MIT OpenCourseWare
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15.023J / 12.848J / ESD.128J Global Climate Change: Economics, Science, and Policy
Spring 2008
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Economics of GHG Control
• Review of concepts, terminology, issues
• CGE models + sample applications
• Example using price only
• The use of MAC curves
• Technology costing approaches
• Issues in the handling of technology
– Endogenous change & “new” technology
– Barriers, failures and the free lunch
Cost/Welfare Concepts
• Emissions price
• Area under marginal abatement curve
• Simple macroeconomic aggregates
(models with one non-energy output)
– GDP
– Consumption (e.g., Homework #2)
• Equivalent variation (economic welfare)
– Income compensation to restore consumers to
pre-constraint level of welfare (≈ consumption)
What to Include?
• What greenhouse substances?
– CO2 only?
– CH4, N2O, HFCs, PFCs & SF6
– Aerosol precursors (e.g., SO2, black carbon)
– O3 precursors
• Carbon sinks?
• Ancillary benefits of GHG controls?
– Urban air pollution
– Other?
Cost to Whom?
• What unit of analysis?
– Nation
– Global, or Annex I vs. Non-Annex I
– Other?
• Issues of aggregation
– Of nations
– Of sub-national components
Approaches to the Task
Carbon price
Shrt Long Trade Tech’n
term term effects detail
√
√
Market-based (CGE)
≅√
Technology-Cost
√
MAC curves
√
√
√
√
Hybrids
MARKAL-Macro
√
U.S. NEMS
√
Others (e.g., EPPA)
≅√
√
√
√
√
√
≅√
CGE (EPPA): What Tradeoffs?
• Multiple objectives in design
– Analysis of policy cost, short and long term
– Drive the climate portion of the IGSM
• Emphasis in structure
– Market interaction vs. focus on many specific
technologies
– Short-term detail vs. long-term economic change
– CO2 only or all GHGs
• Two versions based on agent expectations
– Recursive-dynamic (the workhorse)
– Forward-looking (some simplifications)
Factors Determining Results
•
•
•
•
•
•
•
•
Population growth
Labor productivity growth
Energy efficiency change (AEEI)
Substitution elasticities
Vintaging assumption
Costs of future technologies
Non-CO2 gas assumptions
Fossil energy resources
à Toy
à Toy
Examples of EPPA Analyses
• Short-term mitigation targets
– Trade effects à Kyoto Protocol
–
–
–
–
Intensity vs. absolute targets
Emissions trading à Cap-&-trade bills (4-2)
Inefficient policies
Multi-gas strategies vs. CO2 only
• Long-term atmos. goals à CCSP study
• Studies of particular technologies/fuels
– Carbon capture and storage à Coal study
– Biomass, solar and wind, nuclear
Effects Through Trade
(Annex I Constrains CO2, OPEC view)
• Penalty on CO2 emissions in Annex I
– Price of Annex I energy use rises
– Æ oil world oil demand: Æ export volume
– Å cost of manufacture of energy-intensive
goods in Annex I, Å cost of imports
• Change in the “terms of trade” & view
– Prices of exports (oil, gas, coal) fall from US?
