Climate Change: Economic Considerations for South Dakota

1
Climate Change Economic Considerations for
South Dakota
Evert Van der Sluis Department of Economics
SD Climate Challenge Conference Sioux Falls, SD
September 29, 2007
2
Overview

• Brief overview of climate change
• Whats economics got to do with it?

3
Major Findings of Climate Research

• CO2, CH4, N2O, other gas concentrations ?
• Due to human activities
• Fossil fuels (coal, oil, natural gas)
• Deforestation
• Enhance natural greenhouse effect warm earth
• Human actions likely contributed to global
  warming
• By 0.6ºC (or more) since 1900
• Perhaps much longer
• Global warming scenarios by 2100
• 1.4 to 5.8ºC ?
• Sea-levels 10 to 90 cm ?
• Avoiding global warming requires emissions ? over
  long period of time

Source MacCracken
4
Northern Hemisphere Temperatures Over Time
Source MacCracken
5
CO2 Emission ? May Cause Further Temperature ?
Projected Temperature Change
Projected CO2 Concentration
IPCC temperature increases
Source IPCC TAR, 2001
Source MacCracken
6
What is Global Warming?

• More warming in high (than low) latitudes
• Melting sea ice, land glaciers, ice sheets
• Greater warming over land (than over oceans)
• More warming in winter (than in summer) in most
  locations
• But more intense heat waves in summer

Source MacCracken
7
What is Global Warming?

• Total evaporation ?
• Soils dry more quickly
• Earlier onset of drought
• Total global precipitation ?
• In intense events
• Flood likelihood ?
• Most precip ? in mid- to high-latitudes
• But less rain in subtropics
• More unexpected changes

Source MacCracken
8
Climate Change Will Likely Affect Peoples
Environments Globally
Source MacCracken
9
Various Impacts
Health Impacts Weather-related mortality/heat
stress Infectious diseases Air quality-induced
respiratory effects
Ag Impacts Crop yields commodity
prices Irrigation demands Pests weeds
Climate Changes
Forest Impacts Forest composition change Shift
geographic range of forests Forest health
productivity
Temperature
Precipitation
Water Resource Impacts Water supply timing
change Water quality Water competition ?
Sea Level Rise
Coastal Area Impacts Beach erosion Coastal
wetland floods Flood defenses
Ecosystem Impacts Shifts in ecological zones Loss
of habitat species Coral reefs threatened
Adapted from EPA MacCracken
10
Whats Economics Got To Do With It?Damages (or
gains?) from climate change

• Market impacts
• People place value on items purchased,
• i.e., through a market
• Non-market impacts
• Items we value care about,
• But not obtained through markets

11
Market Impacts Examples

• Climate is production "input"
• Agriculture
• Forestry
• Fisheries
• Water supply
• Energy
• Disruptions due to climate
• Employment / production disruption
• Property damage
• Response / protection costs

12
Non-market Impact Examples

• Human health
• Heat waves
• Vector-borne diseases
• Ecosystem losses
• Landscape
• Amenities lifestyles

13
Externality

• Climate change its effects is example of an
  externality
• One persons actions impose adverse effects on
  someone else
• When externalities are present
• Competitive markets likely will not generate
  outcomes that are in publics interest
• Relying on voluntary actions to deal with
  externality will not be satisfactory or useful

14
What Can Be Done About Externalities?

• Internalize them into markets
• Some of the ways
• Common law
• Proscribe / prohibit practices
• Prescribe practices
• Prescribe performance
• Cost sharing
• Cross compliance
• Taxation

15
Economics Climate Change

• Reduce GHG emissions
• Economic tradeoffs
• What are the costs?
• Who pays?
• What are the benefits?
• Who gains?
• Which policies are effective?

