What is the economic issue?
Bruce A. McCarl
Distinguished Professor of Agricultural Economics
Texas A&M University mccarl@tamu.edu
http://agecon2.tamu.edu/people/faculty/mccarl-bruce/
Energy
Climate Change Mitigation
Climate Change Adaptation
Climate Change Effects
Theme
+ Climate Change
+ Emissions
+ Water
= Social and Agricultural Risk
+ Energy
Plan of presentation
Sources of Risk
Manifestation
Decisions to be made
So what is the Economic issue
Externality is the uncompensated impact of one group’s actions on the well-being of
bystanders.
If effect on bystanders is adverse, a negative externality.
If effect is beneficial, a positive externality.
Fossil fuel emissions can be a negative externality.
Market failure Because buyers and sellers neglect the external effects of their actions
when deciding how much to demand or supply, the market equilibrium is not efficient
when there are externalities.
Income distribution - who gains/ who loses and where – high vs low latitudes
Intergenerational equity -- Bystanders are those damaged by warmer climate now and in
future
Co-benefits some actions that can be undertaken also clean up air and water and enhance
farm incomes and damage trade. How do we consider
Policy issue -
Do we act now to benefit those in future
Policy Alternatives
Wait for more information –do
little and live with it
Plan to adapt
Try to reduce future change
Mitigate emissions
So What could we do?
Monitoring
Adapt
Reducing Drivers
Reactions to climate change basically consist of four directions:
• Live with the effects – do little
• Reduce future extent by limiting GHG net emissions - Mitigation
• Alter the way we do things adapting so as to reduce the impact of
change - Adaptation
• Monitor what is happening- Information
Last three compete with traditional investment
McCarl, B.A., "Some Thoughts on Climate Change as an Agricultural Economic Issue", Journal of Agricultural and Applied
Economics, vol 44 no 5, 299-305, 2012.
Striking a Balance
Climate
Monitoring
Adaptation
Mitigation
NonClimate
Consumption
R&D
Infrastructure
Education
& Much more
• Inevitability of adaptation
• Likely need adaptation and monitoring
• Attention to mitigation as we grow
Policy Challenge
• Most effects in future
• Mitigation and adaptation costs now
• Exact nature of effects and effectiveness of adaptation and
mitigation are uncertain + controversial
• Unilateral action on mitigation not effective but collective
no action means nothing gets done
• Resource and investment competition between current
production/R&D and needs for mitigation/adaptation
So grand challenge is
How much to invest now in mitigation and adaptation in
interest of future parties at likely cost of current?
Economic Needs
• Cost Benefit Analysis
– Do damages merit action?
• Vulnerability costing
– How economic are mitigation actions
• How costly are they – lost income
• How beneficial are they – avoided climate change
– How beneficial are adaptation actions
• How costly are they – lost income
• How beneficial are they – avoided climate change
Economic Needs
• Income distribution Analysis
– Who gains – who loses
– Economic fairness
Price
D
S
P*
Q* Quantity
Economic Needs
• Income distribution Analysis
– Who gains – who loses
– Economic fairness
Price
D
S’
S
P’
P
Q’ Q Quantity
Economic Needs
• Income distribution Analysis
– Who gains – who loses
– Economic fairness
Consumer welfare
Before= a+b+e+f
Price
D
S’
a
S
P’
P
b
c
ef
d
g
Q’ Q Quantity
Consumer welfare
after= a
Consumer welfare
loss= -b-e-f
Economic Needs
• Income distribution Analysis
– Who gains – who loses
– Economic fairness
Consumer welfare
loss= -b-e-f
Price
D
S
P’
P
Producer welfare
Before= c+d+g
S’
a
b
c
ef
d
g
Q’ Q Quantity
Producer welfare
after= b+c
Producer welfare
Change= +b-d-g
Economic Needs
• Intergenerational equity analysis
– Who gains – who loses
– Economic fairness
Suppose we have a 4% discount rate
Suppose damages from 2052 on are $100 per year
How much can you spend now to avoid?
