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Thursday, December 29, 2011

Integrated Economic and Climate Modeling

http://econpapers.repec.org/paper/cwlcwldpp/1839.htm
Abstract: This survey examines the history and current practice in integrated assessment models (IAMs) of the economics of climate change. It begins with a review of the emerging problem of climate change. The next section provides a brief sketch of the rise of IAMs in the 1970s and beyond. The subsequent section is an extended exposition of one IAM, the DICE/RICE family of models. The purpose of this description is to provide readers an example of how such a model is developed and what the major components are. The final section discusses major important open questions that continue to occupy IAM modelers. These involve issues such as the discount rate, uncertainty, the social cost of carbon, the potential for catastrophic climate change, algorithms, and fat-tailed distributions. These issues are ones that pose both deep intellectual challenges as well as important policy implications for climate change and climate-change policy.
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A new feature of the DICE-2007 and RICE-2010 models is that they explicitly include a backstop technology, which is a technology that can replace all fossil fuels. The backstop technology could be one that removes carbon from the atmosphere or an all-purpose environmentally benign zero-carbon energy technology. It might be solar power, or carbon-eating trees or windmills, or some as-yet undiscovered source. The backstop price is assumed to be initially high and to decline over time with carbon-saving technological change. In the full regional model, the backstop technology replaces 100 percent of carbon emissions at a cost of between $230 and $540 per ton of CO2 depending upon the region in 2005 prices.
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Carbon prices in the baseline scenario ... are essentially zero.... Prices under the optimal and temperature-limited scenarios at first rise to $38 and $79 per ton of carbon, respectively, by 2015. Prices under the optimal scenario then continue to rise sharply until they reach the projected backstop price.
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Global average carbon prices under the two Copenhagen Accord scenarios are much lower than under the previous scenarios for the first 2 decades of the projections, reflecting the gradual introduction of policy interventions as well as incomplete participation. Note that the effective carbon price today (around $1 per ton carbon) is well below that required under either the optimal or the temperature-limited scenario.
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The large stakes involved in climate-change policies as measured by aggregate costs and benefits. Using the model discount rates, the optimal scenario raises the present value of world income by $9.1 trillion, or 0.35% of discounted income. This is equivalent to an annuity of $454 billion per year at a 5% annual discount rate. Imposing the 2 °C temperature constraint has a significant economic penalty, reducing the net benefit by almost half, because of the difficulty of attaining that target with so much inertia in the climate system. The Copenhagen Accord with phased-in participation of developing countries has substantial net benefits, but lack of participation in the “rich only” case reduces these substantially.... Costs rise gradually over the coming decades and reach around 1% of national income for the high-income countries in the mid-21st century. ... The results of the RICE-2010 model highlight the spatial asymmetry between winners and losers among countries.... The regions designated to undertake the largest emissions reductions under the Copenhagen Accord are the United States, China, and the European Union; the price tag for these regions totals more than $1 trillion in discounted costs through 2055. Several other regions, particularly Russia, can expect net benefits in a trading regime because they have been allocated excess emissions permits under the Kyoto Protocol and are assumed to continue those allocations in its successor.
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[The optimal price per ton of carbon for] 2015 is $38 per ton of carbon, whereas in the early vintages the optimal carbon price was in the range of $12 - 15 per ton of carbon, all in 2005 US dollars. The major factors accounting for the increase in the optimal carbon price are a major upward revision of global output, particularly those associated with adoption of PPP income measurement, a higher assumed temperature sensitivity, and a lower discount rate on goods.
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There have been many estimates of the SCC in different models (See Tol 2005, 2009 for reviews). Tol has undertaken a systematic research synthesis ... and has calculated a (subjectively determined) quality-weighted mean of the results of the different estimates. The most recent estimate finds a SCC of $36 per ton carbon (for the median of the Fisher-Tippett kernel density for peer-reviewed estimates with a 3% pure rate of time preference, without equity weights, adjusted to 2005 and 2005$). Another study was undertaken by the US Working Group on the social cost of carbon (US Working Group 2010 and Greenstone et al 2011).
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The standard DICE/RICE calibration ... leads to a social cost of carbon of $55 per ton carbon and a real interest rate of 5.3% per year. The Stern Review assumptions in the DICE model lead to a much higher SCC, but also a much lower interest rate.
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The SCC ranges from $42 per ton of carbon ($/tC) in the standard case to $350 in the most unfavorable case. The impact on economic welfare is large but not catastrophic, with a decline of around 2 percent of welfare or consumption annuity in the worst case. (The consumption annuity is the constant level of per capita consumption that gives the same level of utility as the case in question.)
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High damages plus no policy (with a tipping point of 3 °C) does lead to a very steep loss. However, the genuinely catastrophic results, in the sense used here, require all three conditions: high TSC, high convexity of the damage function, and no policy. When all three of these conditions are met, the consumption annuity declines 96 percent relative to the baseline. The catastrophic nature of the extreme values is signaled by an initial SCC that is more than $5,100 per ton of carbon (this being indicative but unreliable because of computational difficulties).
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by William D. Nordhaus; Yale University; Cowles Foundation for Research in Economics; Box 208281, New Haven, CT 06520-8281 USA http://cowles.econ.yale.edu william.nordhaus@yale.edu
Working Paper Number 1839; December, 2011
via EconPapers http://econpapers.repec.org
Keywords: Climate change; Integrated assessment models; Environmental economics; Social cost of carbon; Large-scale mathematical models

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