Economics of the Copenhagen Accord: Analysis from the RICE-2010 Model

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1 Economics of the Copenhagen Accord: Analysis from the RICE-2010 Model William D. Nordhaus Yale University International Energy Workshop Stockholm June 2010 Slides are available nordhaus.econ.yale.edu. 1

2 Outline of lecture 1. Some historical background 2. Development of the RICE-2010 model 3. Implications of the Copenhagen Accord 2

3 Trend in CO2 emissions relative to GDP, US CO2-GDP ratio Trend (-1.7 percent per year)

4 CO 2 concentrations at Mauna Loa

5 Instrumental record: global mean temperature index ( C) Temperature anomaly ( = 0) GISS Hadley US NCDC

6 Projections and the paleoclimatic record 8 Temperature record and projections to 2200, Vostok core, Antarctica Temperature (2000 = 0) , , , ,000 0 Years before present 6

7 Global CO2 emissions trends Growth CO2 intensity of global output (% per year) 2% 1% 0% -1% -2% -3% Emissions weighted growth Composition Total % Weighted growth = growth of emissions weighted by emissions shares; Composition = growth due to changing share of output of different regions 7

8 Fossil fuel use generates CO2 emissions The emissionsclimate-impactspolicy nexus: The RICE-2010 model Carbon cycle: redistributes around atmosphere, oceans, etc. Impacts on ecosystems, agriculture, diseases, skiing, golfing, Climate system: change in radiative warming, precip, ocean currents, sea level rise, Measures to control emissions (limits, taxes, subsidies, ) 8

9 Economic module: RICE-2010 model structure - Ramsey model with labor, capital, abatement, damage - Climate variable is externality and market underinvests in climate capital - 12 regions, no trade, limited carbon energy Environmental module: - Emissions = f(q, carbon price, time) - Concentrations = g(emissions, 3 C reservoirs) - Temperature change = h(ghg forcings, lag T, ) - Economic damage = F(output, T, CO2, sea level rise)

10 Changes in RICE-2010 model structure Recalibrated climate and carbon cycle Changed regional definitions Moved to PPP exchange rates for all modules Updated output to 2009 and CO2 emissions to Re-estimated mitigation cost and damage functions. Changes from control rate to carbon price for control variable. Algorithm moved from GAMS to Excel-Solver for estimation. Added sea-level rise (SLR) module. 10

11 Some detail on how output and emissions are generated Twelve regions (j = US, China, India, EU, Africa,...) j j j t t-1 t 1. Population exogenous : ΔL = L G j j j t t-1 t 2. Total factor productivity exogenous : ΔA = A H j j j j L t t t t 3. Production is Cobb - Douglas in A, L, K : Y = A K 4. CO emissions are function of output, intensity, and carbon price (p) 2 j j j j t t t t E =σ Y p λ α 1-α 5. Carbon price is determined by Hotelling rents and carbon - pricing policy 6. National investment rate is endogenous and optimized per the Ramsey model, over per capita consumption (c), and countries are combined using the "Negishi algorithm." 12 c j=1 t=1 maxw =φ j t j j j t t t U(c,L )R(t) 7. Current version is solved on Excel - Solver, with approximately 155 lines per country.

12 A smörgåsbord of new assumptions 12

13 Region Regions and Emissions CO2 emissions (2005, GtC) US 1,661 EU 1,146 China 1,600 India 405 Russia 431 Japan 370 Eurasia 257 Africa 491 Latin America 1,012 Middle East 589 Other High Income 542 Other Developing Asia 1,064 World 9,568 13

14 Output growth by RICE region

15 The Impacts of Climate Change The Copenhagen Accord, which recognized the scientific view that the increase in global temperature should be below 2 degrees Celsius. Is this firmly based in scientific estimates of the impacts of climate change? Facts on the ground: Estimating impacts has been the most difficult part of all climate science: house-to-house combat for analysts. Very little support for the 2 degrees as a hard target 15

16 Aggregate damage estimates from Tol survey 6 Damages as percent of output Global mean temperature increase ( C) Source: Richard Tol, Jour. Econ. Persp.,

17 Aggregate damage estimates from different studies and aggregate estimate from RICE Tol survey RICE-2010 Damages as percent of output IPCC estimate Global mean temperature increase ( C) Source: Richard Tol, Jour. Econ. Persp., 2009; Nordhaus

