Consequences of climate change impacts for economic growth: a dynamic quantitative assessment Presentation

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1 Consequences of climate change impacts for economic growth: a dynamic quantitative assessment Presentation Jean Chateau, Rob Dellink and Elisa Lanzi Environment Directorate, OECD With Input from F.Bosello & R.Parado from FEEM and K. de Bruin IAMC Annual Conference

2 Motivations I. : Old OECD approaches For years OECD published reports (like Environmental Outlooks) that point we should urgently act on environmental issues because current and future economic/human activities will deteriorate more and more our environment. Then at the OECD we studied the efficiency of a large panel of economic tools to tackle these environmental issues: carbon permits, pesticide taxes, energy taxes,. Off course OECD is not alone on this. Reports and alerts from almost all IOs or Academic and scientific community or NIOs sketched the same picture, and.. Almost nothing happened on practical, or at least the policies adopted were with very limited ambition (ex. Carbon pricing: EU- ETS) 2"

3 Motivations II. : OECD new project streams Starting from this statement we tried to understand why no policy action have been taken and our main conclusions are: Environmental impacts are not really/enough measured in terms of economic losses: as long as you present to policy makers a policy (ex. Climate change mitigation) that will impact negatively GDP you could not convince if you not present the economic benefit of the policy (not only environmental). Most of the environmental and climate policy will affect more the poorer households than the richer (carbon taxes, fossil fuel energy subsidies, ): understanding distributive impacts would help implement successful environmental policy. Opportunity costs of economic-efficient environmental reform: Exple even if energy efficiency investment could be profitable for private or public agents there exists investment that are much more profitable. Showing economic and environmental efficiency of a policy is not enough. 3"

4 CIRCLE Project themes and tracks CIRCLE looks at costs of inaction and benefits of action: feedbacks from environmental challenges on economic growth Climate change Air pollution Modelling track Land-water-energy nexus Water Biodiversity and ecosystems Resource scarcity Scoping track CIRCLE: Costs of Inaction and Resource scarcity: Consequences for Longterm Economic growth 4

5 Production function approach Impacts of environmental damages on the economy are modelled directly as changes in the production function variables (e.g. labour productivity, land efficiency, ) Allows calculating the costs of environmental damages to the macro-economy and studying how the economies adjust to the presence of environmental damages Model impacts and economic feedbacks within a Computable General Equilibrium (CGE) model, ENV-Linkages Project economic growth for future decades and calculate future macro-economic costs of environmental damages Use GDP as key indicator of economic growth 5"

6 OECD ENV modelling tools: ENV-Growth Model: to generate long run macro-scenarios: Outputs: GDP, aggregate savings, current account, labour supply, exchange rate, GDP deflator, Methodology: Mix of a potential output projection model based on conditional convergence of generic economic growth models + a transitional convergence module (OECD Eco dpt meth) Standard utilization : OECD SSP s projection of GDP, OECD@100 report. ENV-Linkages Model: dynamic CGE Model : 40 sectors (including 5 electricity tech. and 8 crops sectors) and 25 regions (IEA World Energy Outlook regions). Vintage capital, Dynamic up to 2060 Outputs: sectoral value added and prices, environmental emissions, energy carriers, Land-use (still in phase of improvement). 6

7 Methodology for preliminary climate analysis Collaboration with CMCC/FEEM to incorporate damages in ENV-Linkages Methodology of the FEEM ICES model Data for a subset of damages from sectoral EU projects Data consistency on damages is ensured by choosing damages corresponding to an appropriate temperature pathway (no simple damage functions relating everything to global ΔT) Damages calculated in ENV-Linkages model to 2060 Autonomous adaptation takes place via sectoral adjustments and international trade Longer term consequences of climate change explored with the AD-RICE model 7"

8 Climate change impacts and damages Sea level rise Coastal land losses and damages to capital Health Changes in mortality & morbidity and demand for healthcare Ecosystems Changes in produc8vity of produc8on sectors Crop yields Changes in agricultural produc8vity Tourism flows Changes in produc8vity of tourism services Energy demand Changes in the demand for energy from cooling and hea8ng Fisheries Changes in catchment Not included Extreme weather events, water stress, catastrophic risks, 8"

9 Global assessment 0.0% Global GDP impacts (% change wrt no- damages baseline) - 0.5% - 1.0% - 1.5% - 2.0% - 2.5% Likely uncertainty range - 3.0% equilibrium climate sensitivity (1.5 C C) Likely Wider uncertainty range - 3.5% equilibrium climate sensitivity (1.5 C (1 C - 6 C) C) Central projection - 4.0% Source: Dellink et al (2014) 9"

10 Regional results (central projection) 2% Global GDP impact (% change wrt no - damages baseline, 2060) 1% 0% - 1% - 2% - 3% Agriculture Sea level rise - 4% Tourism Health - 5% Ecosystems Energy - 6% Fisheries OECD America OECD Europe OECD Pacific Rest of Europe and Asia La8n America Middle East & North Africa South & South- East Asia Sub- Saharan Africa World Source: Dellink et al (2014) 10"

