damage to Coral Reefs
Extreme Weather Events
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Possible rising yields in some high latitude regions
• PAGE uses a discount rate that reflects how we weight the preferences of future generations vs. ourselves▫ Allowing for the fact they will be better off▫ Discount rate approximately 1.4%
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• Impact of atmospheric CO2 on temperature is uncertain
• PAGE treats this parameter as uncertain; DICE and FUND do not
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Importance of Uncertainty & Risk Aversion
▫ Climate sensitivity = impact on temperature of a doubling of atmospheric CO2 from pre-industrial levels
▫ 95% confidence interval = 2.5°C to 5.4°C
• Low abatement costs
• Increasing future damages
• High risk
Gradual Emissions Reduction
Uncertainty
• High abatement costs
• Moderate future damages
• Moderate risk
Aggressive Emissions Reduction
• Accounting for risk aversion increases the incentive for aggressive emissions mitigation
Importance of Uncertainty & Risk Aversion
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Mitigation Benefit and Cost Estimates Relative to No Mitigation – Nordhaus’s DICE Model
Benefits (Avoided Damages)
Abatement Costs
Benefits minus Costs
$ Trillion (US 2005) $Trillion
Nordhaus/DICE Optimal 5.2 2.2 3.1
420 ppm stabilization 12.6 27.2 ‐14.6
560 ppm stabilization 6.6 3.9 2.7
700 ppm stabilization 5.2 2.2 3.1
Note: DICE ignores uncertainty and uses a relatively high discount rate.
Source: Wheeler (2007)
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What Can We Conclude About Costs and Benefits of Mitigation?
• Conservative model estimates suggest that stabilizing CO2 at 560 ppm passes the cost-benefit test.
• Accounting for uncertainty/risk or lowering the discount rate would increase the benefits, implying an even more aggressive target.
• So how do we get there? What policy measures are possible?
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A Price on Carbon
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• Economic participants (millions of firms, billions of people, trillions of decisions) need to face realistic carbon prices if their decisions about consumption, investment, and innovation are to consider the “negative externality” of carbon emissions.
1. To be effective, we need a market price of carbon emissions that reflects the social costs.
2. Moreover, to be efficient, the price must be universal and harmonized in every sector and country.
• But what is the appropriate price of carbon? This question can also be addressed by integrated assessment models.
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1. Baseline: No emissions controls.
2. Optimal policy: Emissions and carbon prices to maximize discounted economic welfare.
3. Limit to 2°C: Constraining global temperature increase to 2°C above 1900
4. Strengthened Kyoto Protocol: Modeled on US proposal with rich countries starting at same time and developing countries joining after 1-3 decades
• Internationally harmonized carbon tax is the economic ideal.• Raise fossil fuel prices proportional to carbon content• All countries would target a comparable tax• Level of tax set to meet emissions target • Uses consumption basis for tax• Raise revenues and have potential for reducing dead
weight losses of taxation.
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Major Policy Approaches• Universal cap and trade is a close second (only if
well-designed)▫ The fundamental defect is the lack of a connection
between targets (emissions) and objective (climate or damages).
▫ Caps are troublesome in a world of differential economic growth and uncertain technological change.
▫ Cap-and-trade regulations show extremely volatile trading prices for carbon emissions.
▫ Systems with international trading are much more susceptible to corruption than tax regimes.
▫ Taxes are more familiar and reliable in every country of the world.
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Major Policy Approaches
• Voluntary measures (carbon offsets) are difficult to calculate and verify and probably useless in the long-term.
• Regulatory substitutes (CAFE standards, ban on light bulbs, …) are very inefficient approaches
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Problems in Reaching an International Agreement
• Reducing GHGs is a global public good▫ If one country reduces, all countries benefit▫ Individual countries have an incentive to “free ride”
• Benefits of avoiding climate change occur in the future, and most benefits accrue to developing countries.
• Developing countries argue that they are not responsible for the majority of the stock of GHGs
• … and their emissions are very low on a per capita basis.
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The Externalities Game (TEG)
Motivation:• To obtain a sense of the ethical dilemmas involved in
climate change mitigation, our next case will involve the Externalities Game.
• An “externality” is a second-party effect arising from the production and/or consumption of goods and services for which no appropriate compensation is paid. ▫ For example, in climate change an externality would be sea level
rise or global temperature change.
▫ Like the noncooperative games examined in game theory (e.g. the Prisoners’ dilemma), externalities create tension between individuals who seek to achieve personal well-being at the expense of communal well-being.
• In this game, the outcomes that impact each player are determined, in part, by the actions of other players.
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Review of Rules:• Each player is randomly assigned one of three possible roles:
Luxury, Intermediate or Subsistence Producer
• Players will make production decisions that result in points (for themselves) and externality costs (shared by everyone).
▫ Whereas points accumulate linearly with production, externalities grow exponentially.
• Production Decisions will be kept confidential, unless players choose to reveal their decision to others
• Your score on this case study will be determined by the production points that you are able to accumulate individually, minus the externality costs that are incurred collectively.
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Review of Rules:• Randomly assigned roles:▫ Luxury Producer (L): gain the most points per
unit of production, but also emit the greatest amount of externalities Max production level = 10
▫ Intermediate Producer (I): gain the second most points per unit of production, and emit the second highest amount of externalities Max production level = 50
▫ Subsistence Producer (S): gain the least amount of points per unit of production, but emit the least amount of externalities Max production level = 240
• A round of game play consists of two steps: 1) production decisions by all players2) point-sharing negotiations.
• Players can only produce whole goods up to their maximum production capacity and not less than 0.
• Players can make deals during the game to share points or limit production for the greater good. However, the instructor will not enforce agreements. Players may lie to each other about their behaviors, and in many cases these lies may go undetected.
• Players do not have to cooperate with anyone if they do not choose to, but it is in their best interest to do so.
• The people they share with and the amount they share is solely at their own discretion and will be kept confidential.
Review of Rules:
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Review of Rules:• Players are allowed to numerically experiment with various production
choices. To experiment with possible choices, players can enter their production decision (as well as the assumed decisions of others) into their copy of the spreadsheet and view the consequences of that decision.
• The actual consequences of a player’s production choices will not be fully attained until after the round has been fully played.
• When all players have come to a final decision, or when the instructor states that deliberation must end, the players will submit their final production value on a note card. *THIS VALUE DOES NOT NECESSARILY HAVE TO BE WHAT WAS AGREED UPON WITH THE OTHER PLAYERS*
• The scores are then calculated by the instructor’s spreadsheet, and they are revealed to the students with an anonymous list of emissions generated by each player.
• A follow-up step of point sharing will then occur.
Susan Spierre
Example of Game Card
S28150 +83 Give 3 points
to J. Smith+80
ProductionDecision Resulting
Grade PointsPoint Sharing Final Grade
Points
Player IDPlayer Name
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Reflection Questions• How did you feel about the outcome? Why?
• How did you feel about your assigned role (L, I, S)? Why?
• Did your assigned role determine your behavior? How?
• How did you react to others’ behavior? Did you feel mad at anyone?
• Did you follow the determined optimal strategy? If not, why not?
Reflection Questions (cont’d)
• How did you decide who to share points with?
• Did you try to get others to share points with you? If so, how?
• What type of real-world situations can we relate this to?
• Are there such techno-scientific optima in the real world?
• How could we re-design the underlying system to solve the non-cooperation problem?