Developing the PAGE2002 model with Endogenous Technical Change

Transcription

1 Developing the PAGE2002 model with Endogenous Technical Change Stephan Albeth 1 & Chis Hope 2 The Judge Business School, Univesity of Cambidge ABSTRACT. Pesented eseach demonstates the inclusion of endogenous technical change into the PAGE2002 integated assessment model of climate change. The expeience cuve o leaning-by-doing concept, made popula by the Boston Consulting Goup duing the 1960 s povides a mechanism with which to descibe cost eduction though expeiential leaning. The implementation of leaning equies both a estuctuing of the way costs ae modelled as well as the inclusion of an explicit leaning function with initial abatement costs and leaning coefficients calibated to histoical enewable enegy data. The discounted values fo total abatement costs ae calculated fo both the standad PAGE2002 model without an explicit leaning function and the modified PAGE2002 model. The esults wee found to be of a simila magnitude, patially due to the myopic effects of discounting, though the esult was found to be highly sensitive to the leaning ate used, which in ou case was a consevative estimate. Keywods: Endogenous Technical Change, Leaning Cuves, Climate Change JEL Classification: O13, Q55, Q56 1 This aticle is based on eseach leading to an MPhil in Management Studies at the Judge Business School, Univesity of Cambidge. Coesponding autho, s.albeth@jbs.cam.ac.uk. Submitted Novembe Senio Lectue at the Judge Business School, Univesity of Cambidge, c.hope@jbs.cam.ac.uk

2 Table of Contents Chapte 1. Intoduction 3 Chapte 2. Climate Modelling Backgound Climate Change Models Modelling Technological Pogess 6 Chapte 3. The PAGE2002 Integated Assessment Model Model Design and Stochastic Featues The Standad PAGE2002 Model Modified Enegy Aspects and Abatement Costs fo CO Endogenous Technical Leaning Choice of secto Cheap vesus expensive cutbacks Cost of cutbacks Initial Cumulative Expeience Regional coss-ove effects Leaning ates fo endogenous technical change Autonomous leaning ates 22 Chapte 4. Modelling esults CO2 concentation and global mean tempeatue fo the 450 ppm scenaio CO2 abatement costs fo the 450ppm scenaio The cost of pevention and global waming impacts Cost of abatement ove time fo the 450 ppm scenaio Compaison of the 450, 500 and 550 ppm scenaios 28 Chapte 5. Discussion and Conclusion Main findings Limitations and aeas of futue eseach 29 Refeence List 30 Annexe 1 34 Stephan Albeth & Chis Hope Page 2 of 36

3 Chapte 1. Intoduction The eseach pesented in this pape looks at the effects associated with Endogenous Technical Change (ETC) in the aea of enewable enegies and climate change. The aim was to devise a method fo implementing ETC into a stochastic model of climate change. These models ae often efeed to as Integated Assessment Models (IAM) o E3 models, epesenting the thee fundamental elements, the envionment, enegy and economics. Duing the last 5 yeas, thee has been a lot of concen ove the enegy and economic aspects of E3 models and in paticula the way that technical innovation has been modelled. Of all the techniques fo educing CO2 emission, such as impoving efficiency o educing consumption, it is govenment sponsoed Reseach and Development (R&D) o stategic deployment of new technologies that appea to be the most acceptable solution. Yet, most E3 models have until ecently used exogenous leaning factos such as autonomous impovements in enegy efficiency that ignoe the ole of policy and avoid the complicated issue of how leaning actually takes place. It has been suggested that though explicitly modelling cost eductions though ETC these models would be bette able to guide policy towads cheape and moe effective abatement stategies 3 than has peviously been done. A geneal shift is taking place towads a new geneation of envionmental-economic models (Löschel, 2002) and the method of choice fo incopoating ETC into E3 models has been to measue the acquied leaning-by-doing o leaning-by-seaching of technology. This is a heuistic method of modelling costs, meaning that it is not based on any povable theoy but, owing to its elatively consistent esults, is a useful tool fo ou puposes. Goups such as the IMCP 4 have paid paticula attention to this aea of eseach, looking at both the benefits, dawbacks and caveats of applying such methods. The eseach pesented in this pape elates to the intoduction of an explicit leaning-by-doing featue into the PAGE2002 Integated Assessment model of climate change. In keeping with the stuctue of the PAGE2002 model, no enegy secto has been incopoated. Instead of calculating the costs associated with enegy technologies, abatement cost itself has been calculated diectly, placing an atificially lowe limit on the cost of geenhouse gas abating technologies. The oveall esults do 3 An abatement stategy defines the amount of CO2 emissions that ae educed as compaed to a nomal scenaio whee no such measues have taken place. 4 Innovation modelling compaison poject (see Köhle et al. 2006) Stephan Albeth & Chis Hope Page 3 of 36

4 coincide well with those of a numbe of othe studies as published in the 2001 IPCC epot and ae able to shed some light on the impotance of uncetainty in modelling ETC in a climate change model. Thee has been some confusion egading the tems endogenous leaning and induced leaning. We have used the tem endogenous leaning to descibe the fact that changes in the abatement path though the leaning function effects the costs of abatement. It is impotant to note howeve that the level of abatements made, and thus the costs, emain exogenous fo any fixed stabilisation scenaio, but becomes a decision vaiable fo an optimisation of the PAGE2002 model. The tem induced will be eseved to descibe the actual changes in cost o pefomance as a esult of policy change as modelled by PAGE2002. The fomat of the pape begins with chapte 2 pesenting a liteatue eview of integated assessment models and the theoies on leaning and innovation modelling. Chapte 3 goes on to look specifically at the PAGE 2002 model with an emphasis on the featues that have been added o changed with the intoduction of ETC into the model. The main esults ae then pesented in chapte 4 and Chapte 5 concludes the pape by discussing how ETC has affected the PAGE2002 stabilisation esults including suggestions fo futue eseach. Stephan Albeth & Chis Hope Page 4 of 36

