GLOBAL WARMING AND ECONOMIC DEVELOPMENT

Transcription

1 GLOBAL WARMING AND ECONOMIC DEVELOPMENT

2 Advances in Computational Economics VOLUME 2 SERIES EDITORS Hans Amman, University of Amsterdam, Amsterdam, The Netherlands Anna Nagumey, University of Massachusetts at Amherst, USA EDITORIAL BOARD Anantha K. Duraiappah, European University Institute John Geweke, University of Minnesota Manfred Gilli, University of Geneva Kenneth L. Judd, Stanford University David Kendrick, University of Texas at Austin Daniel McFadden, University of California at Berkeley Ellen McGrattan, Duke University Reinhard Neck, Universitiit Bielefeld Adrian R. Pagan, Australian National University John Rust, University of Wisconsin Berc Rustem, University of London Hal R. Varian, University of Michigan The titles published in this series are listed at the end of this volume.

3 Global Warming and Economic Development A Holistic Approach to International Policy Co-operation and Co-ordination by Anantha K. Duraiappah European University Institute, Florence, Italy.. SPRINGER-SCIENCE+BUSINESS MEDIA, B.V.

4 Library of Congress Cataloging-in-Publication Data Duraiappah. Anantha K. Global warming and economic development: a holistic approach to international policy co-operation and co-ordination / by Anantha K. Duraiappah. p. cm. -- (Advances in computational economics; v. 2) Based on the author's thesis (doctoral)--university of Texas. Austin. Includes bibliographical references and index. I S B N I S B N ( e B o o k ) D O I / Environmental policy--economic aspects--mathematical models. 2, Environmental policy--international cooperation--mathematical models. 3. Global warming--econom\c aspects--mathematical models. 4. Economic development--environmental aspects--mathematical models. I. Title. II. Series. HC79.E5D dc ISBN Printed on acid-free paper All Rights Reserved 1993 Springer Science+Business Media Dordrecht Originally published by Kluwer Academic Publishers in 1993 Softcover reprint of the hardcover I st edition 1993 No part of the material protected by this copyright notice may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without written permission from the copyright owner.

5 To my grandparents, parents, and wife

6 Table Of Contents List of Tables... xiii List of Figures... xv Preface... xvii Introduction... 1 Chapter One: The Global Warming Problem 1.1 Introduction The Greenhouse Effect Historical Data Substantiating the Greenhouse Effect Uncertainties in Estimating Global Warming Uncertainty in the Economic System Uncertainty in the Carbon Cycle system Uncertainty in the Climate System Impacts of Global Warming Agriculture Output (Food Supply) Slow Change View Carbon Dioxide Fertilization Temperature Rise Feedback Effects Shift in Risk View Conclusion Chapter Two: Policy Responses and International Coordination 2.1 Introduction Policy Objectives Adaptive Policies Preventative Policies... 34

7 viii 2.3 Policy Coordination and International Cooperation Developed Countries and Global Warming: Past, Present, and Future Developing Countries and Global Warming: Past, Present, and Future Conclusion Chapter Three: The Mathematical Model 3.1 Introduction Model Nomenclature Set Specifications The Model Equations The Objective Function Material Balance Constraint for Creditor Countries Material Balance Constraint for Debtor Countries Global Foreign Aid Balance Equation Foreign Aid Condition Constraint Capital Accumulation Capital Constraint Land Constraint Regional Sectorial Production Level Capital-Output Coefficient Land-Output Coefficient Supply of Land Deforestation Constraint Energy Demand Emission of C02 by Fossil Fuels Regional Pollution Level Global C02 Emissions... 67

8 ix Sectorial Gross Domestic Product Regional Gross Domestic Product Carbon Cycle Equations Initial Conditions for Atmospheric C02 Concentration Conversion Formula from Mass to Concentration The Global Temperature Equation Chapter Four: Numerical Data for a Multi-Regional, Multi-Sectorial, and Multi-Process Optimal Growth Model 4.1 Introduction Input-Output Coefficients (A Matrix) Capital Coefficients (B matrix) Capital-Output Coefficient The Constant Term Capital-Output Feedback Coefficients Calibration of Feedback Effects of Increased C02 Concentration levels Calibration of Feedback Effects of increased Temperature Land-Output Coefficients The Constant Term Feedback Effects caused by Perturbations to Climate System Feedback Effects from C02 Rises on Land-Output Variable The Effect of Temperature Rise on Land-Output Variable Energy-Output Coefficients Carbon Dioxide Emission Coefficients