Economic Needs
• Intergenerational equity analysis
– Who gains – who loses
– Economic fairness
Suppose we have a 4% discount rate
Suppose damages from 2052 on are $100 per year
How much can you spend now to avoid?
NPV of $1 realized 40 years from now is (1/(1.04)^50)=$0.14
Economic Needs
• Intergenerational equity analysis
– Who gains – who loses
– Economic fairness
Suppose we have a 4% discount rate
Suppose damages from 2052 on are $100 per year
NPV of $1 realized 40 years from now is (1/(1.04)^50)=$0.14
NPV of 100 annuity is 2500 (100/0.04)
So willingness to pay now is $351 (2500*0.14).
Would you do it?
Is it fair to those in the future?
Economic Needs
• Co benefit analysis
– Direct gains from actions
– Indirect gains
Weighing them off
• Incentive design analysis
Tax, Subsidy, Market, Quota
Accepting proposals
Economic Needs
• Share of a given amount of emissions control
CN
All Non-ag
CA
Q
All ag
CA is cost of abatement by Ag, CN is cost of abatement by Non17Ag,
Economic Needs
• Global perspective
Common property atmosphere and climate
Free rider
Who should pay
Sheer size of market
Economic Needs
• Ag perspective
inelastic vs elastic demand who gains
Price
D
S’
S’
S
P’
D
S
P
Q’ Q Quantity
Q’ Q Quantity
Action on Mitigation
Limiting emissions
Mitigative Actions
Reduce emissions
Capture
Switch fuels
Natural Gas
Nuclear
Alter consumption
Increase absorption
Mechanical sequestration
Oceans
Mines
Aquifers
Biological Sequestration
Forest
Soils
Biofuels
Hydrogen
Per-capita fossil-fuel CO2 emissions, 2005
World emissions: 27 billion tons CO2
AVERAGE TODAY
1-
Source: IEA WEO 2007 and Socolow presentation at Americas Climate Choices
STABILIZATION
Why Mitigate
Greenhouse Gas Forcing and Climate Change
As above
Lagged time between action and response
Compliance with International Agreements
Domestic Policy
Bush Rose Garden an 18 percent reduction in
emissions intensity between now and 2012 - will allow
actual emissions to increase 12 percent.
International attitudes toward US emission levels
Need for cheap emission offsets
Linkage to other goals for agriculture and environmental impacts
Potential emergence of a market
Industry Attitudes
Types of Adaptation Actions
Adaptation can be “autonomous” or “planned.”
Autonomous adaptations are actions taken voluntarily by
decision-makers (such as farmers or city leaders)
Planned adaptations are interventions by governments to
address needs judged unlikely to be met by autonomous
actions
Public sector plays important roles in both cases.
• Support autonomous adaptation by providing information,
shaping market conditions and developing technologies
• Act more directly by developing plans and strategies,
providing resources, and undertaking projects (such as
infrastructure development).
