GLOBAL WARMING AND ECONOMIC DEVELOPMENT
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.
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.
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 9 7 8-9 4-0 1 0-4 7 7 1-5 I S B N 9 7 8-9 4-0 1 1-1 7 5 7-9 ( e B o o k ) D O I 1 0. 1 0 0 7 / 9 7 8-9 4-0 1 1-1 7 5 7-9 1. 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.E5D86 1993 338.9--dc20 92-47021 ISBN 978-94-010-4771-5 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.
To my grandparents, parents, and wife
Table Of Contents List of Tables... xiii List of Figures... xv Preface... xvii Introduction... 1 Chapter One: The Global Warming Problem 1.1 Introduction... 9 1.2 The Greenhouse Effect..... 10 1.3 Historical Data Substantiating the Greenhouse Effect..... 16 1.4 Uncertainties in Estimating Global Warming... 20 1.4.1 Uncertainty in the Economic System... 21 1.4.2 Uncertainty in the Carbon Cycle system... 23 1.4.3 Uncertainty in the Climate System... 24 1.5 Impacts of Global Warming... 25 1.5.1 Agriculture Output (Food Supply)... 27 1.5.1.1 Slow Change View... 27 1.5.1.1.1 Carbon Dioxide Fertilization... 27 1.5.1.1.2 Temperature Rise Feedback Effects... 28 1.5.1.2 Shift in Risk View... 29 1.6 Conclusion... 30 Chapter Two: Policy Responses and International Coordination 2.1 Introduction... 31 2.2 Policy Objectives...32 2.2.1 Adaptive Policies...32 2.2.2 Preventative Policies... 34
viii 2.3 Policy Coordination and International Cooperation... 37 2.3.1 Developed Countries and Global Warming: Past, Present, and Future... 39 2.3.2 Developing Countries and Global Warming: Past, Present, and Future... 41 2.4 Conclusion... 45 Chapter Three: The Mathematical Model 3.1 Introduction... 47 3.2 Model Nomenclature...48 3.3 Set Specifications...49 3.4 The Model Equations... 50 3.4.1 The Objective Function... 52 3.4.2 Material Balance Constraint for Creditor Countries... 54 3.4.3 Material Balance Constraint for Debtor Countries... 55 3.4.4 Global Foreign Aid Balance Equation... 56 3.4.5 Foreign Aid Condition Constraint..... 57 3.4.6 Capital Accumulation... 58 3.4.7 Capital Constraint.... 59 3.4.8 Land Constraint.... 60 3.4.9 Regional Sectorial Production Level... 60 3.4.10 Capital-Output Coefficient... 61 3.4.11 Land-Output Coefficient... 63 3.4.12 Supply of Land... 64 3.4.13 Deforestation Constraint..... 65 3.4.14 Energy Demand... 65 3.4.15 Emission of C02 by Fossil Fuels... 66 3.4.16 Regional Pollution Level... 67 3.4.17 Global C02 Emissions... 67
ix 3.4.18 3.4.19 3.4.20 3.4.21 3.4.22 3.4.23 Sectorial Gross Domestic Product... 68 Regional Gross Domestic Product... 68 Carbon Cycle Equations... 68 Initial Conditions for Atmospheric C02 Concentration... 71 Conversion Formula from Mass to Concentration... 71 The Global Temperature Equation... 72 Chapter Four: Numerical Data for a Multi-Regional, Multi-Sectorial, and Multi-Process Optimal Growth Model 4.1 Introduction... 75 4.2 Input-Output Coefficients (A Matrix)... 76 4.3 Capital Coefficients (B matrix)... 78 4.4 Capital-Output Coefficient... 79 4.4.1 The Constant Term... 79 4.4.2 Capital-Output Feedback Coefficients... 83 4.4.2.1 Calibration of Feedback Effects of Increased C02 Concentration levels... 84 4.4.2.2 Calibration of Feedback Effects of increased Temperature... 86 4.5 Land-Output Coefficients... 90 4.5.1 The Constant Term... 90 4.5.2 Feedback Effects caused by Perturbations to Climate System... 94 4.5.2.1 Feedback Effects from C02 Rises on Land-Output Variable... 94 4.5.2.2 The Effect of Temperature Rise on Land-Output Variable... 95 4.6 4.7 Energy-Output Coefficients... 96 Carbon Dioxide Emission Coefficients... 103