5 Chapte 2. Climate Modelling Backgound 2.1. Climate Change Models Models that combine infomation on the numeous impotant aeas of assessment ae boadly efeed to as Integated Assessment Models, o IAMs, such as the PAGE2002 model. The model aim to bette undestand the coelation of the emission of geenhouse gases to climate change, and how the impacts and abatement costs could shape the wold ove the coming decades o centuies. Table 1 pesents a list of vaious popula models that have only ecently been adapted to include ETC, one of which incopoates full stochastic featues, the PAGE2002 model. Stochastic models ae in many way ideally suited to the study of climate change due to the high level of uncetainty that exists in the field. Table 1 E3 Models modified to include technical change 5 Model MODEL TYPE INNOVATION MODELLING Refeence MARKAL Global enegy system Leaning by doing Baeto et al., 2004a ERIS Enegy system optimisation Two facto leaning cuve Baeto et al., 2004b R&DICE Enegy system optimisation Innovation poduction function Nodhaus, 2002 DEMETER Computable geneal equilibium Leaning by doing Gelagh et al MERGE IAM Leaning by doing Kypeos, 2004 ENTICE Macoeconomic model Leaning by seaching Popp, 2004 WIAGEM IAM Leaning by seaching and backstops Kemfet, 2005 MESSAGE Enegy engineeing optimisation Leaning by doing Guble & Al MIND Macoeconomic model Two facto leaning cuve Edenhofe, 2005 PAGE2002 (Modified) IAM Leaning by doing Cuent wok By using a distibution as opposed to a best guess estimate to calculate values, and by iteating though thousands of diffeent possible outcomes, a stochastic model is able to avoid the [f]law of aveages as well as pesent substantial infomation on the uncetainty of outputs. The tem [f]law of aveages descibes a common eo of assuming lineaity between inputs and esults when in fact the model is non-linea. In othe wods, it is to assume that by inputting aveage values, the model will also output the aveage esult. By using a stochastic model that instead uses distibutions as inputs instead of mean expected values, the model s tue output also in the fom of a distibution can then be found. 5 Models efeing to two facto leaning cuve (2FLC) efe to incopoating both leaning by doing (cumulative poduction/capacity) and leaning by seaching (cumulative R&D). Cumulative capacity stands fo a type of leaning by doing function and cumulative R&D fo a leaning by seaching function. Stephan Albeth & Chis Hope Page 5 of 36

6 2.2. Modelling Technological Pogess In the oveview of the 1998 Enegy Economics special issue on The Optimal Timing of Climate Abatement, Caao and Houcade pointed out the notable influence that leaning appeaed to have on the calculation of abatement costs. Accoding to thei suvey of E3 models, leaning intoduced aound a 50% dop in abatements costs. The IEA publication Expeience Cuves fo Enegy Technology Policy (IEA 2000) pesents a boad oveview of the wok coveed up to the end of the 1990 s and also pesents the findings fom the 1999 IEA wokshop on this subject. Thei ecommendation was that expeience effects should be explicitly consideed in exploing scenaios to educe CO2 emissions and calculating the cost of eaching emissions tagets (IEA 2000, p114). The altenative to adopting ETC, the most common method used to date to explain changes in enegy use, specifically the decoupling of economic gowth fom enegy consumption has been the Autonomous Enegy Efficiency Impovement (AEEI) paamete (Löshel 2002) which has been widely used in IAMs (Gubb & Köhle 2000). This exogenous facto, as pesented in Equation 1, aims to define enegy consumed as a function of Goss Domestic Poduct (GDP) and time and is calculated with the assumption that thee ae no changes in input enegy costs (Manne & Richels 1992). Equation 1 Thee have been numeous citicisms made of this type of technical pogess and accoding to Gubb et al., it has been widely ecognised that the AEEI appoach is inadequate (2000), mainly this appoach puts enegy consumption/gdp as being independent of policy decisions, and thus supposes that public policy could not affect this atio. Futhemoe, due to the vey long tem natue of global waming, even small diffeences in the AEEI and cabonisation levels of enegy souces used can have significant effects on the oveall outcome (Gubb & Köhle 2000). Modelling ETC is seen as an impotant facto in Climate modelling due to its ability to povide clues about the isks of technology lock-out of potentially cheap and envionmentally fiendly technologies. Technology lock-out aises whee taditional enegy Stephan Albeth & Chis Hope Page 6 of 36

7 technologies have had thei pices diven down though cumulative expeience, while altenative technologies ae unable to gain enough momentum to become cost competitive. This can be tue even whee the oveall benefits of deploying new technologies fa outweigh the costs in the long tem. The following is a bief histoy of the development of expeience cuves, and a look at some of thei benefits and dawbacks. Empiical evidence fo leaning cuves was fist discoveed in 1925 at the Wight-Patteson Ai Foce Base whee it was discoveed that plotting an aeoplane s manufactuing input against cumulative numbe of planes built on a log/log scale was found to esult in a staight line. The benefits in efficiency found wee poclaimed by Wight as being the esult of Leaning by Doing in his 1936 publication. This leaning cuve was calculated fo a manufactuing input such as time as shown in Equation 2, whee N is the labou equiements pe unit output fo peiod (t), X t is the cumulative output in units by the end of the peiod. In the equation a is the constant and b the leaning coefficient as detemined by egession analysis. t logn = a blog Equation 2 t X t The next majo advancement in leaning cuves was made by Aow in his 1962 publication (Aow 1962, IEA 2000). He was able to genealise the leaning concept and also put fowad the idea that technical leaning was a esult of expeience gained though engaging in the activity itself. Undetaking an activity, Aow suggested, leads to a situation whee favouable esponses ae selected ove time (Aow 1962, p156). Duing the 1960 s the Boston Consulting Goup (BCG) populaised the leaning cuve theoy. They futhe developed the theoy and published a numbe of aticles on the subject (BCG 1968 in IEA 2000, Hendeson 1973a, Hendeson 1973b). They also coined the tem expeience cuve, as distinct fom leaning cuve which elated to unit total costs as a function of cumulative output, athe than unit inputs as a function of cumulative output as shown in Equation 3. In this Equation the cost pe unit C t depends on the cumulative numbe of units poduced X t and the constant a and coefficient b that ae found using a egession style analysis. This can be ewitten into a moe simple fom, as shown by Equation 4 to Equation7. A simila but much moe useful epesentation of this fomula fo modelling puposes is to compae costs at a futue time t to pesent known costs. This type of fomulation is shown in Equation 8 and Equation 9. The Pogess Ratio (PR) is a widely Stephan Albeth & Chis Hope Page 7 of 36