18 Comparison with EMF-22 Reference Runs Article: Clarke L, Böhringer C, Rutherford TF (2009) International, U.S. and E.U. climate change control scenarios: Results from EMF 22. Energy Economics 31 (Suppl 2): S63-S306. Data source from spreadsheet provided by Leon Clarke. 18

19 Comparison with EMF-22 Reference Runs Model Output growth (% per year) Emissionsoutput growth (% per year) Atmospheric retention (% of cumulative emissions CO2 concentrations, 2100 (ppm) EMF 25th %ile EMF median EMF 75th %ile RICE

20 Model comparison, output growth rates Average output growth,

21 Model comparison, atmospheric retention,* Average atmospheric retention rate, Atmospheric retention = change in concentrations/cumulative emissions. 21

22 Model comparison, CO 2 concentrations, Average concentrations CO2, 2100 (ppm)

23 Policy Scenarios for Analysis 1. Baseline. No emissions controls. 2. Economic cost-benefit optimum. Emissions and carbon prices to maximize discounted economic welfare. 3. Limit to 2 C. Climatic constraints with global temperature increase limited to 2 C above Copenhagen, all countries. Uses US emissions targets joined by other rich countries, with developing countries entering after 1-3 decades. 5. Copenhagen, rich only. Uses US emissions reductions joined by other rich countries, with developing countries staying out. 23

24 Participation rate assumed under Copenhagen Accord Capping region: Date of participation EU 2005 Japan 2005 Russia 2005 US 2015 OHI 2015 Eurasia 2020 China 2030 Latin America 2030 India 2040 Other non-oecd Asia 2040 Middle East 2050 Africa

25 Rate of growth of CO2-GDP ratio: history and Congressional proposals 0 Growth (percent per year) Congressional proposals

26 Baseline projections: IPCC Scenarios and RICE-2010 RICE-2010 Model with no policy measures 26

27 Emissions trajectories CO2 emissions (GtC per year) Optimal Baseline Lim T<2 Copen trade Copen rich Forthcoming, Proceedings National Academy of Sciences (US),

28 Concentrations profiles: RICE Atmospheric concentrations CO2 (ppm) 1,400 1,200 1, Optimal Baseline Lim T<2 Copen trade Copen rich Forthcoming, Proceedings National Academy of Sciences (US),

29 Temperature profiles: RICE Global mean temperature (degrees C) Optimal Baseline Lim T<2 Copen trade Copen rich Forthcoming, Proceedings National Academy of Sciences (US),

30 Carbon prices for major scenarios 1,400 Optimal Carbon price (2005 $ per ton C) 1,200 1, Lim T<2 Copen Trade Copen rich Forthcoming, Proceedings National Academy of Sciences (US),

31 Carbon prices for major scenarios 100 Carbon price (2005 $ per ton C) Optimal Lim T<2 Copen all Copen rich only Actual equivalent global carbon price = $4 / tc

32 Net impacts by region to 2050 of Copenhagen Accord with Trading Net benefits (billions, discounted through 2055) US EU Japan Russia Eurasia China India Middle East Africa Latin America OHI Other -600 Forthcoming, Proceedings National Academy of Sciences (US),

33 Estimated Nash equilibrium Carbon price ($ per t C) US EU Japan Russia Eurasia China India Middle East Africa Latin America OHI Other Global Nash price (emissions weighted) Optimal price Forthcoming, Proceedings National Academy of Sciences (US),

34 Conclusions Unless policy measures are taken, globe is heading for major climate change. Estimate is for 3.5 C by 2100 and 5.7 C by Copenhagen accord: With full but complete participation, unlikely to attain 2 C target. Best estimate is T peak around 2.6 C. If poor countries do not participate, T peak estimated to be around 4.6 C. Carbon price trajectory of Copenhagen Accord around $350 per ton C by mid-21 st century. Price trajectory below optimal in near term. Nash equilibrium of countries suggests a very modest carbon price, in order of $5 per ton C in near term. 34

35 Final thoughts Mankind in spite of itself is conducting a great geophysical experiment, unprecedented in human history. Roger Ravelle (1957) 35