9 x Carbon Dioxide Emission Coefficients from Deforestation Initial Conditions Capital Stocks Capital Stocks in Industry Sector in Developed Region Capital Stocks in Service Sector in Developed Region Capital Stocks in Agriculture Sector in Developed Region Capital Stocks in Industry Sector in Developing Region Capital Stocks in Service Sector in Developing Region Capital Stocks in Agriculture Sector in Developing Region Land Stocks Initial Values for Carbon Mass in Reservoirs Transfer Coefficients for the Carbon Cycle Chapter Five: Numerical Results of Policy Experiments 5.1 Introduction Experiment One: Business As Usual (BASE) Experimental Assumptions Experimental Mechanics Experimental Results Experiment Two: Stabilizing C02 Emissions Levels (SCE) Experiment Results Experiment Three: The Developed Region Accepts a C02 Protocol, "PayBack" (PB) Experiment Results Experiment Four: The Developing Region Accepts a C02 Protocol, the "Bribe" Experiment(B)

10 xi Experiment Results Experiment Five: Holistic Model Simulation (Holistic Base) Experiment Results The Holistic Base Compared to SCE, PB, and B Strategies Conclusion Chapter Six: Sensitivity Analysis 6.1 Introduction Sensitivity Analysis on Feedback Parameters Experiment Results Sensitivity Analysis on Land-Output Coefficient Experimental Results Conclusion Chapter Seven: Summary and Conclusion Appendix ONE The GAMS Statement Appendix TWO Data Calibration Bibliography Index

11 List of Tables Chapter Four 4.1 Input-Output Coefficients for the Developed Region Input-Output Coefficients for the Developing Region Capital Coefficient for both Regions Capital-Output Coefficients for the Developed Region Capital-Output Coefficient for the Developing Region C02 Feedback Effect on Capital-Output Coefficient Temperature Feedback Effect on Capital-Output Coefficient Land Available in Regions in Land-Output Coefficients for the Developed Region Land-Output Coefficients for the Developing Region C02 Feedaback Effect on Land-Output Coefficient Temperature Feedback Effect on Land-Output Coefficient Sectorial Share of Regional GDP Sectorial Output Level World Consumption of Energy Regional Consumption of Fossil Fuels Regional Share of Fossil Fuels Energy Consumption by Sectors in Regions Energy-Output Coefficient C02 Emission Coefficients by Fossil Fuels a C02 Emission Coefficients by Fossil Fuels C02 Emission Coefficients by Deforestation Capital Stocks in Base year Land Stock in Base Year Carbon Mass in Reservoirs in Transfer Coefficients in Carbon Cycle Chapter Five 5.1 Desired Growth Rates for State and Control Variables at Sectorial level for the Developed Region xiii

12 xiv 5.2 Desired Growth Rates for State and Control Variables at Sectorial Level for thedeveloping Region Regional Growth Rates Desired Path for Environmental Variables Regional Growth Rates for Economic Variables in Base Experiment Difference between Base and SCE for Economic Indicators Difference between PayBack and Base for Economic Indicators Difference between Bribe and Base for Economic Indicators Difference between Holistic Base and Base for Economic Indicators Feedback Effects on Land and Capital Productivity Comparisons of Economic Indicators among Holistic Base, SCE, and Base experiments Chapter Six 6.1 Effects on Regional C02 Emissions and Global Temperatures Percentage Changes in Land and Capital Productivity caused by Temperature Rises Results from Scenario Appendix TWO Capital-Output Coefficients for the Developed Region from Other Studies Capital-Output Coefficients for the Developing Region from Other Studies Capital-Output Coefficients for the Developed Region Capital-Output Coefficient for the Developing Region Land-Output Coefficient for the Developed Region Land-Output Coefficient for the Developing Region