8 used atio of final to initial costs associated with a doubling of cumulative inputs. The simple algebaic manipulation is pesented in Equation 10 though to Equation 12. The leaning ate epesents the cost savings made as pesented in the last of these Equations. logc = a b log Equation 3 t X t C t = e C t = e a b log X a e b log X Equation 4 Equation 5 C C C t t C t 0 C C C t t 0 = const e = const X log X const X = const X b X t = C X 0 0 b b t b 0 b b 2 * X = = 2 X b Equation 6 Equation 7 Equation 8 Equation 9 Equation 10 PR b = 2 Equation 11 LR = 1 PR Equation 12 Despite a stong pefeence fo the use of cost data in the calculation, lack of such infomation often leads to eplacing costs with pice data which ae moe eadily available (IEA 2000). This leads to an equivalent fomulation as pesented in Equation 13 and Equation 14, whee b is the leaning coefficient and P 0 and X o ae the pice and cumulative output duing the initial peiod. logp = a blog Equation 13 t X t P t b X t = P X 0 Equation 14 0 The use of pice data educes the quality of the empiical analysis as pices can vay due to maket influences. As poposed by BCG, eductions in cost that ae made ealy in the poduct s development ae often not passed on to the buye, as shown in Figue 1. This situation can emain until thee is a shake-up of the industy due to inceased competition (BCG 1968 in IEA 2000). Futhemoe, due to the discovey that knowledge diffusion could Stephan Albeth & Chis Hope Page 8 of 36

9 have a seious impact on long-tem cost advantages (Liebeman, 1987), leaning cuves began to lose favou. Figue 1 Pice development of a new poduct as fomulated by BCG (Souce IEA 2000) Howeve, much of what is descibed by the jagged line in Figue 1 elates only to a tansfe of funds, and as such, would have little effect on the net costs of abatement. This allows integated assessment modelles and policy-makes, facing long tem stategic decisions, to use expeience cuves in ode to pedict how costs of low-cabon technologies might evolve theeby helping them to calculate the oveall costs of abatement. So with a new emphasis on global cost eductions athe than sustained competitive advantages, these ideas have once again enjoyed geat populaity. Leaning ates fo a numbe of electicity poducing cuves have been calculated, as shown in Figue 2. Electicity costs in 1990 US dollas pe kwh have been gaphed against cumulative poduction in TWh on a log/log gaph with the associated pogess atios included. The line of best fit fo each technology has a linea slope equal to the -b as descibed in Equation 3. This can also be tansfeed into a Pogess Ratio (PR) as shown by Equation 11. Fo example in this study, photovoltaics has a PR of 65% (the vey uppe limit of published findings) which means that if thee was a doubling of the amount of cumulative photovoltaic electicity poduction, the pice would geneally be educed to 65% of the pesent value. Altenatively one could say that fo evey doubling of cumulative poduction, thee is a cost eduction equal to the Leaning Rate (LR) which is 1-PR, o 35%. Stephan Albeth & Chis Hope Page 9 of 36

10 Figue 2 Pogess Ratios of Electic Technologies in EU, (Souce IEA 2000) Anothe elated aea of eseach has focused on the pediction of the Beak-even point of low-cabon altenatives. That is, the amount of cumulative poduction equied and associated costs such that the unit cost of a elatively new and expensive technology such as sola can become compaable to the unit cost of taditional technologies. In Figue 3, the aea shaded in gey epesents the cumulative costs needed to each the beak-even point. A simila poblem exists hee than what has been found fo the AEEI, whee a small amount of uncetainty in the aveage ate can lead to lage eos in the detemination of futue costs. As pesented by Figue 3, a small eo of less than 2% in the leaning ate can lead to an eo in the final Beak-even point of close to an ode of magnitude. Figue 3 Making Photovoltaics Beak-Even (IEA 2000, p15). The IEA has paid special attention to the whole leaning cuve concept and has suggested that all models elating climate change to the economy should explicitly define technical Stephan Albeth & Chis Hope Page 10 of 36

11 innovation. Not only have the standad expeience cuves been used, but a numbe of moe complex vesions have also been developed. One common example is the 2 Facto Leaning Cuve (2FLC) which combines both leaning-by-seaching and leaning-by-doing that elates cost eductions to both cumulative expeience and cumulative R&D as descibed in Equation 15. P t b c X t K t = P X K 0 Equation This pesupposes that spending on R&D can also help achieve cost eductions, though all stages of a poduct s life cycle, and thus can become an impotant facto when any sot of optimisation is made. Thee ae, howeve, seious limitations on publicly available data about pivate R&D expenditue and so an accuate epesentation of this facto can sometimes be difficult to make (Junginge 2005). Lack of such data explains pehaps while Single Facto Leaning Cuves (SFLC) ae sometimes pefeed. It has also been found by some authos that R&D has only a mino and often statistically insignificant effect on costs when used with histoical data (Papineau 2004). Othe authos, who pefe the use of the SFLC, suggest that cumulative poduction o capacity is a suogate fo total accumulated knowledge gained fom many diffeent activities whose individual contibutions cannot be eadily discened o modelled (Rubin et al. 2004). An explanation fo some of the difficulty in aiving at accuate data fo the 2FLC is a vitual cycle o positive feedback loop between R&D, maket gowth and pice eduction which stimulated its development (Wanatabe 1999 in Baeto & Kypeos 2004a, p616). Hee the authos concluded that sound models fo the ole of R&D in the enegy innovation system ae not yet available (Baeto & Kypeos 2004a, p616). The aim of the two facto leaning cuve is to incease the accuacy of the pedictions made using expeience style cuves yet the oveall esults have been fa fom conclusive. Papineau found the esults of R&D disappointing fo wind and sola poduction. She suggested that this may be due in pat to the elative benefits of othe foms of govenment intevention such as diect subsidisation (Papineau 2004), which would lead to inceased cumulative poduction, athe than inceased R&D. Fo the sake of completeness, the fomulation of the 2FLC is shown in Equation 15. Stephan Albeth & Chis Hope Page 11 of 36