Means to Adapt
Investment to facilitate adaptation
•Research
•Extension
•Capital investment
Ag Adaptation
•Irrigation
•Drought resistant varieties
•Tolerant breeds and varieties
•Crop and livestock mix
•Tree rotation age
•Abandonment
McCarl, B.A., Adaptation Options for Agriculture, Forestry and Fisheries, A Report to the UNFCCC Secretariat Financial and Technical Support
Division, 2007. http://unfccc.int/files/cooperation_and_support/financial_mechanism/application/pdf/mccarl.pdf
Why Adapt - Inevitability
Characteristics of stabilization scenarios
Year CO2
needs to peak
Year CO2
emissions
back at 2000
level
Reduction in 2050
CO2 emissions
compared to 2000
2.0 – 2.4
2000 - 2015
2000- 2030
-85 to -50
490 – 535
2.4 – 2.8
2000 - 2020
2000- 2040
-60 to -30
535 – 590
2.8 – 3.2
2010 - 2030
2020- 2060
-30 to +5
590 – 710
3.2 – 4.0
2020 - 2060
2050- 2100
+10 to +60
710 – 855
4.0 – 4.9
2050 - 2080
+25 to +85
855 – 1130
4.9 – 6.1
2060 - 2090
+90 to +140
Stabilization
level
(ppm CO2-eq)
Global mean
temp. increase
at equilibrium
(ºC)
445 – 490
IPCC WGIII Table SPM.5: Characteristics of post-TAR stabilization scenarios WG3 [Table TS 2,
3.10], SPM p.23
Why Adapt
Greenhouse Gas Forcing and Climate Change
Lagged time between action and response
Inevitability of climate change
Slow mitigation action
Policy Implementation Choices
Carbon Mkt
Like for SO2
Farm Program
Green aspects
Govt Carbon
Program
Adaptation
Investment
Adaptation versus Mitigation
Investment Allocation
Economic Considerations
Activity
Consequences
Consumption
Current Utility
Conventional investment
Future production and
consumption benefits
Adaptation investment
Avoided climate change
damages to production now
and possibly in future- more
consumption
Mitigation investment
Avoided extent of climate
change with lessened to
production in future- more
consumption
Next few pages based on Wang, W.W., and B.A. McCarl, "Temporal
Investment in Climate Change Adaptation and Mitigation", 2010.
Optimal Time Path of Adaptation
and Mitigation Investment
Figure 5. Optimal investment of adaptation and
mitigation in the model with both allowed
Figure 6. Temporal investment distributions between
adaptation and mitigation
Reasons for Differences:
• The different mechanism of adaptation and mitigation
• The different timing of results from adaptation and mitigation
So Where Does an Economist Come In?
Example issues
• What are effects/costs of climate change, now and in future?
• What Adaptation actions are possible and what are best
(those having best cost benefit results in reducing impact of
change)
• What Mitigation actions are possible and best (most effective
in reducing the extent of climate change)
• How can we determine who/what gains, who/what loses and
how do we adapt
• How do we configure measurement and monitoring (best
system for finding out what is occurring and where)
• How can we predict what private and public actions will do to
climate change extent and effects plus how that will that affect
the ecosystem, economy and social groups
Adaptation
Ag/Ecosystem items
• R&D - Heat tolerant crops, Low water using crops, Pest and
disease resistance/treatment, Heat tolerant livestock breeds,
Invasive species management
• Risk management assistance
• Variability insurance
• Information Dissemination
• Adaption practices
• Altered enterprises
• Infrastructure investment - water control, application
efficiency, migrated processing
• Managing previously unmanaged items – ecosystems,
species migration, other?
Non Ag items (but ag related)
• Non ag water conservation including landscape alteration
• Land conservation
Aisabokhae, R.A., B.A. McCarl, and Y.W. Zhang, "Agricultural Adaptation: Needs, Findings and Effects", Handbook on Climate Change and
Agriculture, Edited by Robert Mendelsohn and Ariel Dinar, Published by Edward Elgar, Northampton, MA, pp 327-341, 2011.
McCarl, B.A., Adaptation Options for Agriculture, Forestry and Fisheries, A Report to the UNFCCC Secretariat Financial and Technical
Support Division, http://unfccc. int/files/cooperation_and_support/financial_mechanism/application/pdf/mccarl. pdf, 2007.
Effects Monitoring
Information Development
• Identify threats
• Current
• Projected
• Identify observed adaptations
• Natural
• Autonomous
• Identify adaptation alternatives and responses
• Autonomous Adaption practices
• Places where public assistance may be needed
• Threat and adaptation action assessment
• Likely consequences
• Unanticipated consequences
• Identify limits to adaptation
Bringing in Mitigation
Ag and range and ecosystems small part of the issue
• Identify emission threats
• Permafrost
• Peat
• Fires
• Identify feasible, cheap mitigation possibilities
• For threats
• For existing systems
• Identify ways to grow without growing emissions
• Identify ways to maintain and grow food production
• Without more emissions
• Protecting environment
• Incentive design