Centre for Computational Finance and Economic Agents
Cost Benefit analysis traditional style v ACE
approach with Digital Mapping of Transition
from High to Low Carbon Energy Base
Professor Sheri Markose
Director CCFEA
Economics Department
University of Essex
Presentation:
Climace meeting 14 May 2009
Climate Change Impacts: Objective
of Sustainable Development
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Environmental sustainability: institutionalization of necessary processes that
can prevent environmental degradation, over use of natural resources, the
triggering of irreversible climate change and the onset of health and life
threatening environmental hazards
Socio-economic sustainability refers to the capacity of systems to be viable
and resilient whilst maintaining cohesion, conditions of civil society and
improved standards of living
ES KEY INGREDIENT OF SOCIO-ECONOMIC SUSTAINABILITY
Till recently technological and industrial developments were neither
constrained by environmental considerations nor were the processes of
technological innovation itself spurred on by the need to prevent the
widespread economic and environmental negative externalities from
industrialization.
Fundamental new driver for technological innovation which comes from
considerations of environmental sustainability :firms and indeed nations are
aiming to be economically dominant players in green technology and even
financial solutions for risks from climate change
45% growth to over $1-2 Trillion of Environmental Industries by 2015
CLIMATE CHANGE and
EXTREME WEATHER EVENTS
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Affect all business/sectors from aviation to agriculture
Rainfall and availability of water
Sea level rise : Coastal Erosion
Energy Systems
Transportation and Other Infrastructure
Severe climate events eg flooding
Public Health
• Ongoing trigger for ADAPTATION which is regional
• Anticipatory mitigation leading to Carbon Abatement Technology
Innovation CAT-I
• CONSERVATION : Retaining extant technology
• New Green Sector Knowledge ;Household Behaviour /Preference
Change ‘green ethic’; Tech- Structure Change : These are not
incremental changes
Traditional Cost Benefit (C-B) Analysis for
Economic Impact of Climate Change
• DICE (Dynamic Integrated Climate- Economy Model,
Nordhaus 1992) using GAMS (General algebraic
Modelling Syntax)
• Single aggregate equation for ‘representative agent or
social planner’
• Most C-B done in this vein- with aggregation proceeding
from sectoral breakdown of GDP, emissions and costs of
abatement
• Stern Review uses PAGE2002
• MARKAL-Macro (Market Allocation Dynamic
Optimization) underpins 2007 Energy White Paper
Economic Cost of Climate Change
Model : Economic Components

C
t
Max  1    Lt log  t
t 0 
 Lt
T



K t  1   K K t 1  I t 1
Qt  t ALt
1
Kt
Qt  Ct  I t 1

Eq. 1. Consumption Function
Eq. 2. Capital Growth
Eq. 3. Cobb-Douglas Production
Function
Eq. 4. Macroeconomic Identity
Economic Cost of Climate Change
DICE Model :Climate Components
t

