Transcript No Slide Title - Stanford University

Integration and
Decision-Making Frameworks
for Climate Change Policy
MS&E 290
Public Policy Analysis
February 27, 2003
Overview
• One More Key Concept
– Discounting From the Future to The Present
– Extending the Concept Across Generations
• Elements of Integrated Assessment
• Two Types of Integrated Assessment Models
– Policy Optimization
– Policy Evaluation
• Uses of Integrated Assessment Models
• Decision Making Frameworks
– Deterministic (Optimization, Simulation, Tolerable Windows)
– Decision Analysis
– Game Theory
The Discount Rate:
What is a Dollar Tomorrow Worth Today
• Current Generation
– Discount Rate Strongly Ties Into the Market Rate of Return on
Capital
– Current Rate of Return on Capital May Be Imperfect Measure
– Even if Not Perfect Movement Away Would be Gradual
• Intergenerational
– Much More Complicated
– Current Rate of Return on Capital May Be Imperfect Measure
– Options Approach May be Preferred
Key Components of Integrated Assessment Models
ATMOSPHERIC COMPOSITION
CLIMATE & SEA LEVEL
Climate
Atmospheric Chemistry
Ocean
Carbon Cycle
HUMAN ACTIVITIES
Energy
System
Agriculture,
Livestock, &
Forestry
Other Human
Systems
Coastal
System
Ocean
* temperature
* sea level
ECOSYSTEMS
Terrestrial
Carbon Cycle
Un-managed
Eco-system
Crops and
Forestry
Hydorlogy
Two Kinds of
Integrated Assessment Models
• Policy Optimization Models
– Focused on Finding Optimal Level of Emissions
– Usually Include Impacts at the Aggregate Level
• Policy Evaluation Models
– Focused on Simulating Effects of Policies
– Usually More Detailed Impacts
– Can be Run Backwards - Tolerable Windows Approach
Types of
Integrated Assessment Models
Deterministic Models
Deterministic
Policy Optimization Models
Deterministic
Policy Evaluation Models
Decision Making
Under Uncertainty Models
Stochastic
Policy Optimization Models
Stochastic
Policy Evaluation Models
Uses Of
Integrated Assessment Models
Deterministic Models
Deterministic
Policy Optimization Models
- Compute Optimal Carbon Taxes,
Control Rates, etc.
-Calculate Costs of Meeting Emission/
Concentration/Climate/Impact Targets
Deterministic
Policy Evaluation Models
- Insure Consistency in Assumptions
- Assess Interactions and Feedbacks
- Identify Critical Gaps in Research
Decision Making
Under Uncertainty Models
Stochastic
Policy Optimization Models
Stochastic
Policy Evaluation Models
-Assess Optimal Policies
- Compute Probabilities of
Under Uncertainty
-Compute Value of
Information/Research
Cost/Benefits of Climate Policies
- Compute Probabilities of
Meeting Targets
Global Cost/Benefits Circa 2070
500
450
400
Carbon Tax ($/ton)
350
300
Marginal Cost
250
Marginal Benefit
200
150
100
50
0
1
2
3
4
5
6
7
Global Emission Reductions (BtC)
8
9
10
North Costs/Benefits Circa 2070
350
300
Carbon Tax ($/ton)
250
200
Marginal Cost
Marginal Benefit
150
100
Gain
50
0
1
2
3
4
5
6
7
Global Emission Reductions (BtC)
8
9
10
South Costs/Benefits Circa 2070
250
Carbon Tax ($/ton)
200
150
Marginal Cost
Marginal Benefit
100
50
Loss
Gain
0
1
2
3
4
5
6
7
Global Emission Reductions (BtC)
8
9
Emission Reductions at Nash Equilibrium
9
Emission Reductions by the North
(Billion Tons C)
8
7
6
5
North's Reaction Function
South's Reaction Function
4
3
2
1
0
0
1
2
3
4
5
6
7
Emission Reductions by the South (Billion Tons C)
8
9
Deterministic Policy Optimization Models:
Balancing the Costs of Controlling Carbon Emissions
Against the Costs of Climate Impacts Over Time
Carbon
Emissions
Optimal With
No Impacts
2000
Time
Incremental Optimal
Value/Cost With
Impacts
Optimal
Optimal With
With
No Impacts
Impacts
2100
2000
2100
Time
Simple Example of Uncertainty
in Policy Optimization Models
Case
Climate
Sensitivity
(Per CO2
Doubling)
Damage
Function
(Per 2 Degrees
C Increase)
90% Prob.
2.5 Degrees C
2% of GDP
10% Prob.
4.8 Degrees C
15% of GDP
Hedging Against Bad Climate Outcomes
Global Carbon Emissions (GtC)
25
20
Reference
90% Probability Scenario
10% Probability Scenario
Hedge/90% Scenario
Hedge/10% Scenario
15
10
5
0
2000
2010
2020
2030
2040
2050
Year
2060
2070
2080
2090
2100
Hedging Against Bad Climate Outcomes
Carbon Tax ($2000/metric ton)
1200
1000
800
Reference
90% Probability Scenario
10% Probability Scenario
Hedge/90% Scenario
Hedge/10% Scenario
600
400
200
0
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
Year
Game Theory Formulations
• Look at Incentives for Countries to Take Action on
Their Own or in Coalitions
• Can Be Either Formulated Either Deterministically
or Under Uncertainty
• May Lead to Over-Estimating Rationality and
Propensity of Nations to Act Only in Their Own Self
Interest
Figure 1.6: The Global Sustainability Perspective
Alternative
Development Pathways
Development
Equity, Sustainability
Finance, Technology,
Livelihoods
Environmental &
Socio-Economic
Impacts
Adaptation,
Vulnerability
Costs
co-benefits
Mitigation
Emissions
Climate
Policy
Sustainable
Development
Policy
Vision,
Lifestyles
Some Stated Objectives for
Impacts, Adaptation and Mitigation Parts of
IPCCs Third Assessment Report (TAR)
Expand Scope of SAR to Include Development/ Developing Country
Perspective on Climate Change
CC is Ultimately a Development/Developing Country Problem
Global Models Are Very Weak in Representing Developing Countries
Developing Countries Seem Resistant to CDM, emissions trading, etc.
Expand Scope of SAR to Include Insights From Social Sciences Other
Than Economics
In Part, Related to Developing Country Perspective
In Part, Realization That Any One Discipline is Insufficient
Review/Update Economic Analyses/Insights Contained in SAR
A Revealed Preference Study
of Climate Change Policy Analyses
Class of
World Citizen
2 Billion People
Without Markets
Typical OECD
(AEA Member?)
Analysis
What 2 Billion
People?
ROW Analysis
High Priority:
Reduce Their
Vulnerability
2 Billion In or Near They Don’t Count High Priority:
Poverty with Fragile for Much!
Reduce Their
Markets
Vulnerability
2 Billion Potential
Decaf Latté
Drinkers
Half Are Stuck In They Can Take
Transition, But the Care of
Rest We Can Help Themselves
Possible Moral for This Story
“And these children that you spit on
as they try to change their world
are immune to your consultations…
they’re quite aware of what they’re going through”
<and whose putting them through it>
-David Bowie
Alternative Moral For Story
“The differences in experiences between people in the
North and people in the South are so great that
the environmental economics to be found in the North
do not much resonate in the South”
-Partha Dasgupta, Cambridge University
(From invited address at 45th anniversary
of Resources for the Future)