12 The question of floo-costs has also been aised and effots to calculate thei value with espect to minimum mateial costs fo specific technologies has been caied out (Zweibel 1999, Neuhoff 2005). Zweibel looked at long tem goals fo the sola maket and concluded that costs of 1/3 USD/Wp could be eached, thus making it a financially viable option to fossil fuel electicity (1999). Anothe impotant issue aised by vaious authos is the need fo moe accuacy of data and the inheent uncetainty associated with the leaning model itself (Papineau 2004, IEA 2000). Güble et al. (1998) also listed uncetainty in leaning as one of thei final caveats and acknowledged the potential dawbacks of best guess paameteisation (p510). Futhemoe inaccuate pedictions and dynamic vaiability of the leaning ate may lead to situations whee pices do not fall as planned (IEA 2000) and whee appaently optimal uptake stategies may in fact become vey costly. One appoach to this poblem is to incopoate stochastic leaning cuve uncetainty diectly into the model (Papineau 2004, p10), potentially educing the dange of using the leaning cuve phenomenon. A stochastic style of modelling allows an appeciation of tue mean expected values as well as descibing the level of uncetainty in the pediction. A geate undestanding of the leaning cuve phenomenon offes solutions to policy makes though the ceation of new enegy technology options by exploiting the leaning effect, e.g., though niche makets (IEA 2000, p19). Fo much the same easons, it may also be tue that the pivate secto, amed with moe accuate knowledge about long tem leaning ates and diffusion ates would be encouaged to invest in low-cabon technologies foeseeing thei widespead uptake. Stephan Albeth & Chis Hope Page 12 of 36

13 Chapte 3. The PAGE2002 Integated Assessment Model As the focus of this pesent wok is diectly on the issue of abatement costs, and not on the calculation of impacts, it is equested that inteested eades efe diectly to Hope (2004) fo a full explanation of all othe aspects of the model such as the calculation of impacts and the cabon-cycle, both emaining unchanged in the modified PAGE2002 model pesented hee Model Design and Stochastic Featues The PAGE2002 model is a stochastic IAM of climate change that uses a numbe of simplified fomulas to eplicate the complex envionmental and economic inteactions as pesented in the liteatue. Futhemoe, the coefficients and data anges used often come diectly fom the Thid Integovenmental Panel on Climate Change (IPCC 2001a, 2001b, 2001c) assessment epot (Hope 2004). The stochastic featues ae designed to embace the emaining uncetainty of the best available knowledge found in the liteatue, o the andomness of natue itself, and is geneated though and Risk Optimise applications installed ove an existing Excel platfom (Palisade). These pogams, designed specifically fo stochastic modelling, allow the use to define the type of distibution used fo all model inputs. The model simulates the outcome by unning a set numbe of iteations and pesents statistical summaies of the coelation coefficients between the model s inputs and vaious outputs. The PAGE2002 model uses tiangula distibutions and a total of 5000 simulations ae used fo calculating the costs and impacts of stabilisation scenaios. The model is defined by ten diffeent time intevals spanning 200 yeas, divides the wold into eight egions, and consides thee diffeent gases as descibed in Table 2. As shown, the model uses shote time steps at the beginning and uses longe time steps towads the end of the model s time span, with time steps anging fom one yea to 50 yeas. This has been done so that the computational effot is concentated in the ealie yeas because emission foecasts become less accuate with time, and because late emissions have a smalle influence on costs and ealised global tempeatue incease to 2200 (Hope 2002). Stephan Albeth & Chis Hope Page 13 of 36

14 Table 2 Definition of gases, egions and yeas g Gas i Yea 1 cabon dioxide (CO2) (base yea) 2 methane (CH4) thid gas (SF6) Region The Euopean Union (focus egion) The United States of Ameica Othe OECD nations Afica and the Middle East China and Centally Planned Asia India and South East Asia Latin Ameica Fome Soviet Union & E. Euope The standad vesion of PAGE2002 used in this eseach consides thee geenhouse gasses that cause global waming, Cabon Dioxide (CO2), Methane (CH4) and Sulfu Hexafluoide (SF6). Only CO2 costs have been modelled using ETC in the modified vesion of PAGE2002, although a simila epesentation could be made fo the othe impotant geenhouse gas, CH The Standad PAGE2002 Model The standad PAGE2002 model does not incopoate enegy o industy activity vaiables. Instead the model takes the simplifying assumption that costs can be diectly associated to the emission eductions themselves. The calculation begins with each egion s allocation of an emissions path as descibed by the scenaio being modelled, and compaes this to the BAU scenaio. The abatements made fo each egion is the diffeence between these two emission paths. Using a set of fixed unit costs associated with abatement, the model uses this infomation to calculate the total costs of abatements as well as the adaptive costs and impacts caused by the climate change as induced by the scenaio s emissions levels 6. The abatement costs ae divided into cheap and added-cost cutbacks. Cheap cutbacks efe to a cost that elates to all cutbacks made. The distibution of cheap cutback costs can incopoate negative values in the standad vesion, descibing situations whee abatements actually lead to educed oveall costs. Added-cost cutbacks efe to cutbacks made above a cetain fixed level elative to base yea emissions, and incu costs that ae added to the cheap 6 The model does not, on the othe hand, include a feedback loop whee high abatement levels could slow down the economy. Stephan Albeth & Chis Hope Page 14 of 36