13 List of Figures Chapter One 1.1 Earth's Radiation Budget Balance Radiation Budget After Perturbation C02 Concentration Trend Observed at Mauna Temperature Trend Correlation Between Indistrial Revolution and Atmospheric C02 concentration Traditional Economic Model Structure Holistic Model Structure Chapter Two Relative Contribution by Greenhouse Gases to Anthropogenic Greenhouse Effect Regional C02 Admission Levels Contribution by Sectors to the Greenhouse Effect Chapter Three Schematic Diagram of Holistic Model Structure A Carbon Cycle Model Chapter Four 4.1 Percentage Change in Crop Yield When Temperature and Precipation Changes Chapter Five Projected Global C02 Emissions C02 Emissions by Regions Desired versus Base results for agricultural GDL levels in developed region Desired versus Base results for agricultural GDP levels in developing region xv

14 xvi 5.5 Output versus GDP levels in the agriculture sector in the developed region..., Output versus GDP levels in the agriculture sector in the developing region C02 emissions by regions under Holistic Base Percentage Difference in Consumption Level Between Holistic and SCE for Developed Region Percentage Difference in Consumption Level Between Holistic and SCE for Developing Region C02 emissions under Holistic and SCE conditions for the developed region C02 emissions under Holistic and SCE conditions for the developing region Chapter Six Technology Combination Technology Combination Under Scene 5 Conditions Chapter Seven Global C02 Emission Under Holistic and SCE Conditions Regional C02 Emissions in Holistic Base expe11ment Regional C02 Emissions under Holistic Base and SCE

15 Preface The computer revolution both in the hardware as well as in software has made it possible for economists to analyze complex issues which could not be solved in the past by analytical methods. A large library of numerical techniques are now available to economists for solving models ranging from a simple system of linear simultaneous equations to large non-linear dynamic optimization models. We attempt to take advantage of these advancements in computational economics to address the issue of global warming and economic development. The use of computer simulation models has enhanced the understanding of some of the underlying issues in the global warming literature which would have been impossible without these models. However, to date, the global warming issue has been addressed in a partial equilibrium framework. In other words, the climate scientists tend to specify economic variables as exogenous variables in their global warming models while the economists do the same by specifying the climate variables as exogenous variables in their global warming models. Both approaches ignore important feedback relationships which will be triggered when either economic or climate variables are perturbed. The ideal model structure would be one in which both systems are incorporated within one framework with emphasis on the long run effects of greenhouse gas curbing policies and the corresponding effect on the economic growth potential of the economies. The task is not easy as the global warming problem is a complex and difficult problem. Let us demonstrate the complex nature by giving a brief overview of the necessary components required for an ideal model structure. First, a global economic system has to be specified. Next, a climate system has to be specified. Third, links between the two systems have to be formulated. The link between the economic and climate system via emission equations can be relatively easily done. However, linking the climate system back to the economic xvii

16 xviii system through damage equations is far more difficult. These equations tell us the impact climate change will have on the economic system. All the equations above will need to be specified as differential or difference equations as both systems are time dependent and this becomes especially crucial in the global warming problem because of the long time lags between emissions and impacts. To add to this complexity, we should then take into account of the large degree of uncertainty inherent in both systems as well as in the linkage equations. And finally, the political issues of the global warming issue have to be explicitly captured as different regions will have different attitudes towards the problem. By formulating a model in the structure specified above, the following three fundamental questions in the global warming problem can be answered: is a reduction in greenhouse gas emissions necessary? if the answer is yes to question one, then what is the optimal or sustainable level of reduction? Which country or group of countries should be held responsible for achieving the optimal or sustainable level of emissions? We believe that this book's main contribution to the global warming literature is the description of the methodology used in the follliulation of such an ideal model with emphasis on the damage equations. We call the model a holistic optimal growth model for reasons which will become obvious as the reader proceeds through the book. The book is primarily intended for economists working in the environmental field as the modeling methodology presented here could be used to analyze other environmental problems. It should also be of interest to the climate change community as it highlights economic constraints and behavior which are

17 xix crucial to the global warming problem. Finally, we hope that policy analysts working on the global warming problem would use the optimal growth model to provide results which could be used for policy analysis purposes. This book is the result from the author's doctoral dissertation study at the University of Texas at Austin. I should like thank David Kendrick without whose guidance and support this book would not have been possible. My gratitude also goes to Hans Amman for his suggestions on the modeling aspects of the study, Jurgen Schmandt for identifying the important policy issues, and to Joe Ledbetter for his help in shortening the learning curve on the climate science required for the study. Finally, my wife Chinnie for the moral support and encouragement.