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Economics 331bSpring 2011

Economics of Climate Change:Impacts

Agenda

This week: ImpactsWeek 10: MitigationWeek 11: Discounting and optimal policies

Week 12: Alternative policies ?Week 13: International agreements ?

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Consumption

Basics of impacts analysis

Time

Impacts or damages

C=F(K,L,A,T)

C=F(K,L,A,T’)

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Impacts Analysis

Impacts are the reason we care about climate change.

Major areas of concern:• market economy (agriculture, manufacturing,

housing, …)• non-market sectors (health, recreation, …)• non-human systems (ecosystems, species, oceans, …)

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”).

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Basics of Impact Analysis

1. Start with a production function: Q j,t = F(K j,t ; W j,t , T j,t), t in future, j sector.

where Q j,t = output; K j,t = capital and other conventional inputs; W j,t = weather (realization); T j,t = climate

2. We often have data on the impact of weather changes , ∂Q j,t /∂Wj,t.

3. But, we need to understand climate impacts, ∂Q j,t /∂ T j,t

4. “Climate” is really a vector of important climatic variables (temperature, precipitation, soil moisture, snow pack, …), often at detailed geophysical resolution.

5. Impacts analysis requires estimating the production function in the distant future, at which time the impacts will occur.

6. Finally, we need to discount back the impacts to the present.

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Share of total national income in sector

Sector by impact 1948 1973 2007

Heavily impacted sectors 9.3 3.9 1.1 Farming 8.2 3.4 0.8 Forestry, fishing 1.1 0.6 0.2

Moderately impacted sectors 11.7 11.1 9.7 Real estate (coastal) 0.2 0.2 0.3 Transportation 6.0 3.9 2.9 Construction 4.2 5.0 4.4 Utilities 1.4 2.0 2.0

Lightly or negligibly impacted sectors 79.1 85.0 89.3

Real estate (non-coastal) 4.9 6.9 8.5 Mining 2.8 1.4 2.0 Manufacturing

Durable goods 13.3 13.4 6.7 Nondurable goods 12.7 8.5 5.0

Wholesale trade 6.4 6.7 5.8 Retail trade 9.0 7.8 6.5 Warehousing and storage 0.1 0.2 0.3 Information 2.6 3.4 4.2 Finance and insurance 2.4 4.0 7.9 Rental and leasing services 0.6 0.8 1.0 Services and residual 18.1 24.2 37.2 Government 11.1 14.6 12.6

TOTAL 100.0 100.0 100.0

Shares of economy by vulnerability, US

Some important sectors or issues

- Agriculture- Sea-level rise- Hurricanes- National security- Ocean acidification- Species losses- Health- Tipping points and singularities

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Example from Agriculture

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

Q j,t = F(Kj,t ; W j,t )

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

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Diagram used to show disastrous effects of climate change

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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.

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Short-run v. long-run productivity

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The tricky issue of declining share of agriculture

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1965 1970 1975 1980 1985 1990 1995 2000 2005

Shar

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agr

icul

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in G

DP

(%)

High income East Asia

Latin America South Asia

Sub-Saharan Africa

Can there be “negative damages”?

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Summary of studies on Rice from IPCC

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IPCC, Fourth Report, Impacts, p. 286. “Responses include cases without adaptation (red dots) and with adaptation (dark green dots). Adaptations+ represented in these studies include changes in planting, changes in cultivar, and shifts from rain-fed to irrigated conditions”

Agenda for today

1. Finish agriculture2. Calculation of marginal damages3. Sea-level rise4. Return to adaptation5. Summary of damages

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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.

Source: Mendelsohn et al.; Cline

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Price of carbon emissions

Marginal Damages

The basic analytical structure

Abatement

Pcarbon*

Marginal Cost

0Abatement*Market!

Where does the marginal damage function come from?

1. Recall that we estimate the damage function:

Dt = D(ΔTt ) = f(Kt , Lt , At ; Tt +ΔTt ) - f(Kt , Lt , At ; Tt)

2. We also relate temperature change to past emissionsΔ Tt = g( E0 , E1 , E2 , … , Et )

3. From which we get the marginal damage function .

The marginal damage is sometimes called “social cost of carbon, SCC, which you will calculate soon.

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rvt t t t v t

v=t

SCC = MD = [PV (D )] / E = [ D e ] / E

Global Warming and Sea Level Rise (SLR)

Major variations in geological history (-150 to +40 meters)

Sources in future:- Thermal expansion (up to 2 meters in next 500 years)- Small glaciers (0.5 meters)- Greenland (up to 6 meters)- Antarctic (56 meters), but major unstable is West Antarctic Ice Sheet (7 meters)- Arctic Sheet (very likely to disappear, 0 meters)

Major issues are stability and irreversibility

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18 cm rise since 1900 Current rate:3.3 cm per decade IPCC

Satellite Altim

eter

Tide Gauges

Observed Sea Level Rise (SLR)

Rahmstorf, Cazenave, Church, Hansen, Keeling, Parker and Somerville (Science 2007)

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Recent Global Sea Level Rise (SLR) Estimates

Delt

a C

om

m. WB

GU

Data

Data:Church and White (2006)Scenarios 2100:50 – 140 cm (Rahmstorf 2007)55 – 110 cm (“high end”, Delta Committee 2008)Scenarios 2200:150 – 350 cm (“high end”, Delta Committee 2008)Scenarios 2300:250 – 510 cm (German Advisory Council on

Global Change, WBGU, 2006)

Rahmstorf at http://www.ozean-klima.de/

SLR = 0 meters

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Econ 331

Impact of SLR on New Haven

http://flood.firetree.net/

SLR = 3 meters

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SLR = 9 meters

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SLR = 13 meters

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Adaptation again as applied to SLR

Suppose that the capital stock is:

10% irreplaceable treasures (art, rare books, …)30% structures (lifetime ~ 100 yrs.)30% mobile equipment like planes and cars (lifetime ~ 10 yrs.)30% short-lived equipment like computers (lifetime ~ 2 yrs.)

Now consider adaptation in terms of a warning time for a 7-meter SLR:Tsunami (30 minutes)Asteroid (20 years)Global warming (200 years)

What would you do (say for Yale) with each warning time?

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National Academy Report on Abrupt Climate Change

“Illustration of difference between impacts with and without adaptation. The upper line shows the impact of climate change with full adaptation where farmers can change crops and irrigate…. The lower line shows the impacts without adaptation, as is likely to occur with abrupt climate change. Note that … the costs are likely to be lower with adaptation. We have also shown a break in the no-adaptation line to reflect the potential for sharp threshold effects, such as those due to floods or fire.” (National Academy, Abrupt Climate Change, 2002.)

Central message

For adaptive systems, need to consider adaptations to climate change (farmers, skiers, swimmers, trees, coral reefs, …)

But must consider the costs of adaptation as one of the costs of climate change (costs of moving, snowmaking machinery, new crops, …)

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

Source: IPCC, Second Assessment Report

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Damage summary from Tol survey: global

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Global mean temperature increase (°C)

Dots from Tol survey

IPCC estimate

Damage summary: global

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Global mean temperature increase (°C)

Line is Yale DICE/RICE model

Dots from Tol survey

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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 and tipping elements- 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

Summary of Impacts Estimates