1 b  

b2
1  dTe 
1
2
t
Et   1   Qt
CCt  Et  1   CC CCt 1
Eq. 5. Climate Change Factor
Mu : Abatement rate ; Te: Temperature
b1 , b2 give abatement cost
Eq. 6. Emissions Function
Eq. 7. Carbon Concentration Growth
Te growth related to CC
DICE-Model Done with Matlab !
No need for Super-computing
• Beguilingly simple
• Parameters for costs of abatement and costs of
temperature increase: Pure Fiction ?
• As Stern Review Results were criticised: so can
mine
• Underestimate investment costs of
abatement(b1, b2); increase costs of temperature
change : We have a convincing story
• Abatement Rate =30%;Cost Average £59 bn pa
• Abatement Rate=50%;Cost Average £247bn pa
Economic Cost of Climate Change Model: 100Years
Economic Cost of Climate Change Model: 100Years
Critique of DICE/M-M/PAGE
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Main responses to climate change: Adaptation, Conservation (reduce use of
CO2 high energy with extant technology); CAT-I Carbon Abatement
Technology Innovation
Consumer preferences unchanging during model horizon : hence no
consideration of diffusion of ‘green ethic’
Extensive study of household preference change: In the UK using BHPS
data
No link up to institutional structures and incentives involved within Sectors
eg Emissions Trading ; Insurance and Finance sectors involved in
innovative risk management for extreme climate events (catastrophe
insurance )
No model of competitive co-evolution arms race which already in place for
CAT-I where green sector growth and drive for market share has started;
New CAT-I firms becoming market leaders or extant firms converting to
CAT (eg Walmart/Asda and Honda showcasing their green technology )
See, Neil Strachan UKERC on pros and cons of Markal-Macro
Multi-Scale Complex System Analysis
Needed
• Sectoral disaggregation alone not enough for policy analysis
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Most of all no transitional path dependencies : Necessary to digitally and
dynamically track the transition of the economy from high carbon use to low
carbon
Marginal Cost- Benefit Analysis assume incremental change and not major
structural or emergent change
Micro-decisions of interconnected agents (household or firms ) can have
macro-systemic implications: CAT-I disruptive technology change
accelerated absolescence of extant industry
How an economy transits to low carbon in terms of lost employment and
output in ‘old’ technology and drivers for GDP growth through a combination
Adaptation, Conservation and CAT-I requires ACE type frameworks
Why? Individual behaviour change; CAT-I technology race ; business
and risk management innovation; govt. to coordinate with all three; all
being informed and taking responsibility
Global Market for Environmental Goods and Services: $548 billion in 2004
Projected to be over $1- 2 Trillion by 2015
US, EU and Japan account for 94% DTI Report on Emerging markets in
EGS Market by Country 2004
Environmental Sector (J.Selwyn)
250
211 (38.5%)
210 (38.3%)
$ Billion
200
150
93 (17.0%)
100
50
45(8.2%)
UK
18 (3.2%)
14 (2.5%)
0
US
EU
Japan
China
India
(UK CEED, 2006)
45% growth in world markets to 2015
$ Billion
World EGS Markets to 2015
900
800
700
600
500
400
300
200
100
0
2002
2005
2010
2015
Year
(UK CEED, 2006)
DIGITAL MAPPING OF UK FIRMS’ PARTICIPATION IN GREEN TECHNOLOGY CLUSTERS AND ETS
Methodology
Institutions and Incentives : Multi-Scale
The UK transition to a low carbon economy requires the
large-scale development and implementation of CATs.
This project examines how this occurs via market and
price incentives from participation in Emissions
Trading Schemes (ETS) and Green clusters. The
latter are local energy networks that provide energy to
local industry and households with increased energy
efficiency and large reductions in emissions. The aim of
this research project is to identify and understand the
drivers
for
the
implementation
of
CATs
in
UK
DTI has identified several regions within the UK with
increased uptake of CATs and the development of
localised green clusters (UK CEED, 2006). Together
with increased shift towards regional planning offices
and regional innovation policies, the development of
green clusters provides an important step for the
transition to a low carbon economy.
Industry D
Generator A
Generator B
Industry E
Generator C
domestic
From centralised
to green clusters
storage
Generator A
Industry D
Generator B
Industry E
Generator C
domestic
local production
The methodology consists of two steps:
1.Analysis of diffusion of CATs and infrastructure
development, localised incentives and UK-ETS on
regional clusters (’00 – ’09)
2.Development of Agent-Based Model for:
1.Modelling of complex interaction between
competition and technology development
2.Dynamic tracking of historical and future
transition of green clusters
3.Test bed for policy instruments
Model framework
Governance
socio-economic
sustainability
index
Micro-behaviour
Expected outcome
The following outcomes are expected from this
research project:
•Understanding of drivers for evolution of green
clusters and impact of ETS
•The role of competition in the development of CATs
•Understanding of interaction between local
governance and national and international
policies on energy & innovation
•Construction of a socio-economic sustainability index
•Test bed for exploration of existing and development
of new policy instruments
Climace and Flame Needed
• Tracking household level consumption and
behaviour/preference change for green goods
• Dynamic tracking of interconnected multi-scale
firm level CAT-I and ETS Activity
• UK regional and sectoral adaptation projects
• Explicit incorporation of climate change risks to
business and climate change financial products
• Computational test beds for policy analysis
• Socio-economic sustainability index in addition
to DICE type cost benefit analysis