15 cutback costs. As the abatement levels incease, a lage popotion of cutbacks ae made at the added-cost cutback level, inceasing the aveage cost of abatement. The total costs of an abatement scenaio as compaed to the BAU scenaio can then be compaed to the total eduction in impacts gained though educed global waming impacts. The diffeence of these two values epesents the Net Pesent Value (NPV) of the abatement stategy being tested with a positive NPV meaning that discounted benefits outweigh the discounted costs. The details of the standad methods fo calculating abatement costs and associated fomulas fo the thee geenhouse gases, as developed in the standad PAGE2002 model, can be found in Hope (2004). Figue 4 Pesent value of futue benefits o damages as a popotion of futue value US China Simple aveage The PAGE2002 model has shown to be highly sensitive to the method of discounting used. The model allows fo vaiable discount ates fo each time peiod and egion following what is known as the pesciptive appoach 7. ( g p ) d, i ptp + eu, i, i = Equation 16 This appoach calculates the discount ate (d,i ), using a Ramsey type optimal gowth function (Cline 2004) with a pue ate of time pefeence (ptp). This is shown in Equation 16 whee e u epesents the elasticity of utility and g and p show the gowth ates of GDP 7 The pefeed teminology fo the IPCC (IPCC, 2001a) Stephan Albeth & Chis Hope Page 15 of 36

16 and population espectively, with vaiables indexed by egion and peiod i. The aveage, highest and lowest esults of the discounting method can be seen in Figue Modified Enegy Aspects and Abatement Costs fo CO2 The enegy/emission/abatement assumptions made in the standad PAGE2002 model have ceated an inteesting challenge fo the development of a leaning mechanism in the modified PAGE2002 model. This is mainly due to the highly aggegate natue of CO2 abatement. Fo instance abatements can be the esult of changing enegy poduction methods on one hand o by educing demand fo enegy on the othe, each with diffeent associated financial and social costs. Futhemoe, abatements can be made in the electicity secto o tanspot secto, by eithe individual o industy consumes. Since PAGE2002 does not explicitly model the enegy secto, costs ae not defined as the diffeence between two foms of enegy poduction, but instead as a function of CO2 abatements diectly. This means that, apat fom an initial calibation pocedue, all aspects elating to enegy poduction ae diectly calculated in the PAGE2002 model in tems of abatements. This includes backstops that epesent a cheape way to abate CO2 athe than efeing to a paticula enegy poducing technology. Cheap cutbacks can epesent any mix of technologies able to educe CO2 emissions easily and cost effectively. Added-cost cutbacks again epesent any numbe of technologies able to extensively cut back CO2 emissions past a cetain theshold, and these come at an exta cost. In the vesions used in this study of both the standad and the modified PAGE2002 models, the cutbacks ae calculated as the diffeence between the IMCP pescibed stabilisation scenaios and the BAU scenaio. As one might expect, the BAU scenaio has essentially zeo abatement costs associated with it as it is assumed the most cost effective measue would geneally be chosen. In the modified model, the theshold between cheap and expensive cutbacks has been designated in a slightly diffeent manne to the standad model. Wheeas the standad PAGE2002 model has defined the theshold level as a pecentage of base yea emissions, in the modified vesion they ae calculated as a pecentage of the egion s zeo cost emissions, as indicated by the business-as-usual emissions fo the yea in question. Hence as the geneal tendency goes towads highe emission levels, the amount of cutbacks that ae cheap o come with added-costs vaies popotionally. Stephan Albeth & Chis Hope Page 16 of 36

17 These changes can be descibed by Equations 17 though 20 fo CBH i,co2,, which epesents the added-cost cutbacks as a pecentage of base yea emission. All of the following fomulas can be found in Annexe 1 whee the fomula numbe in squae backets [] efes to the fomula numbes used in Hope (2004) which have been changed in the modified PAGE2002 model with leaning (fo CO2 abatement only). Equation 18 fo total cutbacks CB i,co2, emains unchanged howeve it has also been included fo the sake of completeness. Equations 19 and 21 fo CCB i,co2, and CCBH i,co2, ae the cumulative cheap and added-cost cutbacks fo a given egion and time peiod whee E 0,CO2, epesents the base yea emissions conveting cutbacks measued in pecentage points to physical cutbacks in million tonnes. Equation 22 fo CBT and Equation 23 fo CBHT epesent the total amount of cheap cutbacks and added-cost cutbacks made fo all egions fo a paticula time peiod i Endogenous Technical Leaning As well as the inclusion of a single facto leaning function to the PAGE2002 model, othe alteations in the cost stuctue have also had to be made. The standad model allowed the distibution of cheap cutback costs to include negative values, wheeas in the modified model all cutback costs ae positive. This implies that at any point in time, all technologies leading to abatements ae moe expensive than the cost of taditional fossil fuel enegies. Due to positive cutback costs, the modified model implicitly includes a floo cost (albeit vaiable) fo enegy poduction equal to that of fossil fuels, beneath which it is assumed low-cabon altenatives cannot fall and towads which thei costs gadually tend as a esult of leaning. Cost-eductions ae descibed by an expeience cuve style function with a small autonomous leaning element, howeve, unlike taditional expeience cuve functions that look at costs as a function of cumulative investments o output, we have applied the function to CO2 abatements made. Cheap cutbacks, Equation 24, and added-cost cutbacks, Equation 25, fo egion and peiod i ae also shown. Initial costs ae calculated as a faction of the model s focus egion, the EU. CPF epesents the atio of the initial costs in egion to those of the model s focus egion. Natually, the value fo the CPF of the focus egion is unitay, i.e. CPF = 0 1. Hence, the total CO2 abatement cost in US$(2000) fo analysis yea i and egion is as shown in Equation 26. Stephan Albeth & Chis Hope Page 17 of 36