x 4.8 4.9 4.9.1 4.9.1.1 4.9.1.2 4.9.1.3 4.9.1.4 4.9.1.5 4.9.1.6 4.9.2 4.9.3 4.10 Carbon Dioxide Emission Coefficients from Deforestation... 104 Initial Conditions... 106 Capital Stocks... 107 Capital Stocks in Industry Sector in Developed Region... 107 Capital Stocks in Service Sector in Developed Region... 108 Capital Stocks in Agriculture Sector in Developed Region... 108 Capital Stocks in Industry Sector in Developing Region... 108 Capital Stocks in Service Sector in Developing Region... 109 Capital Stocks in Agriculture Sector in Developing Region... 110 Land Stocks... 111 Initial Values for Carbon Mass in Reservoirs... 111 Transfer Coefficients for the Carbon Cycle... 112 Chapter Five: Numerical Results of Policy Experiments 5.1 Introduction... 113 5.2 Experiment One: Business As Usual (BASE)... 120 5.2.1 Experimental Assumptions... 120 5.2.2 Experimental Mechanics... 121 5.2.3 Experimental Results... 122 5.3 Experiment Two: Stabilizing C02 Emissions Levels (SCE)... 129 5.3.1 Experiment Results... 130 5.4 Experiment Three: The Developed Region Accepts a C02 Protocol, "PayBack" (PB)... 131 5.4.1 Experiment Results... 132 5.5 Experiment Four: The Developing Region Accepts a C02 Protocol, the "Bribe" Experiment(B)... 134
xi 5.5.1 Experiment Results... 134 5.6 Experiment Five: Holistic Model Simulation (Holistic Base)... 136 5.6.1 Experiment Results... 137 5.6.2 The Holistic Base Compared to SCE, PB, and B Strategies... 142 5.7 Conclusion... 148 Chapter Six: Sensitivity Analysis 6.1 Introduction... 151 6.2 Sensitivity Analysis on Feedback Parameters... 153 6.2.1 Experiment Results... 155 6.3 Sensitivity Analysis on Land-Output Coefficient..... 161 6.3.1 Experimental Results... 161 6.4 Conclusion... 164 Chapter Seven: Summary and Conclusion... 165 Appendix ONE The GAMS Statement... 177 Appendix TWO Data Calibration... 205 Bibliography... 213 Index... 219
List of Tables Chapter Four 4.1 Input-Output Coefficients for the Developed Region... 76 4.2 Input-Output Coefficients for the Developing Region... 77 4.3 Capital Coefficient for both Regions... 78 4.4 Capital-Output Coefficients for the Developed Region... 81 4.5 Capital-Output Coefficient for the Developing Region... 81 4.6 C02 Feedback Effect on Capital-Output Coefficient... 86 4.7 Temperature Feedback Effect on Capital-Output Coefficient... 89 4.8 Land Available in Regions in 1985... 91 4.9 Land-Output Coefficients for the Developed Region... 92 4.10 Land-Output Coefficients for the Developing Region... 93 4.11 C02 Feedaback Effect on Land-Output Coefficient... 95 4.12 Temperature Feedback Effect on Land-Output Coefficient... 95 4.13 Sectorial Share of Regional GDP... 97 4.14 Sectorial Output Level... 98 4.15 World Consumption of Energy... 99 4.16 Regional Consumption of Fossil Fuels... 99 4.17 Regional Share of Fossil Fuels... 100 4.18 Energy Consumption by Sectors in Regions... 102 4.19 Energy-Output Coefficient... 102 4.20 C02 Emission Coefficients by Fossil Fuels... 103 4.20a C02 Emission Coefficients by Fossil Fuels... 104 4.21 C02 Emission Coefficients by Deforestation... 106 4.22 Capital Stocks in Base year... 110 4.23 Land Stock in Base Year... 111 4.24 Carbon Mass in Reservoirs in 1985... 111 4.25 Transfer Coefficients in Carbon Cycle... 112 Chapter Five 5.1 Desired Growth Rates for State and Control Variables at Sectorial level for the Developed Region... 118 xiii
