MIT OpenCourseWare
http://ocw.mit.edu
15.023J / 12.848J / ESD.128J Global Climate Change: Economics, Science, and Policy
Spring 2008
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Analysis of Benefits of GHG
Mitigation
• Why they are needed
• Uses and limits
• Issues in estimation
• Market-based methods
• The Stern Review approach
• Can we do better?
Need for Benefit Measures
• Inform mitigation policy deliberations
– Short-term effort (% reduction or price)
– Long-term goals (atmospheric target)
• Guide adaptation at a regional level
• Stir public interest and concern
Ä Desire that measures be
– Widely understood
– Accepted by diverse parties
– Robust, for long-term use
Use: Inform Current Effort
• Current mitigation is the most important issue
– Think about path of effort
– What is the initial period level?
• Alternative approaches
– B/C analysis: max PV of net benefits
– Set long-run target and work back
– [Precautionary principle?]
• For formal analysis, need a benefit measure
• NOTE: Benefits are implicit in any solution!
Use: Guide Atmos. Target
• FCCC’s facilitating myth: a “danger” level
– Atmospheric GHG concentrations
– W/m2
– ΔT
• Then fold back to current effort by
– Cost effectiveness analysis
• Lowest cost way to attain assumed goal
– Tolerable windows
• Minimum effort required now to preserve future option
• Implicit assumption about benefit function?
Issues In Benefit Estimation
• Weakness in the underlying science
• Conversion to a common unit (like $)
– Limits of expressing all in natural units
– Keep track of multiple attributes?
• Valuation: willingness to . . .
– Pay
– Accept
(what pay to get benefit)
(payment demanded to give up)
• What to assume about adaptation?
Potential Effects of Climate
Change (±)
Climate Damage
Property
Primary Sectors
Other Sectors
Protecton
Agriculture
Energy
Mortality/morbidity
Wetlands
Ocean circulations
Dryland loss
Forestry
Water
Amenity
Species loss
Antarctic Ice Sheet
Fisheries
Transport
Migration
Tourism
Human Well Being Ecosystem Loss
Disaster Risk
Severe storms
Eventual Temperature change (relative to pre-industrial)
Food
Falling crop yields in many developing regions
Severe impacts
in marginal
Sahel region
Rising number of people at risk from hunger (25-60% increase in the 2030s In one study
with weak carbon fertilisation), with half
of the increase in Africa and West Asia.
Rising crop yields in high-latitude
developed countries if strong carbon
fertilisation
Entire regions experience
major declines in crop yields
(e.g. up to one third in Africa)
Yields in many developed regions
decline even if strong carbon fertilisation
Significant changes in water availability (one
study projects more than a billion people suffer
water shortages in the 2080s, many in Africa,
while a similar number gain water)
Water
Small Mountain glaciers
disappear worldwide potential threat to water
supplies in several areas
Greater than 30% decrease
in runoff in Mediterranean
Sea level rise threatens
major world cities, including
London, Shanghai, New York,
Tokyo and Hong Kong
and Southern Africa
Coral reef ecosystems
extensively and eventually
irreversibly damaged
Possible onset of collapse
of part or all of Amazonian
rainforest
Large fraction of ecosystems unable to maintain current form
Ecosystems
Many Species face extinction
(20-50% in one study)
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Extreme
Weather
Events
Small increases in hurricane
intensity lead to a doubling of
damage costs in the US
Risk of rapid climate
change and major
irreversible impacts
Risk of weakening of natural carbon absorption and possible increasing
natural methane releases and weakening of the Atlantic THC
Increasing risk of abrupt, large-scale shifts in the
climate system (e.g. collapse of the Atlantic THC
and the West Antarctic Ice Sheet)
Onset of irreversible melting
of the Greenland ice sheet
o
0C
o
1C
o
2C
o
3C
o
4C
o
5C
Figure by MIT OpenCourseWare, adapted from Stern Review.
