Explore the Potential of Economic Models to Assess Climate Change Impacts

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Explore the Potential of Economic Models to
Assess Climate Change Impacts
Francesco Bosello and Paulo A.L.D. Nunes
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Road Map
? Selection of a modelling framework, anchor of
the economic analysis and valuation exercise Goal
is to explore the use of the market price
mechanism, rooted in the demand and supply forces
the so called invisible hand (Adam Smith, The
Wealth of the Nations, 1776)
? Proposed framework ? Computable General
Equilibrium CGE modeling is used to describe and
evaluate in welfare terms alternative allocations
in the input and output markets. Recently
assessment of environmental facts (e.g. climate
change impacts via induced changes in demand and
supply)
Potential extension to evaluate changes in
natural resources qual./qt. and ecosystem
services
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The aim of the exercise
? assess and value the environmental facts
(impacts) in terms of GDP changes, since the CGE
analysis is anchored at a macro economic
perspective, for the economies under
consideration.
? consider both direct and indirect (cost)
effects since economic systems adapt in
response to any shock under consideration
(substitution mechanisms)
? highlight transmission channels within and
between domestic and international markets,
across all the economic sectors under
consideration, since all the markets are
linked.
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Sketching a CGE
Consumers (households, government)
Maximise welfare from consumption
demand
supply
Demand and supply functions mimic observed
economic systems parameters are calibrated on
real data
Constrained by income
Income
Output marketsGoods and services
Input markets K, L, Land, NR
Constrained by technology
Income
demand
supply
Minimise cost of production
Producers (firms, government)
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CGE with climate change
Consumers (households, government)
Maximise welfare from consumption
demand
supply
Constrained by income
Goods and services
Income
Climate change and other environmental pressures
Constrained by technology
K, L, Land, NR
Income
demand
supply
Minimise cost of production
Producers (firms, government)
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An illustration sea level rise due to climate
change
Global Circulation Model (Reduced form K.
Hasselmann model dvlp. Max Plank Institute
Hamburg, G. Hoos, 2002)

• T 0.93 C. in 2050
• SLR 25 cm. in 2050

• Data set 1 Sq. Km. of land lost due to erosion,
  if
• there is no protection. Country detail.
• Data set 2 The costs of full protection.
  Country detail.
• Basis is the 1993 Global Vulnerability Analysis
  
• by Delft Hydraulics and Nicholls and
  Leatherman,1995.
• The former provides estimates for all countries,
  
• the latter additional information for some
  countries
• interpolated for all.

Environmental Impact Model (Tol, 2003)
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The economic model
GTAP-EF (Extended Version of GTAP-E Burniaux and
Truong 2002)
17 Economic Sectors Rice Wheat Cereal
Crops Vegetable Fruits Animals Forestry Fishing Co
al Oil Gas Oil Products Electricity Water Energy
Intensive industries Other industries Market
Services Non-Market Services
8 Regions USA United States EU
European Union EEFSU Eastern Europe and
Former Soviet Union JPN Japan RoA1
Oth. Annex 1 countries Eex Net Energy
Exporters CHIND China and India RoW
Rest of the World
(Further extension possible to 66 countries and
57 sectors)
Calibrated in 1997
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The baseline
Starting point equilibrium calibrated in 1997.
Re-calibration process in order to get a future
reference case without climate change.
This refers to obtaining a picture of the future
world economy. In practice, long-run estimates of
primary inputs (land, labour, capital and natural
resources) stocks and productivity used to
Shock the model 1997 calibration equilibrium to
obtain new equilibrium that will emerge before
sea level rise effects are considered.
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The data

• Population World Bank.
• Labour stock G-Cubed model Version48E (McKibbin,
  2001).
• Labour productivity G-Cubed model Version48E
  (McKibbin, 2001).
• Land productivity IMAGE 2.2, B1 Scenario (RIVM,
  2001).
• Natural resources stock endogenised s.t. Pnr
  PIGDP

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Sea Level Rise Model Operationalization
No protection Land is simply lost, negative
supply-side shock on the endowment LAND.
Total protection No LAND is lost, but defensive
investment has to be undertaken ? Imposing new
investment behavior.
Coastal protection requires additional regional
investment. Regional households need to save
more ? In each region regional savings increase
uniformly to meet the increased investment
demand. Private consumption is crowded out ?
share of income devoted to consumption decreases
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No protection selected results
Outputs
Inputs
biggest loosers
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Full protection selected results
Inputs
Outputs
highest (absolute) values
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Challenges for the future
Extend this modelling framework to evaluate in
economic terms the impact of climate change on
biodiversity, on ecosystem services or of carbon
sequestration, their distributional effects and
welfare implications.
Translate environmental changes into changes in
quality, quantity or type of production factors
Translate environmental changes into changes of
consumers preferences
Changes in firm production patterns, in
households possibility to consume
Changes in households preferences to consume
Then these information (supply and demand
changes) are suitable to be evaluated
economically
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In practice integrated assessment and modularity

• Temp. increase
• Temp. rate of change
• Precipitation
• Ecosystem change

Global Circulation Models (Or other)
Climate Change and Variability (or other
changes in environmental system)

• Loss of land (sq. Km.)
• Health (mortality/morbidity)
• Changes in crop yields
• Ecosystem services

Disentangle Climate/ (ecosystem) Change in
(some) Physical Impacts
Environm. Impact Models
Translation in meaningful economic format
e.g. loss in labour productivity, in tourism
flows, fish stock
Economic (GE) Model
Provides post-adaptation (GE) welfare
evaluation of physical impacts
Feedback on the environment (e.g. emissions)

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In sum
? Translation of environmental pressures in a
supply and demand format ? multidisciplinarity.
? Downscaling integration or consistency of the
macro level computation with micro level
evaluation studies.
? Existence of non-market values often effects
are not market priced ? urgency to integrate CGE
model computations (macro level) with non-market
valuation studies (micro level).
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Contact
francesco.bosello_at_feem.it paulo.nunes_at_feem.it
Campo S. Maria Formosa 30122 Venezia -
Italy tel [phone] fax 39 041
27 11 461 web http//www.feem.it