3.Optimal Emission Levels Flashcards
What are the type of uncertainties in the risk matrix in climate change damage?
- Uncertainty in predicting climate change
- Uncertainty in valuation
What are of IAMs? give their Simplified structure!
Integrated Assessment Models (IAMs):
- are combined climate and economic models which allow a joint modeling of natural and socio-economic processes
- Primary analytical tool for quantitative climate policy analysis
- Used to predict the impacts of GHG emissions and to evaluate the optimal abatement path (when, where and how much to abate)
- First climate-economy IAM developed by Nordhaus (1991)
Economy module vs climate module:
- Economic dynamics cause emissions, which
- Enter the carbon cycle,
- and increases GGH concentrations, which
- affect climate dynamics, causing
- Temperature change, which leads to
- Damage function, causing
- Loss of production influencing
- Economic dynamics
What are the results of IAMs?
equity in climate models, didn’t ask about small diversion
- Welfare maximization models
- General equilibrium models
- Partial equilibrium models
- Simulation models
- Cost minimization models
What are the parameters of the DICE Model?
1-The Global Capital Reservoir :
Investment = Savings Rate x (Gross Output-Abatement Costs –Climate Damages)
2-Relative Climate Costs :
Relative Climate Costs = (Abatement Costs + Climate Damages)/Gross Output
3- Consumption:
(Gross Output –Climate Damages –Abatement Costs) –Investment
4- Social utility function :
f(global population, the per capita consumption, discount rate and alpha)
5- Emissions:
Emissions = sigma*(1 -ECR)*Gross_Output
What are the main drivers of differences in Integrated Assessment Models (IAMs) Results?
- •Choice of model structure
- •Treatment of abatement costs and assumptions on technological change
- •Way of handling uncertainty in climate outcomes
- •Way of handling equity across time and space
Name different types of IAMs and what they do?
- WMM: economy-> growth model, the discounted present value of Welfare is Maximized across all time periods–> optimization over the amount of abatement in each period
- GEM: Economy-> submodels (sectors), goal finding a set of prices of which all markets are cleared with recursive dynamics where prices are set for each–> no perfect foresight assumed
- PEM: Reduced GE models–> only partial of sectors considered
- Simulation Models: Based on predictions about future emissions and climate conditions, No feedback between climate and economic models, i.e. climate and emission parameters are exogenous to the model (Scenarios)–> Estimation of the potential costs of different future emission paths
- CMM: no feedback between climate and economic models ONLY EMISSION ARE REPRESENTED, Very detailed modelling of the energy sector and different industries–> Identify the most cost-effective solution to achieve a certain stabilization target
How to handle equity across time?
Give the discount rate formula? why are IAMs extremely sensitive to small changes in r(t)?
–> through discountig!!
Discount rate: r(t) = ρ + ɳ g(t)
ρ = rate of pure time preference
ɳ = elasticity of marginal utility of consumption
g(t) = growth rate of income
Because of long time horizon of climate change, IAMs are extremely sensitive to relatively small changes in r(t)
How to handle equity across space in IAMs taking care of economic climate modeling?
- • Regionally disaggregated IAMs include separate utility functions for each world region
- • Weights are put on the regional utility functions to account for interregional differences in per capita income
- • Weights aim at equalizing the marginal product of capital across regions
- • Equity weighting implies ethical judgements
Treatment of abatement costs and assumptions on technological change?
- Characterization of technologies by decreasing or increasing returns to scale?
- Level of detail in technology sub-models: How many regions, industries, fuels, abatement technologies and end uses are included?
- Does the model include macroeconomic feedback from investment in abatement technology?
- Is technological change exogenous or endogenous
Decreasing vs. increasing returns to scale
• Many IAMs characterize technologies with decreasing returns to scale
• Decreasing returns to scale are usually used for convenience (to avoid path dependence and multiple equilibria)
• Increasing returns to scale is more realistic, esp. when representing knowledge-based technology
Accounting for macroeconomic feedback of abatements costs?
• In many IAMs, abatement costs are considered as loss of income –> Negative feedback
• More realistic approach:
- Account for job and income generating effects of abatement
- Consider abatement costs as additions to capital rather than subtractions from income
Explain endogeneity of technological change:
• In many IAMs, technological change is exogenous –> technological learning curves are taken as given
• More realistic approach:
- Make technological change dependent on investment and R&D efforts
- Model technological change as an outcome of economic activity
–> In tendency, models including endogenous technological change provide lower estimates of abatement costs
