The Impact of Climate Change and Climate Policy on the Canadian Economy

1. The Impact of Climate Change and Climate Policy on the Canadian Economy Jim Davies Jim MacGee Jacob Wibe

2. Questions • What is the net economic impact of climate change and global climate change policy on the Canadian economy? • Costs and benefits from different emissions reduction targets • Implications of migration and population growth • Canada is different: • More energy intensive than OECD average • High immigration • Northern climate

3. Modeling Approach • Adopt Nordhaus’ DICE Model (2007) • Model Canada as a small open economy • Take as given • World path of carbon emissions • Climate • Relative price of carbon energy

4. Main Findings • Benchmark calibration: Reducing CO2 emissions in Canada more costly than Nordhaus (2007) world average • Canadian immigration policy increases world output but raises Canadian abatement cost • Contribution: Dynamic model to compare alternate CO2 emission time paths

5. Selected Literature: Canada • Static CGE models used to examine impacts of climate policy on Canada: • Hamilton and Cameron (1994), Jaccard and Montgomery (1996), abIorwerth et al. (2000), Dissou (2005), Wigle and Snoddon (2007), Boehringer and Rutherford (2008) • Sectoral models: • Jaccard and Montgomery (1996), Jaccard et al. (2000), Loulou et al. (2000) Jaccard and Rivers (2007)

6. DICE-2007 • Dynamic Integrated model of Climate and Economy • Neoclassical Growth Model – Maximize a Social Welfare Function for the World • Consumption constrained by economic and geophysical relationships • Decision variables: Savings rate for capital and emissions-control rate

7. Production • DICE functional forms assumed • Parameters differ for Canada: • Damage coefficient: Ωt • Abatement cost function: Λt

8. Abatement Cost Function: Λt • Cost of controlling GHG emissions • μ = % reduction in industrial emissions • Calibrate to two points: • Nordhaus (2007) backstop price schedule • NRTEE (2009): • 3.3% GDP in 2020 to reduce emissions to 31% below BAU • 4.8% GDP in 2050 to 78% below BAU

9. Canadian Abatement Costs • Alternative estimates of abatement costs: • Dissou (2005): $15.4 billion (1.15% of GDP) to reach Kyoto target in 2010 • Jaccard et al (2003): $45 billion to reach Kyoto target in 2010 (cumulative costs 2000-2022)

10. Abatement Cost Function for Canada Share of Controlled Emissions

11. Damage coefficient: Ωt • Nordhaus (2007) models damages as quadratic in global mean temperature • Calibrate: • Use regional damage estimates for U.S. from Mendelsohn (2001) • Fit quadratic using estimated damage at T=2.5° and T=5 °

12. Matching Regions

13. Damage Function, Dt Degrees C°

14. Benefits to Canada from Reduced Global Warming? NPV 2005 - 2095, billions of dollars.

15. Policy Question • Should immigrant receiving countries receive additional “emission credits” if they accept immigrants from countries worst hit by global warming?

16. Impacts on Canada from Immigration NPV 2005 - 2095, billions of dollars.

17. Conclusions • Global climate change policy has a significant impact on Canadian Economy • High abatement costs associated with optimal global policy • Global abatement effort is of little benefit to Canada in economic terms

18. Conclusions • Canadian Immigration policy increases world output but raises Canadian abatement cost • Immigration increases economic burden on Canada in meeting emission targets

19. Abatement Cost Function: Λt Share of Controlled Emissions

20. Mendelsohn’s Regions