– Price of energy-intensive imports rises
• Net of all Ä welfare loss
Kyoto Example
Figure 1. Reference and Kyoto Carbon
Emissions
7000
6000
MtC
5000
Annex B
4000
Non-Annex B
Annex-B, Kyoto
3000
2000
1000
0
1995 2000 2005 2010 2015 2020 2025 2030
Time
Transfer of Costs to Energy Exporters
EET
FSU
OOE
EEC
JPN
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
-4.0
USA
EV%
Figure 3. Welfare Effects of Kyoto Protocol: EV%
(NT-D, 2010)
Annex B
1.0
0.5
0.0
-3.0
-3.5
-4.0
Non-Annex B
EV%
SAF
-2.5
RNF
-2.0
RME
-1.5
BRA
VEN
MEX
IND
CHN
IDN
-1.0
KOR
-0.5
Cost of Long-Term Targets
• Total reduction required
– Reference emissions growth
– Carbon cycle (ocean/land uptake)
• The role of technological change
– Ease of substitution
– Autonomous change
– Endogenous change (policy influenced)
• Sources of endogenous change
– AEEI, σ = f(carbon price)
– Explicit modeling of R&D, and its effects
– Learning by doing: Cost = f(∑Q)
• Specification of a “backstop” technology
% Loss in Global World
Product 550 ppmv case (MER)
IGSM_Level1
IGSM_Level2
IGSM_Level3
IGSM_Level4
1200
800
400
0
2020
2040
2060
2080
2100
Year
2000
$/tonne (2000$)
1600
MERGE_Level1
MERGE_Level2
MERGE
MERGE_Level3
MERGE_Level4
1200
800
400
0
2020
2040
2060
2080
2100
Year
2000
$/tonne (2000$)
1600
MINICAM_Level1
MINICAM_Level2
MINICAM_Level3
MiniCAM
MINICAM_Level4
1200
800
400
0
2020
2040
2060
Year
2080
2100
CO2 Price Paths
$/tonne (2000$)
1600
Emissions
price and
IGSM
economic
cost
Percentage Lossin Gross W orld Product
2000
8%
7%
6%
IGSM_Level2
MERGE_Level2
MINICAM_Level2
5%
4%
3%
2%
1%
0%
2000
2020
2040
2060
2080
2100
Origin of the Differences
• Required CO2 reduction
• Assumptions about post-2050
technology
Uncertainty in Ocean Uptake
Cumulative Reduction (GtC 2000- 2100)
Target
(ppmv)
IGSM
MERGE
Mini-CAM
Year
2000
472
112
97
0.0
650
674
258
267
-2.0
550
932
520
541
-4.0
450
1172
899
934
GTC/Year
750
Determinants of the CO2
Effort Required
•
•
Potential achievements with the
non-CO2 gases
2040
2060
2080
2100
2060
2080
2100
IGSM_Level1
IGSM_Level2
IGSM_Level3
IGSM_Level4
IGSM_REF
-12.0
Year
No-policy emissions growth,
uncertain over a century
CO2 uptake by the oceans &
terrestrial biosphere, subject to
scientific uncertainty
-8.0
-10.0
2000
2020
2040
0.0
-2.0
-4.0
GTC/Year
•
-6.0
2020
-6.0
-8.0
-10.0
-12.0
MINICAM_Level1
MINICAM_Level2
MINICAM_Level3
MINICAM_Level4
MINICAM_REF
Role of Science
&Technology
Price vs Percentage Abatement 2050
$2,000
IGSM
Price ($/tonne C)
$1,600
MINICAM
MERGE
$1,200
•
$800
$400
•
$0
0%
20%
40%
60%
80%
100%
Percentage Abatement
•
Price vs Percentage Abatement 2100
$2,000
IGSM
Price ($/tonne C)
$1,600
•
MINICAM
MERGE
$1,200
Differences in technology advance
late in the century make a big
difference in CO2 price & cost
The scenarios assume CCS and
bio-fuels are unrestrained, and for
two models same for nuclear
In the more stringent cases electric
power is essentially de-carbonized
by century’s end
Differences depend on many
technologies, but end-use ones
are critical, e.g.,
– Introduction of H2 as a carrier in
transport and other uses
– Electrification of non-transport
demand
$800
$400
$0
0%
20%
40%
60%
Percentage Abatement
80%
100%
Example Using Price Only
(The MIT Coal Study)
100
CO2 Price ($/t)
80
High CO2 Price
60
40
Low CO2 Price
20
0
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Scenarios of Penalties on CO2 Emissions ($/t CO2 in constant dollars)
Figure by MIT OpenCourseWare.
Global Primary Energy Consumption under High CO2 Prices
(Limited Nuclear Generation and EPPA-Ref Gas Prices)
1000
Energy Reduction from Reference
Non-Biomass Renewables
Commercial Biomass�
Nuclear
Coal w/ CCS
Coal w/o CCS
Gas w/o CCS
Ol w/o CCS
600
400
200
0
2000 2005
2010 2015 2020
2025 2030
2035 2040 2045 2050
Figure by MIT OpenCourseWare.