18 3.5. Choice of secto A paticulaly difficult choice with egads to the design of the modified model was to decide how o on which secto to base the leaning assumptions and calibation. Thee ae thee main industial sectos that emit CO2, the electicity secto, the tanspot secto and a vaiety of othe industies such as the steel industy. Despite the fact that electicity accounts fo less than half of CO2 emissions, it has been chosen as the epesentative secto fo two main easons. 1) Thee exists a substantial body of liteatue in the aea of electicity costs and ETC. This would allow a moe igoous epesentation of the model as a whole with the possibility fo amendments as knowledge about the tanspot and othe sectos becomes available. 2) As the tanspot industy moves towads lage CO2 abatements, a simila set of technologies to the electicity secto abatements may be used. This includes the use of electic vehicles, hydogen o flywheel powe stoage systems, distibuted enegy technologies and geate use of electified public tanspot. This could lead not only to an inceased impotance of the electicity secto, but may also allow fo a diect tansfe of technologies fom one secto to the othe. Anothe impotant decision consides which of the many possible cuent and futue technologies o stategies should be taken as epesentative of oveall abatements. Despite the effectiveness that a shap eduction in enegy consumption would have on CO2 emissions, it would be difficult fo a govenment to, fo instance, educe peoples mobility without causing political poblems (IPCC 2001c, p65). Innovation would seem to be the pefeed method to each substantial CO2 abatements. Pesent abatement technologies fall into thee geneal categoies, enewables, nuclea (both fission and fusion), and Cabon Captue and Sequestation (CCS). The fist of these, enewables, ae chosen as they epesent the only known final solution to the poblem of CO2 abatement without necessaily ceating othe futue envionmental poblems such as nuclea waste. Fo the electicity industy, the most economic fom of enewable enegy that can still be expanded to fulfil a lage popotion of ou enegy needs is onshoe and offshoe wind powe. The use of wind powe will be constained by the availability of sites and the Stephan Albeth & Chis Hope Page 18 of 36

19 oveall stability of the electicity infastuctue due to the intemittent natue of the wind. Beyond a cetain level, the enegy system then entes into the expensive cutbacks, with the addition of added costs to take into account the use of moe expensive electicity geneation technologies o changes in the oveall infastuctue. Fo these added costs, sola enegy is consideed as the backstop technology Cheap vesus expensive cutbacks The theshold sepaating cheap and expensive cutbacks is based on an assumption that aound 30% of eductions could be met though the poduction of elatively inexpensive enewable enegy, such as wind powe. As suggested by Smith et al. (2004) the vaiation in electicity poduction of wind powe could stat to become poblematic at the 10% level, and may be modeately poblematic with 20% o moe of electicity poduction coming fom this souce. A distibution with a highe ange of minimum 10%, aveage 30% and maximum limit of 50% has been used fo thee easons. Fistly, as suggested by Smith, impovements in foecasting can impove the above atio. Shot of applying anothe leaning cuve to this value, a highe judgement-based uppe limit has been used. Secondly, technological advancements may impove this atio as expeience builds in such aeas. Futhemoe, othe enewable enegies may fom pat of the mix and, so long as they ae not highly coelated with wind poduction, would incease the atio of cheap enewable electicity that could be poduced without impacts on stability of supply. Added-cost cutbacks ae those that elate to enegy poduction equiing the use of expensive technologies such as sola photovoltaic electicity and, because of the inceased level of poduction fom enewable technologies, may also equie an ovehaul of electicity tansmission and stoage systems Cost of cutbacks Both wind enegy and paticulaly sola enegy have been attacked fo thei high enegy equiements in the poduction phase. Accoding to the Wold Enegy Council compaison of lifecycle emissions, an aveage amount of CO2/kWh ove the entie poduct life cycle was found to be 60g of CO2/kWh fo sola PV and 10g of CO2/kWh fo wind powe 8 (WEC, 8 The values used ae also much the same as the values shown (IEA 2002) Stephan Albeth & Chis Hope Page 19 of 36

20 2004). The CO2 abatement ealised as compaed to coal o gas poweed electicity is descibed by Equations 27 and 28. It is impotant to note that the analysis has been used to get mean appoximate values, howeve the model then uses vey wide distibutions. The value of 22c/kWh fo sola PV plus distibution o stoage costs as used in Equation 28 is close to the values pesented by Zwaan and Rabi (2004) fo stand alone sola systems that included the significant stoage costs equied fo lage scale abatements by sola photovoltaics. Since the cost pe tonne of CO2 emains positive in this vesion of the PAGE2002 model, the mean zeo cost scenaio is set at 5% below the CPI Baseline, suggesting that, on aveage, the fist 5% of eductions as compaed to the BAU scenaio have a zeo aveage cost Initial Cumulative Expeience In ode fo the model to take into account leaning, an estimation of the total amount of CO2 aleady saved though the two backstop technologies is equied. As the values used epesent the cutbacks made in the electicity industy, and do not conside simila types of abatements in othe sectos that make up two thids of all emissions, the histoical abatements made fo the electicity backstop ae multiplied by thee. This assumes that simila abatements and leaning has taken place in these othe sectos. Futhemoe, as these values seve as a poxy, a wide distibution is used in ode to encompass the tue value. Accoding to IEA data, the sum of wind capacity installations pe yea ove the peiod fom 1990 to 1999 is aound with the units of MW*yeas. As thee wee small amounts of wind powe befoe that date, the total value is inceased to MW yeas. A simila appaisal of available data has been made by Junginge et al. (2005) who have caied out an in depth study of global wind powe leaning ates. Fo the added-cost cutbacks, accoding to the BP website, the cumulative sola capacity*yeas is aound MW yeas up to but not including the yea Fom these values we can calculate the cumulative histoical CO2 abatements made by each of these two technologies Regional coss-ove effects Ou evised leaning cuve fomula calculates the maginal cost of CO2 abatement, as a function of total abatement to date and, fo the modified PAGE2002 model, incomplete Stephan Albeth & Chis Hope Page 20 of 36

