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Explore the Potential of Economic Models to Assess Climate Change Impacts

Explore the Potential of Economic Models to Assess Climate Change Impacts. Francesco Bosello and Paulo A.L.D. Nunes. Road Map.  Selection of a modelling framework, anchor of the economic analysis and valuation exercise

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Explore the Potential of Economic Models to Assess Climate Change Impacts

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  1. Explore the Potential of Economic Models to Assess Climate Change Impacts Francesco Bosello and Paulo A.L.D. Nunes

  2. Road Map Selection of a modelling framework, anchor of the economic analysis and valuation exercise Goal is to explore the use of the market price mechanism, rooted in the demand and supply forces – the so called invisible hand (Adam Smith, “The Wealth of the Nations, 1776) Proposed framework Computable General Equilibrium CGE modeling is used to describe and evaluate in welfare terms alternative allocations in the input and output markets. Recently assessment of “environmental facts” (e.g. climate change impacts via induced changes in demand and supply) Potential extension to evaluate changes in natural resources qual./qt. and ecosystem services

  3. The aim of the exercise  assessand value the “environmental facts (impacts)” in terms ofGDPchanges, since the CGE analysis is anchored at amacro economic perspective, for the economies under consideration.  considerboth directandindirect(cost) effects – since economic systems “adapt” in response to any “shock” under consideration (substitution mechanisms)  highlighttransmission channels within and between domestic and international “markets”, across all the economic sectors under consideration, since all the markets are “linked”.

  4. Sketching a CGE Consumers (households, government) Maximise welfare from consumption demand supply Demand and supply functions “mimic” observed economic systems: parameters are calibrated on “real” data Constrained by income Income Output marketsGoods and services Input markets K, L, Land, NR Constrained by technology Income demand supply Minimise cost of production Producers (firms, government)

  5. CGE with climate change Consumers (households, government) Maximise welfare from consumption demand supply Constrained by income Goods and services Income Climate change and other environmental pressures Constrained by technology K, L, Land, NR Income demand supply Minimise cost of production Producers (firms, government)

  6. An illustration: sea level rise due to climate change Global Circulation Model (Reduced form K. Hasselmann model dvlp. Max Plank Institute Hamburg, G. Hoos, 2002) • T = + 0.93 °C. in 2050 • SLR= + 25 cm. in 2050 • Data set 1: Sq. Km. of land lost due to erosion, if • there is no protection. Country detail. • Data set 2: The costs of full protection. Country detail. • Basis is the 1993 Global Vulnerability Analysis • by Delft Hydraulics and Nicholls and Leatherman,1995. • The former provides estimates for all countries, • the latter additional information for some countries • interpolated for all. Environmental Impact Model (Tol, 2003)

  7. The economic model GTAP-EF (Extended Version of GTAP-E Burniaux and Truong 2002) 17 Economic Sectors: Rice Wheat Cereal Crops Vegetable Fruits Animals Forestry Fishing Coal Oil Gas Oil Products Electricity Water Energy Intensive industries Other industries Market Services Non-Market Services 8 Regions: USA: United States EU: European Union EEFSU: Eastern Europe and Former Soviet Union JPN: Japan RoA1: Oth. Annex 1 countries Eex: Net Energy Exporters CHIND: China and India RoW: Rest of the World (Further extension possible to 66 countries and 57 sectors) Calibrated in 1997

  8. The baseline Starting point: equilibrium calibrated in 1997. Re-calibrationprocess in order to get a future reference case “without climate change”. This refers to obtaining a picture of the future world economy. In practice, long-run estimates of primary inputs (land, labour, capital and natural resources) stocks and productivity used to: Shock the model 1997 calibration equilibrium to obtain new equilibrium that will emerge before sea level rise effects are considered.

  9. The data • Population: World Bank. • Labour stock:G-Cubed modelVersion48E (McKibbin, 2001). • Labour productivity:G-Cubed model Version48E (McKibbin, 2001). • Land productivity: IMAGE 2.2, B1 Scenario (RIVM, 2001). • Natural resources stock: endogenised s.t. Pnr = PIGDP

  10. Sea Level Rise: Model Operationalization No protection:Land is “simply” lost, negative “supply-side” shock on the endowment LAND. Total protection:No LAND is lost, but defensive investment has to be undertaken  Imposing “new” investment behavior. Coastal protection requires additional regional investment. Regional households need to save more  In each region regional savings increase uniformly to meet the increased investment demand. Private consumption is crowded out  share of income devoted to consumption decreases

  11. No protection: selected results Outputs Inputs = biggest loosers

  12. Full protection: selected results Inputs Outputs = highest (absolute) values

  13. Challenges for the future Extend this modelling framework to evaluate in economic terms the impact of climate change on biodiversity, on ecosystem services or of carbon sequestration, their distributional effects and welfare implications. Translate environmental changes into changes in quality, quantity or type of production factors Translate environmental changes into changes of consumers’ preferences Changes in firm production patterns, in households’ possibility to consume Changes in households’ preferences to consume Then these information (supply and demand changes) are suitable to be evaluated “economically”

  14. In practice: integrated assessment and modularity • Temp. increase • Temp. rate of change • Precipitation • Ecosystem change Global Circulation Models (Or other) Climate Change and Variability (or other changes in environmental system) • Loss of land (sq. Km.) • Health (mortality/morbidity) • Changes in crop yields • Ecosystem services Disentangle Climate/ (ecosystem) Change in (some) Physical Impacts Environm. Impact Models Translation in meaningful economic format e.g.: loss in labour productivity, in tourism flows, fish stock Economic (GE) Model Provides “post-adaptation” (GE) welfare evaluation of physical impacts Feedback on the environment (e.g. emissions) +

  15. In sum:  Translation: of environmental pressures in a supply and demand “format”  multidisciplinarity.  Downscaling: integration or consistency of the macro level computation with micro level evaluation studies.  Existence of non-market values: often effects are not market priced  urgency to integrate CGE model computations (macro level) with non-market valuation studies (micro level).

  16. Contact: francesco.bosello@feem.it paulo.nunes@feem.it Campo S. Maria Formosa 30122 Venezia - Italy tel +39 | 041 | 27 11 400 fax +39 | 041 | 27 11 461 web http://www.feem.it

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