Global Primary Energy Consumption under High CO2 Prices
(Expanded Nuclear Generation and EPPA-Ref Gas Prices)
1000
800
Energy Reduction from Reference
Non-Biomass Renewables
Commercial Biomass�
Nuclear
Coal w/ CCS
Coal w/o CCS
Gas w/o CCS
Ol w/o CCS
EJ/Year
EJ/Year
800
600
400
200
0
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Figure by MIT OpenCourseWare.
Exajoules of Coal Use (EJ) and Global CO2 Emissions (Gt/yr) in 2000 and 2050 with and without
Carbon Capture and Storage*
Limited Nuclear
2060
Business As Usual
Expanded Nuclear
2050
2000
2060
With CCS
Without CCS
With CCS
Without CCS
100
448
161
116
121
78
U.S.
24
58
40
28
25
13
China
27
88
39
24
31
17
Global CO2 Emissions
24
62
28
32
26
29
CO2 Emissions from Coal
9
32
5
9
3
6
Coal Use: Global
* Universal, simultaneous participation, High CO2 prices and EPPA-Ref gas prices.
Figure by MIT OpenCourseWare.
Marginal Abatement Curve
Marginal
Cost
p
How to
Construct?
Total
cost
O
k
j
Abatement
Aggregating Gases
CO2
Other GHG
or sink
Total
pOT
pCOM
pC
O
kC
O
kOT
O
kCOM
MACs and Banking
2004
2005
MAC
MAC
$20/ton
$10/ton
O
5%
k07
Cut
O
Discount rate = 5%/year
k08
Cut
Shortcomings of MACs
Trade effects
Marginal
Cost
p
Distortions in
markets
Calculation
procedures
?
O
k Abatement
j
National Academies - 1991
100
25% Implementation/High Cost
Cost ($/t CO2 equivalent)
80
60
Energy Modeling
40
20
100% Implementation/Low Cost
0
-20
100% Annual U.S. CO2
equivalent emissions
-40
-60
-80
-100
0
2
4
6
8
Emission Reduction (billion tons CO2 equivalent per year)
Comparison of mitigation options using technological costing and energy modeling calculations.
Figure by MIT OpenCourseWare.
McKinsey - 2007
Cost basis
Discount
rate
What is in
baseline?
What use?
Courtesy of McKinsey & Company. Used with permission.
What is Happening to Cost?
IHS/CERA Power Capital Costs Index
250
231
Index Value
200
179
Overall Portfolio
Portfolio Minus Nuclear
150
100
50
2000
2001
2002
2003
2004
2005
2006
2007
Figure by MIT OpenCourseWare.
Explaining Why Technologies
Are Not Used
• Market failures: decision-makers don’t
see correct price signals
– Lack of information
– Principal-agent problems (e.g., landlordtenant)
– Externalities & public goods
• Market barriers
– Hidden costs (e.g., transactions costs)
– Disadvantages perceived by users
– “High” discount rates
Alternative Views of the Options
Increasing energy efficiency
Alternative Notions of the Energy Efficiency Gap
Technologists'
optimum
Eliminate
"market barriers" to
energy efficiency, such
as high discount rates
and inertia; ignore
heterogeneity
Theoretical
social optimum
Eliminate
environmental
externalities and
market failures in
energy supply
Economists'
narrow optimum
Eliminate market failures in
the market for energy-efficient
technologies
Baseline
Set aside corrective
policies that cannot be
implemented at
acceptable cost
True social
optimum
Net effect of corrective
policies that can pass a
cost-benefit test
Increasing economic efficiency
Figure by MIT OpenCourseWare, adapted from Resources for the Future.
Thinking about Technology
• What is technology, and tech. change?
• What leads to change?
– Does change tend to economize on one
factor or another, in response to prices?
– What is the role of R&D expenditure?
– To what degree is it ad hoc or random?
• Role of “learning by doing”
P
• How to distinguish tech change from
– Change in inputs (in response to price)
– Economies of scale
∑Q
“New” Technologies
• Carbon capture and storage
– From electric power plants
– From the air
• Renewables
– Wind & solar
– Biomass
– Tidal power
– Geothermal
What determines the
likely contribution of
each?
• New generation of fission, and fusion
• Solar satellites
• Demand-side technology
– Fuel cells and H2 fuel
– Other? (lighting, buildings, ind. process, etc.)