PowerPointPrsentation

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Efficiency Gains from What-Flexibility in
Climate Policy An Integrated CGE Assessment
Christoph Böhringer ZEW Mannheim and University
of Heidelberg Andreas Löschel ZEW
Mannheim Thomas F. Rutherford University of
Colorado
ZEW DP 04-48
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Overview
1. Issues 2. Integrated Assessment
Framework 3. Model, Policy Scenario, and
Results 4. Conclusions
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1. Issues
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Climate Policy Background
Stylized facts

• Rapidly growing emissions in developing
  countries (China, India, etc.)

• Less rapidly growing emissions in OECD countries

Consensus

• Global emission reductions necessary in the long
  run

Key policy issues

• Nature of targets (intensity versus absolute
  perhaps safety valve...)
• Timing of - targets - participation (full
  participation versus multi stage approach)
• Equity (egalitarian, responsibility, capability,
  etc.)

• Comprehensive use of flexibility mechanisms
• where-flexibility (JI, CDM, ET)
• when- and what-flexibility

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Derivation of Optimal Climate Response Policies
Cost-benefit analysis How much, When, What,
Where (Who)
Uncertainty (in particular with respect to
benefits), irreversibilities
Option value theory
Risk aversion justifies precautionary principle!
Cost-effectiveness approach

• UN Framework Convention on Climate Change (1992)

The ultimate goal of this Convention ... is to
achieve stabilisation of greenhouse gas
concentrations ... to prevent dangerous
anthropogenic interference with the climate
system.

• EU Council (1996, 2004)

the Council believes that global average
temperatures should not exceed 2 degrees above
preindustrial levels
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Key Objectives
Policy analysis

• Long-term temperature targets and decadal rate
  constraints

• Efficiency gains from what-flexibility (CO2
  and CH4)

Methodology

• Integrated assessment model

• In general linkage between economic model and
  climate model
• In specific decomposition approach to make use
  of comprehensive CGE setting
  for economic model (capturing e.g. initial market
  inefficiencies)

• Incorporation of marginal abatement cost curves
  for non-CO2 emissions

• Calibration of MACs based on bottom-up estimates

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2. Integrated Assessment Framework
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Integrated Assessment Models of Climate Change
Generic structure
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Categorization of IAMs (Weyant et al. 1996)
Optimization Models
Simulation Models

• Normative derivation of optimal policy
• responses

• Descriptive evaluation of specific policy
• scenarios

• cost-benefit analysis
• cost-effectiveness analysis

• policy simulations

• Consistent (re-)actions of agents based
• on rational behavioural assumptions
• Limited level of details due dimensionality
• constraints (computational tractability)
• Example DICE (Nordhaus 1994)

• Lack of transparency/consistency
• (black box)
• (Soft-)linkages of detailed modules on
• economic, social, or bio-/geophysical
• aspects
• Example IMAGE (Rotmans 1990)

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Decomposition Motivation
Integrability constraints of mathematical
programs

• Limitation to first-best (efficient) settings
• Poor performance in approximating the infinite
  horizon

Decomposition

• Relaxation of integrability constraints by mixed
  complementarity formulation of economic model
  (Rutherford 1995)

• Precise approximation of post-terminal effects
• Incorporation of second-best settings

• Clear-cut interface between expert models from
  different disciplines

• Division of work
• Sensitivity analysis on different (alternative)
  sub-modules (e.g. various climate
• models)

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Decomposition Technique
Climate response to anthropogenic activities
Reduced form representation of climate model
Numerical differencing of the climate model
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CH4 Abatement Options
Data

• CH4 sources, baseline, sectors

• Marginal abatement cost CH4

Agriculture

• rice cultivation
• enteric fermentation
• manure management

Model integration

• Iterative re-calibration of sectoral cost
  functions to include bottom-up data

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3. Model, Policy Scenarios, and Results
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Model Implementation and Calibration
Key features

• Multi-sector, multi-region computable general
  equilibrium (CGE) model

• emission-intensive industries (energy sectors,
  agriculture, energy-intensive industries)
• central geo-political regions (Europe, USA,
  Africa, Asia, ) within climate policy process

• Intertemporal framework (time horizon 2100)

• CO2 and CH4 (what-flexibility)

• Reduced form representation of climate (based on
  decomposition)

Calibration

• Alternative baseline scenarios (WEC/IIASA
  1998)
• Baseline annual interest rate 5
• Central case assumptions

Source WEC/IIASA (1998)
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Structure of Intra-Period Economic Sub-Model
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Scenarios
Basic features

• Mean temperature rise lt 2 C (stabilized by
  2100)
• Where- and when-flexibility
• What-flexibility

• CO2 only (CO2)
• CO2 and CH4 (Multigas)

• Contral policy scheme

• temperature target only (TTarget)
• decadal rate constraint (TRate)

Core scenarios
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Results (1)
Welfare implications (HEV in lifetime income -
change)

• Substantial efficiency gains through
  what-flexibility
• Decadal rate hedging is quite expensive

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Results (2)
Global mean temperature (degree Celsius)

• Long-term temperature target temperature
  decreases from 2050 onwards
• Decadal rate target temperature decreases
  already in initial periods

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Results (3)
CO2 emissions from fossil fuels (Tg of C eq.)

• Long-term temperature target substantial
  cutbacks only in 2nd half of century
• Decadal rate target early (costly) reductions
  in emissions necessary

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4. Conclusions
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Summary
Policy insights

• Substantial gains from what-flexibility

• Precautionary decadal rate constraints rather
  costly

Methodological contributions (policy-relevant)

• Bottom-up integration of marginal abatement cost
  curves (CH4)

• Decomposition (formulation of economic model as
  MCP)

• Incorporation of market inefficiencies
• Short-horizon vis-à-vis conventional optimization
  approach
• Convenient sensitivity analysis regarding
  alternative climate models