11 The impact of trade linkages 2% 1% Regional GDP impacts (% change wrt no - damages baseline) 0% - 1% - 2% - 3% - 4% - 5% 'Unilateral' impact - 6% Total impact OECD America OECD Europe OECD Pacific Rest of Europe and Asia La8n America Middle East & North Africa South & South- East Asia Sub- Saharan Africa Source: Dellink et al (2014) 11"

12 Current status 1st results (on costs of inaction) published Next steps Continue policy analysis Improve agricultural sector representation (Done) Add more impacts - but how to integrate large-scale disruptive events (catastrophes)? Integrate with other themes 12"

13 Preliminary conclusions climate analysis Effects of selected climate impacts on economic growth by 2060 non-negligible Large variation between regions and sectors large losses in South & South-East Asia, gains from trade adjustments in OECD-Pacific Of selected impacts agriculture dominates Large uncertainties Lock-in to much worse risk profile GDP losses remain for at least a century more Substantial increase in risk of much larger damages Adaptation and mitigation policies are both essential Mitigation limits level of damages plus uncertainty on damages Adaptation cannot replace mitigation 13"

14 Strengths and Weakness of our global CIRCLE project Total consistent macro-economic and sectoral baseline for Energy, Agriculture and trade of these commodities. Very Narrow collaboration with IEA (energy side), ITF (transport), OECD-FAO (short term agr.) + rely directly to long run agriculture projections from IFPRI s IMPACT model (AGMIP Scenarios). Ongoing process of baseline harmonization on more elements global trade (ECO Trade Dpt & CEPII), water use with GTAP-Purdue, IMAGE for Land-Use, resources projections LSE & IEA, But in any case we will still not have a real IAM: Environmental damages through factors changes not through damages functions. Horizon still limited to 2060: to narrow for Climate Change Perspective Missing Elements: Endogenous population changes, imperfect link between physical units and economic values,. 14

15 THANK YOU! For more information:

16 Preliminary analysis of benefits of policy action Assessment of benefits of policy action require insight into stream of future avoided damages Not straightforward to assess with ENV-Linkages Lack of sectoral adaptation information is also an issue As first step, use the AD-RICE model which is especially suited for this (as perfect foresight model) AD-RICE is an augmented version of Nordhaus RICE model, with explicit representation of adaptation Look at both adaptation and mitigation policies, and their interactions 16

17 Stylised analysis post-2060 Global damages as percentage of GDP % - 1% - 2% - 3% - 4% - 5% - 6% - 7% - 8% - 9% Likely uncertainty range (Business as Usual) Likely uncertainty range (Committed by 2060) Central projection (Business as Usual) Central projection (Committed by 2060) Central projection (highly nonlinear damages) Source: Dellink et al (2014) 17"

18 Preliminary results: adaptation policies % change wrt no-damage baseline Likely Likely uncertainty range range - Optimal --Flow No adaptation Central projection - --Optimal adaptation 0% -1% -2% -3% -4% -5% -6% -7% -8% -9% Central projection - --Flow adaptation Central projection - No --No adaptation -10% Preliminary results; not to be cited or quoted 18"

19 Preliminary results: mitigation policies 0% % change wrt no-damage baseline Likely uncertainty range - No - No mitigation Likely uncertainty range - - Optimal mitigation Central projection - No - No mitigation Central projection - - Optimal mitigation Weitzman damage function - No - No mitigation Weitzman damage function - - Optimal mitigation -1% -2% -3% -4% -5% -6% -7% -8% -9% -10% Preliminary results; not to be cited or quoted 19"

20 Preliminary results: discounting 0.0% % change wrt no-damage baseline Likely Likely uncertainty range range - UK Nordhaus - Stern Treasury discounting Central Central projection - Nordhaus - discounting Central Central projection - UK - UK Treasury discounting Central Central projection - Stern - Stern discounting -0.5% -1.0% -1.5% -2.0% -2.5% Preliminary results; not to be cited or quoted 20"

21 Preliminary results: interactions 0% % change wrt no-damage baseline Optimal adaptation - - No mitigation Optimal adaptation - - Optimal mitigation Flow adaptation - - No mitigation Flow adaptation - - Optimal mitigation No adaptation - - No mitigation No adaptation - - Optimal mitigation -1% -2% -3% -4% -5% -6% -7% -8% -9% -10% Preliminary results; not to be cited or quoted 21"

THE JOINT ECONOMIC CONSEQUENCES OF CLIMATE CHANGE AND AIR POLLUTION. Rob Dellink Environment Directorate, OECD

THE JOINT ECONOMIC CONSEQUENCES OF CLIMATE CHANGE AND AIR POLLUTION Rob Dellink Environment Directorate, OECD Impacts conference 2017 Climate change and air pollution Joint analysis of climate change and