xiv 5.2 Desired Growth Rates for State and Control Variables at Sectorial Level for thedeveloping Region... 118 5.3 Regional Growth Rates... 119 5.4 Desired Path for Environmental Variables... 120 5.5 Regional Growth Rates for Economic Variables in Base Experiment.... 125 5.6 Difference between Base and SCE for Economic Indicators... 130 5.7 Difference between PayBack and Base for Economic Indicators... 133 5.8 Difference between Bribe and Base for Economic Indicators... 135 5.9 Difference between Holistic Base and Base for Economic Indicators... 139 5.10 Feedback Effects on Land and Capital Productivity... 141 5.11 Comparisons of Economic Indicators among Holistic Base, SCE, and Base experiments... 142 Chapter Six 6.1 Effects on Regional C02 Emissions and Global Temperatures... 156 6.2 Percentage Changes in Land and Capital Productivity caused by Temperature Rises... 158 6.3 Results from Scenario 5... 159 Appendix TWO 1 2 3 4 5 6 Capital-Output Coefficients for the Developed Region from Other Studies... 206 Capital-Output Coefficients for the Developing Region from Other Studies... 206 Capital-Output Coefficients for the Developed Region... 207 Capital-Output Coefficient for the Developing Region... 208 Land-Output Coefficient for the Developed Region... 210 Land-Output Coefficient for the Developing Region... 211
List of Figures Chapter One 1.1 Earth's Radiation Budget Balance... 11 1.2 Radiation Budget After Perturbation... 14 1.3 C02 Concentration Trend Observed at Mauna... 17 1.4 Temperature Trend... 18 1.5 Correlation Between Indistrial Revolution and Atmospheric C02 concentration... 19 1.6 Traditional Economic Model Structure... 21 1. 7 Holistic Model Structure... 22 Chapter Two 2.1 2.2 2.3 Relative Contribution by Greenhouse Gases to Anthropogenic Greenhouse Effect... 35 Regional C02 Admission Levels....38 Contribution by Sectors to the Greenhouse Effect....39 Chapter Three 3.1 3.2 Schematic Diagram of Holistic Model Structure... 52 A Carbon Cycle Model... 69 Chapter Four 4.1 Percentage Change in Crop Yield When Temperature and Precipation Changes... 87 Chapter Five 5.1 5.2 5.3 5.4 Projected Global C02 Emissions... 122 C02 Emissions by Regions... 123 Desired versus Base results for agricultural GDL levels in developed region... 126 Desired versus Base results for agricultural GDP levels in developing region... 126 xv
xvi 5.5 Output versus GDP levels in the agriculture sector in the developed region...,... 128 5.6 Output versus GDP levels in the agriculture sector in the developing region... 128 5.7 C02 emissions by regions under Holistic Base.... 138 5.8 Percentage Difference in Consumption Level Between Holistic and SCE for Developed Region... 143 5.9 Percentage Difference in Consumption Level Between Holistic and SCE for Developing Region... 143 5.10 C02 emissions under Holistic and SCE conditions for the developed region.... 145 5.11 C02 emissions under Holistic and SCE conditions for the developing region.... 145 Chapter Six 6.1 6.2 Technology Combination... 157 Technology Combination Under Scene 5 Conditions... 160 Chapter Seven 7.1 7.2 7.3 Global C02 Emission Under Holistic and SCE Conditions... 169 Regional C02 Emissions in Holistic Base expe11ment.... 169 Regional C02 Emissions under Holistic Base and SCE... 170
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
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
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.