Stern
Review
Summary
Getting to Common Units
(Problems of Incommensurability)
~ Uncertainty
– Differences in risk preference
$ Non-market effects
– “Constructed market” methods controversial
– Scale, time overwhelm empirical methods
+ Aggregation
– WTP = f(income)
– People not at the table (discounting)
Market Analysis & Extensions - I
• Traded goods at market prices
– Agriculture (farm budget studies)
– Energy
– Sea level rise (capital loses, with adaptation)
– Health effects (medical costs, lost wages)
• Indirect information from related markets
– E.g., real estate values
• Surrogate markets
– E.g., recreation benefits from travel cost
Market Analysis & Extensions - II
• Hypothetical mkts (contingent valuation)
– Survey methods
– Experimental methods
• Categories of value
– Use
– Option
– Existence
• Special problems in application to
climate change
Future Impact Index
Di (ΔTt ) = A1 (ΔTt ) + A2 [ΔTt ]
X
• Common unit of account: WTP as % of GDP
– Basis: global mean temperature change (ΔT)
– Using literature survey, guess Di(ΔT0 = 2.5 °C), X
– Aggregate to get D = g(T)
• Solve for different ΔT
– & assumed shape
% loss
D0(2.5)
2.5
ΔT
Assumptions Needed
(Nordhaus example)
• Sea-level rise
– For US, assume Q(2.5 °C) = 0.1 % of GDP
– Others: Qr = QUS (ACoastal, r / ATotal, r) / (ACoastal, US / ATotal, US)
• Health
– Estimates of years of life lost (YLL) to disease
– Assume 1 YLL = 2 years of per capita income
• Human settlements and ecosystems
– Assign regions within the range 5-25% of GDP
• Catastrophes
– Probabilities based on Delphi method (survey technique)
– Guess expected loss, regional vulnerability ~ 30% of GDP
A. Baseline-climate scenario, with market impacts and the
risk of catastrophe.
% loss in GDP per capita
2050
0
2100
2150
-5
The Stern
damage
calculation
2200
-5.3
-10
-15
-20
-25
-30
-35
-40
Combined scenarios
Baseline Climate, market impacts + risk of catastrophe
2050
0
20% loss now
and forever
% loss in GDP per capita
5-95% impacts range
2100
2150
2200
-5.3
-7.3
-5
-10
-13.8
-15
-20
-25
-30
-35
-40
Baseline Climate, market impacts + risk of catastrophe
High Climate, market impact + risk of catastrophe
High Climate, market impact + risk of catastrophe +
non-market impacts
Figure by MIT OpenCourseWare, adapted from Stern Review.
“Now and Forever” Costs
900
900
800
800
700
700
Reference
growth rate
600
GDP
100
0
0
2000
2100
2090
2080
2070
2060
2050
2040
2030
2020
2010
2100
100
2090
200
2080
200
2070
New GDP
2060
300
2050
300
2040
Loss 2
2030
400
400
2020
Loss 1
GDP
2010
500
GDP
500
2000
GDP
600
Equivalent Δ
GDP path
900
800
700
Damage
scenarios
500
GDP
Loss 1
400
Loss 2
300
P=Y
200
100
P=X
2100
2090
2080
2070
2060
2050
2040
2030
2020
2010
0
2000
GDP
600
An annuity, indexed to
GDP, with the same
welfare implications as
the projected
(uncertain) damage.
Aggregate Benefit Functions:
Value and Limits
• Guard against unreasonable estimates
• Seek insights, not accurate numbers
– Efficient paths of effort over time
– Explore the role of waiting, learning
• Know when just any number is worse
than just no number at all!
Can We Do Better?
• Data gathering, research and analysis
• A portfolio at different levels of detail (OECD
recommendation)
1. Global physical variables, with analysis of
uncertainty
2. Effects at regional scale, mainly in natural units
3. Market and non-market valuation, aggregation and
estimation of monetary benefit functions