21 shaing of expeience acoss the eight egions is allowed. Fo the initial expeience gained befoe the yea 2000, 100% shaing is assumed acoss all egions. The ange fo the Regional Cossove ate (RC) in the futue stats fom 100% shaing as used in the ERIS model (Baeto & Kypeos 2004b), as well as patial shaing, while maintaining a elatively high aveage of 87% as shown in Table 3. The distibution used is judgement based, howeve with time a moe accuate appaisal should be available. Futhemoe, as suggested by Junginge et al. (2005), as lage intenational companies sevice moe clients aound the wold, leaning becomes a global, athe than local phenomenon, pehaps leading to egional coss-ove ates that should incease with time Leaning ates fo endogenous technical change Due to the aggegate natue of CO2 abatement and the lack of pevious wok done to measue CO2 abatement leaning ates explicitly, quite a wide distibution of leaning ates is incopoated. In this way, it is the aim of the modified PAGE2002 model to encompass the geneal esults pesented in the liteatue, as put fowad by Zwaan & Rabi (2004), Junginge et al. (2005), Rubin (2004), WEA (2000), IEA (2000) and Papineau (2004). Fo sola enegy alone, the leaning ates found in the liteatue have been quite vaied. They have anged fom 35% to 18% in the IEA (2000) publication, depending on how and fom which egion the values have been calculated. Papineau (2004), on the othe hand, has found values of 5% to 19%, once again, depending on the chosen egion and type of calculation made. The ates of matue technologies, on the othe hand, such as coal and CCGT wee found to be aound 4% to 10% accoding to IEA (2000) and FGD and SCR scubbes 9 have also been found to have leaning ates of 11% and 12% espectively (Rubin, 2004). The leaning ates used fo both types of technologies have a mean tiangula distibution of 0.13 with a maximum value of 0.22 and minimum value of This ange encompasses all values except the one highest value published by the IEA (2000) fo sola, and also encompasses the leaning ates of the moe matue technologies. These lowe ates wee included because abatements need to be modelled ove the next two centuies, and it is 9 A pocess that educes pollutants such as SO2 and NOx emissions, paticulaly impotant fo fossil fuel poweed electicity geneation. Stephan Albeth & Chis Hope Page 21 of 36

22 possible that leaning ates fo these new and gowing technologies will eventually slow down to levels commonly found by matue technologies Autonomous leaning ates Table 3 Summay Table of coefficient anges used. Code Key leaning coefficient distibutions Mean Units Min Mode Max Uncetainty in baseline emission levels -5 % CL CO2 abatement cost (cheap=l) 17 US$(2000)/t CO CH CO2 abatement cost (added-cost=h) 250 US$(2000)/t CO AL Autonomous technical change L 0.10 %/Yea AH Autonomous technical change H 0.25 %/Yea Appox. Leaning ate (LR) L BL Leaning coefficient L Appox. Leaning ate (LR) H BH Leaning coefficient H EL Initial expeience stock L 1000 MT of CO EH Initial expeience stock H 10 MT of CO RC Regional cossove of expeience L & H 87 % MAX maximum cheap emissions as pecentage of zeo cost emissions 30 % As well as endogenous technical leaning, the modified PAGE2002 model also includes a small amount of autonomous technical leaning. These values have been made on judgement and thei coefficients ae as shown in Table A sensitivity analysis is caied out as pat of this eseach to identify the most petinent coefficients. 10 The autonomous technical change level is smalle fo the cheap cutbacks due to the fact that the CPI baseline fom which emission eductions ae calculated shows a eduction in total emissions. This has been assumed to eflect inceased competitivity of enewable enegies that ae nea to being competitive aleady, and as such would aleady be pat of the cheap cutbacks categoy. Stephan Albeth & Chis Hope Page 22 of 36

23 Chapte 4. Modelling esults 4.1. CO2 concentation and global mean tempeatue fo the Figue 5a CO2 Concentation in 2100 unde the 450ppm scenaio with a mean of 521ppm and 5% and 95% confidence levels at 477ppm and 572ppm Respectively. 450 ppm scenaio Figue 5b Global Mean tempeatue change in 2100 fom 2000 levels with a mean ise of 3.1 degees centigade and 5% and 95% confidence levels at 1.8 and 4.6 Respectively. 4 Pobability Pobability Concentation Tempeatue The standad CO2 emission scenaio that is supposed to lead to a 450 ppm stabilisation taget fo the yea 2100 is found to give a highe CO2 concentation when applied to the PAGE2002 model, as shown in Figue 5a. This is due to a feedback loop in the PAGE2002 model s cabon cycle which limits the ocean s cabon sequestation ability as the tempeatue ises (Hope, 2004). This esult also applies to the 500 and 550 ppm stabilisation scenaios. Futhemoe, due to the stochastic natue of the model and the distibutions fo the input coefficients, it can be seen that the final concentation levels ae fa fom cetain. The esulting tempeatue ise by 2100, shown in Figue 5b, and abatement costs in Figue 7 show similaly lage vaiations. Fo the pupose of compatibility to othe models, and since the focus of the compaison poject is on peventative costs and innovation, and not on the cabon cycle, the pojects standadised emission scenaios ae used thoughout. Hence any efeence to, fo example, a 450 ppm stabilisation scenaio efes in fact to a highe stabilisation level within the PAGE2002 model. Once again inteested eades should efe to Hope (2004). Stephan Albeth & Chis Hope Page 23 of 36

