Agenda

Today: impactsFriday at class time: Gokay will review material.Friday at noon: Questions will be distributed.Monday in class: ExamWednesday TBA: Gokay will do an introduction of

Excel modeling in preparation for your building your little integrated-assessment model.

Then spring break.

1

2

Economics 331bSpring 2009

Economics of Climate Change:Impacts

4

Price, MC, MPB of abatement

Market equilibriumwith externality

Abatement

Marginal cost

0

Marginal private benefit

Market equilibrium:Zero carbon reductionsWhere MPB = MC

5

Price of carbon emissions

Marginal Damages

The basic analytical structure

Abatement

Pcarbon*

Marginal Cost

0Abatement*

What is climate?

Consider the complex system as a stochastic process:

dx(t)/dt = h[x(t); α, ρ, …]

x(t) is temperature, precipitation, ocean currents, etc. α, ρ, etc. are parameters.

Weather is the realization of this process.Climate is the statistics of the process (mean,

higher moments, extremes). It is usually calculated as moving averages (e.g., 30-year “normals”).

6

7

Impacts Analysis

Central task is to evaluation the impact of climate change on society

Two major areas:– market economy (agriculture, manufacturing,

housing, …)– non-market sectors

•human (health, recreation, …)•non-human (ecosystems, species, fish, trees, …)

Basics of Impact Analysis1. Start with a production function:

Q j,t = F(K j,t , L j,t ; T j,t , C j,t)

Where Q j,t = output in sector j at time t; K j,t = capital stock and other assets; L j,t = labor and other current; T j,t = weather (realization);

C j,t = climate (= statistics of climate)

2. We often have data on the impact of weather changes on Q j,t . But, we need to understand climate impacts:

∂Q j,t /∂ C j,t = ∂F(K j,t , L j,t ; T j,t , C j,t)/∂C j,t

3. Generally, we will have a vector of climatic variables (temperature, precipitation, soil moisture, snow pack, …). We will need to translate global mean temperature change into the relevant climatic variables. This requires calculating ∂C j,t /∂T, which is non-trivial given regional resolution of climate models.

4. Finally, all this gives us the impact relative of global warming: Impact effect =∂Q j,t /∂T = ∂F(K j,t , L j,t ; T j,t , C j,t)/∂ C j,t /∂C j,t /∂T

8

9Nordhaus, based on BEA , industry accounts, http://www.bea.gov/industry/index.htm#annual

Market sectors by vulnerability to climate change, US, 2007 PercentBillions of dollars of GDP

Gross domestic product 13,808 100.0

Major Potential Impact 168 1.2 Farms 137 Forestry, fishing, and related activities 31

Moderate Potential Impact 598 4.3 Water transportation 11 Utilities 281 Real estate Coastal 159 Accommodation 121 Arts, entertainment, and recreation Outdoor 27

Small to Negligible Impact 13,041 94.4 Mining 275 Construction 611 Manufacturing 1,617 Trade 1,698 Retail trade 893 Transportation and warehousing 407 Information 586 Finance, insurance, real estate, etc. 2,652 Services and government 4,302

Example from Sea Level Rise: Model Runs

10IPCC, 2001

Example from Verly on Sea-Level RiseOn Cape Cod

11

Caroleen Verly, “Sea-Level Rise on Cape Cod: Predicting the Cost of Land and Structure Losses”, Yale University, 2008

Land value and altitude

12

Caroleen Verly, “Sea-Level Rise on Cape Cod: Predicting the Cost of Land and Structure Losses”, Yale University, 2008

Impact of SLR on Land and Structures

13

Caroleen Verly, “Sea-Level Rise on Cape Cod: Predicting the Cost of Land and Structure Losses”, Yale University, 2008

Example from Agriculture

Long history of agricultural production functions in which weather is a variable. Remember:

Q j,t = F(K j,t , L j,t ; T j,t , C j,t)

- This produced first set of estimates of impact of global warming; led to very large estimates of losses.

14

Example of impact of weather on yield

15

Why is this completely wrong for understanding the impact of climate change on agriculture?

Example from Agriculture

Long history of agricultural production functions in which weather is a variable.- This produced first set of estimates of impact of global

warming; led to very large estimates of losses.

Problem: The temperature-output relationship does not take into account adaptation of farmers to climate.

This is the “dumb farmer” v. “smart farmer” controversy.

Ricardian methods are attempt to look at equilibrium effect of climate by looking at cross-sectional impact of climate on farm values (Mendelsohn key figure here)- This produced much smaller estimates because of

farmer adaptation.

16

Short-run v. long-run productivity

17

18

Estimates of Impacts on Agriculture late in the 21st C

Impacts on net value of agriculture as percent of national or global income:

Mendelsohn ClineNorth American + 0.4 % + 0.5 %Africa - 5.0 % - 4.0 %

Global average - 0.2 % - 0.1 to -.05%

Estimated effect of ag on output is small because (1) agriculture is small, (2) farmers can adapt, (3) CO2 is a fertilizer.

Query: Assume this is for 2075. What is effect on growth rate of total GDP of region for 2000-2075?

Source: Mendelsohn et al.; Cline

First Generation Estimates of AggregateMonetized Damages of CO2 Doubling, U.S., for present economy

Source: IPCC, Second Assessment Report

19

20

Economic Impacts of Gradual Climate Change on the U.S.

Joel B. Smith, A Synthesis of Potential Climate Change Impacts on the U.S., Prepared for the Pew Center on Global Climate Change, April 2004

21

IPCC Collation of Global Damages, AR Three

22

Estimated Damages from Yale Models and IPCC Estimate

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

0 1 2 3 4 5 6 7Mean temperature increase (oC)

Clim

ate

dam

age/

glob

al o

utp

ut

RICE-1999

DICE-2007

IPCC estimate

23

Early studies contained a major surprise:Modest impacts for gradual climate change, market impacts,

high-income economies, next 50-100 years:- Impact about 0 (+ 2) percent of output.

- Further studies confirmed this general result.

BUT, outside of this narrow finding, potential for big problems:- many subtle thresholds- abrupt climate change (“inevitable surprises”)- many ecological disruptions (ocean carbonization, species loss, forest

wildfires, loss of terrestrial glaciers, snow packs, …)- stress to small, topical, developing countries- gradual coastal inundation of 1 – 10 meters over 1-5 centuries

OVERALL: “…global mean losses could be 1-5% Gross Domestic Product (GDP) for 4 ºC of warming.”

(IPCC, FAR, April 2007, but no serious original work)

Summary of Impacts Estimates

24

Major problems of impacts analysis

1. Most impacts analyses impose climate changes on current social-economic-political structures.- Example: impact of temp/precip/CO2 on structure of Indian economy in

2005

3. However, need to consider what society will look like when climate change occurs.

4. Example of difficulties of looking backward:– 2 ˚C increase in 6-7 decades – that was Nazism, period of

Great Depression, Gold Standard, pre-Keynesian macro– 4 ˚C increase in 15 decades –Ming Dynasty, lighting with

whale oil, invention of telegraph, no cars, many horses….

5. Tendency to look for cloud behind every silver lining.

6. In the end, it appears that major impacts are NON-MARKET, VERY DIFFICULT TO VALUE, and VERY CONTENTIOUS.