16
South Dakotas Economy

• Agriculture ( forestry)
• Directly affected by climate
• Other sectors
• Affected mostly by water supply

17
Sectoral Studies

• Agriculture
• Water
• Commercial forestry
• Fire
• Public health

18
Approach Broad Varied

• Work from common set of scenarios
• Based on hard sciences
• For each sector
• Review what is known
• Get qualitative info about scenarios
• Assess quantitative data about impact of
  scenarios
• May also use case studies
• Also identify
• What is not known
• Whats needed for more complete analysis in future

19
General Approach to Ec Research on Climate
Change

• Develop impacts
• Physical
• Trace to social economic impacts
• Identify opportunities for adaptation policies
• Again quantify economic impacts where possible
• Carry impacts through to rest of economy

20
Economic Policy Analysis Interaction

• Need both
• Economic analysis
• Policy analysis
• Q How much fossil fuel will industry X burn?
• A it depends
• On constraints on firms in industry
• On incentives they face
• ? Analyses of impacts mitigation must come
  together

21
Impact Scenario AnalysesExample from
California Study

• Contrast two global emission scenarios
• Business as usual with continuing high rate of
  growth in greenhouse gas (GHG) emissions
• Sustained global efforts to reduce GHG emissions
  by 2100

Source Hanemann
22
Time Lags(From California Study)

• Temperature projections similar for two scenarios
  until about 2045
• Suggests that future climate (next 40 years)
  already determined by past emissions
• Emission reductions initiated now show a
  significant effect after about 2045, with their
  impact increasing over time

Source Hanemann
23
Lessons Learned(From California Study)

• Spatial impacts important
• Impacts subject to nonlinearities thresholds
• Average assessments of impacts over space time
  are misleading
• Especially important for measuring
• Economic impacts
• Designing adaptation policies
• Adverse impacts of climate change likely
  disproportionately large in worst years
• The worst years get worse

Source Hanemann
24
Non-linear Relationship Between Temperature
Yields
25
Common Patterns(From California Study)

• No large changes on average, but.
• Bad years occur more frequently
• Economic harm more severe in bad years
• Raises issue of risk aversion insurance
• Additional economic questions

26
My Speculation for SD Agriculture

• Negatives
• More extreme conditions
• Periods of water scarcity
• Periods of high temperatures
• Pests

• Positive(?)
• Longer growing season(?)

27
Extreme Events (Heat Waves, Floods, Storms)

• Consequences spill over to larger economy
• Not just climate-sensitive sectors
• Agriculture
• Forestry
• Water
• Energy
• Property damage
• Disruption of normal production

28
Existing Research

• There is little existing research on economic
  consequences of
• Changing plant varieties
• Alternative crops
• Range livestock management
• Hydrological issues

29
Research Needs

• Need publicly funded research
• Climate change affects all of us
• Provide accurate information
• To make effective policy choices

30
Concluding Comments

• Climate change is real
• All of us are affected by it
• All of us need to make adjustments
• Need studies on economic impacts of climate
  change in South Dakota
• Market-based impacts
• Non-market impacts
• To help make appropriate local policy decisions

31
Selected Sources

• Michael Hanemann, UC Berkeley
• Michael C. MacCracken, Climate Institute, Intl
  Association of Meteorology and Atmospheric
  Sciences
• Vincent Smith, Montana State University

32
(No Transcript)
33
Policy Options and Consequences

• Markets
• Internalization
• Common law
• Proscribing practices
• Prescribing practices
• Prescribing performance
• Cost sharing
• Cross compliance
• Taxation

34
The Role of Economics in the Environmental
Policy Debate

• Problem arises with the trade-off between things
  whose values are established by society (via
  markets) and things whose values are not
  established (e.g., environmental amenities)
• Economics can provide means of estimating
  non-market values so that comparisons are valid

35
Non-market valuation

• Techniques involve implicit values and/or
  simulated marketswillingness to pay
• Hedonic estimation techniquesstatistical
  estimation from data on amenities
• Travel cost methodlook at how far people will
  travel and how much it costs them
• Contingent valuationsurvey households on how
  much they would pay for different amounts of
  something

36
Energy policy

• Relatively recent direct influence on ag.
  sectorethanol and biodiesel
• Ethanol subsidy since 1978 (now .51 per gallon
  as tax exemption)
• Biodiesel subsidy since 2005 (tax exemption)