24 4.2. CO2 abatement costs fo the 450ppm scenaio Figue 6 shows the inputs that have the biggest positive and negative influence on the total peventative costs. The impotance of the leaning coefficient (fo added cost cutbacks) and the elasticity of utility, which contibutes to the discount ate, ae evident. They ae even moe impotant than pesent day unit costs of CO2 abatement fo low and added-cost cutbacks o initial knowledge stock and autonomous technical change coefficients. Due to thei evident impotance, futue vesions of the PAGE2002 model would geatly benefit fom moe accuate distibutions. With the existing model, the total peventative costs discounted to today in yea 2000 dollas is between 2 and 13 Tillion dollas, with a mean value of 6 tillion dollas. Figue 6 Coelation sensitivity analysis of Total Peventative Costs fo the 450 ppm stabilisation scenaio. Leaning coeff. B2 Initial CO2 cheap cutback costs Elasticity of utility Pue time pefeence Latin Ameica CO2 ange Initial CO2 added cost cutback costs Leaning coeff. B1 Uncetainty in CO2 emissions Autonomous technical change Initial expeience stock Student Vesion Fo Academic Use Only Coelation Coefficients Stephan Albeth & Chis Hope Page 24 of 36

25 Figue 6 Distibution of Total Peventative Costs fo the 450 ppm stabilisation scenaio. Pobability Oiginal PAGE Modified PAGE with leaning Modified PAGE with leaning = Student Vesion Fo Academic Use Only Values in Tillion USD (2000) Despite the many diffeences in the way in which the oiginal PAGE2002 model and the evised PAGE model with leaning deal with abatement costs, the distibution of total peventative costs is emakably simila. Not only is this tue with the 450 stabilisation scenaio, but simila esults ae found fo the 500 and 550 scenaios. The thid line epesenting the evised model with no leaning (neithe autonomous no leaning by doing) uses the costs of abatement if enewable technologies wee to emain fixed at 2000 pices. Unsupisingly, these costs ae well above the model with endogenous technical change The cost of pevention and global waming impacts. In tems of compaative costs, the aveage cost impacts including lage scale discontinuities fa outweigh the elatively mino costs of abatement, as shown in Figue 8. Howeve, due to the effect of discounting, these two costs become compaable in pesent tems, with the NPV of abatement highly dependant on the abatement levels chosen. The 450 ppm stabilisation scenaio fo example etuns an NPV of $0.45 Tillion, wheeas the 500 stabilisation ises to an NPV of $1.8 Tillion and the 550 stabilisation level falls again to $1.4 Tillion. Simila values wee found fo the PAGE2002 model with implicit technical leaning, showing once again the similaity of the two models. Stephan Albeth & Chis Hope Page 25 of 36

26 Figue 8 Cost of impacts vesus peventative measues fo 450ppm scenaio Mean Reduction in Impacts Mean Peventative Costs The sensitivity analysis in Figue 9 eveals the impotance of leaning fo the sum of total abatement and impact costs, with the added cost (BH) leaning coefficient in 4 th place. Figue 7. Coelation sensitivity analysis of total impacts and costs Elasticity of utility Pue time pefeence ate Equilibium waming fo a doubling of CO2 Leaning coeff. B2 Non-econ impact Sulfate indiect (log) effect Initial CO2 added cost Student Vesion Fo Academic Use Onl Half-life of global waming Leaning coeff. B1 Initial CO2 low cost cutbacks Coelation Coefficients Stephan Albeth & Chis Hope Page 26 of 36

27 4.4. Cost of abatement ove time fo the 450 ppm scenaio Figue 10a Unit CO2 abatement costs fo cheap cutbacks 450ppm Figue 10b Unit CO2 abatement costs fo added cost cutbacks 450ppm $/tco2 20 $/tco % mean 5% % mean 5% With the 450 emission levels, both the cheap and added cost cutbacks, as shown in Figue 10a and Figue 10b, benefit fom majo cost eductions. Costs fo the expensive cutbacks ae quick to come down due to thei elative newness as technologies and thus thei existing position low down on the leaning cuve. This allows lage cost eductions fo elatively mino levels of technology deployment. As expected, this initial dop in costs slows down substantially as the technology moves futhe up the expeience cuve, and is less damatic fo the highe stabilisation levels. The vaiation in futue costs is also substantial. As shown in Figue 10b, expensive cutbacks in the yea 2050 may cost as much as $50/tCO 2 at the 95% level o as little as $3/tCO 2 at the 5% level depending on the paametes chosen at andom fom the given anges. The mean value was $15.7/tCO 2. Stephan Albeth & Chis Hope Page 27 of 36

28 Figue 7. Peventative Cost Compaison of implicit and explicit leaning models 450 ppm scenaio $million % explicit leaning mean explicit leaning 5% explicit leaning 95% implicit leaning mean implicit leaning 5% implicit leaning Figue 11 gives pehaps the cleaest epesentation of how the implementation of explicit leaning has affected the PAGE2002 model. Due to highe initial costs, cutbacks ove the fist pat of the centuy actually cost moe than in the standad model. These cost inceases ae gadually educed to the point whee the two models pedict simila outcomes aound the yea Afte this point, costs in the evised model emain well below the levels in the standad model as technology continues to advance Compaison of the 450, 500 and 550 ppm scenaios Due to the lage emission eductions equied fo all of the stabilisation scenaios it is found that the mean unit costs of CO2 cutbacks emained simila acoss the scenaios. Fo example, the mean added cost cutbacks in the yea 2100 vaied fom $15.7/tCO 2 fo the 450ppm scenaio to $18.3/tCO 2 fo the 550 scenaio, down fom ove $200/tCO 2 befoe leaning occued. Fo all thee of the scenaios, the total abatement costs closely match those found in the standad PAGE2002 model whee only implicit leaning is used. Stephan Albeth & Chis Hope Page 28 of 36