37
Effects on ag. sector

• Changes price relationships among commodities
• Changes land use patterns and quantities of
  various commodities produced
• Affects trade flows of commodities (and
  petroleum)
• Affects consumer prices of food (and energy)

38
(No Transcript)
39
Projects

• Local biomass feedstocks availability for
  fueling ethanol production
• With Richard Shane Larry Stearns
• Biofuels production from agriculture a
  cross-country comparison
• With Edouard Renault Mariétou Seck (Ecole
  Nationale Supérieure Agronomique de Toulouse
  students)
• Value-Added Agriculture Activities in a Changing
  Food and Fiber System (emphasizing biofuels)
• New project
• Proposed project Developing sustainable harvest
  strategies for cellulose-based biofuels the
  effect of intensity and season of harvest on
  wildlife and biomass production
• With on-campus colleagues
• Other involvement NC-506 Sustainable
  Biorefining Systems for Corn in the North Central
  Region
• Multidisciplinary group of researchers from
  several U.S. states
• IA, IL, IN, KS, MI, MN, MO, ND, NE, SD, WI, OH, OR

40
US Energy Department Projections

• World petroleum demand
• 1.3 per year ?
• Chinas petroleum needs
• 3.2 per year ?
• Indias oil requirements
• 2.3 per year ?

41
World Energy Outlook
World energy consumption growth

• 70 ? by 2030
• 70 ? outside OECD countries
• 20 ? in China
• 60 ? due to transportation
• 18 cars / 1,000 people in China
• 800 in US

World Energy Consumption
42
World Energy Outlook

• World CO2 Emissions ?

World CO2 Emissions by Region
43
(No Transcript)
44
Source http//www.wtrg.com/prices.htm
45
World Ethanol Production, 2005
46
World Corn Exports in 2005/2006
47
World Ethanol Imports, 2006
48
Given Current Energy Projections

• U.S., China, India, EU, Japan, South Korea
• Each expected to be importer of ethanol over next
  decade
• Brazil will be major exporter of ethanol
• Already exports about 25 of production
• gt 1 billion gallons

49
Corn Ethanol Productionuse 27 of 07 corn crop
nearly 9 billion gallons
50
Ethanol Corn Production Trends
U.S. Corn Production
U.S. Ethanol Production
51
Current Status - Ethanol
52
Biodiesel ProductionUse 17 of 07 soy oil crop
500 million gallons
53
Global Coarse Grain Stocks Tight
of total use
19 Record corn prices
2006/07F 12
Crop Year
54
U.S. Corn Carryover Stocks(in Weeks Supply)
55
Corn Acres Planted Highest Since 1945
56
Projected Corn Ethanol ProductionExpect 12 bil.
gal. in 2016/1730 of corn crop
57
Ethanol Imports Augment DemandImports Soar, led
by Brazil
Source Census and Customs CBI TRQ data
58
World Ethanol Imports, 2006
59
Projected Soy Biodiesel Production Expect 700
million gallons in 2016/17 23 of soy oil
production
60
Ethanol-Corn Price Spread(Weekly Data)
2000
2002
2004
2006
1999
2001
2003
2005
2007
61
Ethanol-Corn Price Spread(Annual data with
alternative ethanol price scenarios)
Ethanol priced historical premium
Priced gasoline
Priced 70 gasoline
62
Millions of Barrels per Day (Oil Equivalent)

• Source Smalley, and Bookout, Two Centuries of
  Fossil Fuel Energy International Geological
  Congress, Washington DC July 10,1985.
  Episodes, vol 12, 257-262 (1989).

63

• Global temps ? by 1.5 K in over past 150 years
• Weather changes threaten loss of polar ice,
  rising sea levels, unpredictable rain falls, crop
  failures, and loss of many species
• Energy solutions must account for global warming

64
Transforming Global Energy Resources

• Global oil supply ?
• Global warming
• Which resources for energy?

2004
14.5 Terawatts 220 MBOE/day
?
2050
30 -- 60 Terawatts 450 900 MBOE/day
65
U.S. Energy Sources
Source EIA