Climate change and economic analysis

Transcription

1 Climate change and economic analysis by Finn R. Førsund Department of Economics University of Oslo * Slides prepared for the Symposium on Energy and CO 2 Emission/Policies Global CO 2 Economics Sandbjerg (University of Aarhus), August 2009 Global CO2 Economics 1

2 Global warming and CO 2 Svante Arrhenius 1896, Nobel prize 1903 Studied causes of ice ages Predicted correctly the change in temperature of doubling of CO 2 Predicted it would take 3000 years Global CO2 Economics 2

3 Global warming threatening human existence Intergovernmental Panel on Climate Change (IPCC) First time the human race is capable of destroying life on earth as we know it with peaceful means Increased surface temperature Massive extinction of species Change in weather patterns Sea level rise from ice melting: 7-20 meters Global CO2 Economics 3

4 The fundamental stock flow trade-off Haavelmo (Nobel prize 1989) (1971): Social entropy Positive utility of current consumption, but negative utility of build-up of social entropy Social entropy: index for accumulation of pollution caused by current production and consumption Social entropy causes negative impacts due to various types of discomforts, and global warming Global CO2 Economics 4

5 Haavelmo s social entropy model Social utility function uxt ((), Zt ()), u > 0, u u u x 2 < 0, < 0, < x Z 2 0 Z Accumulation of social entropy t Zt ( ) = k N( τ) x( τ) dτ 0 The present value of utility t V() t e u[ x( τ), k N() s x() s ds] d = t ρ ( t τ) τ 0 Global CO2 Economics 5 τ

6 The dynamics of social entropy Flow of pollutants, knx x: consumption per capita Accumulated amount N: population k: contribution to social entropy per Z t Catastrophe level time unit of production/ consumption Z: index for accumulated amount Global CO2 Economics 6

7 Sustainability Depreciation of social entropy as pollutants Natural processes of dilution, decaying, chemical processes changing the nature of stocks of pollutants, carbon sinks Fundamental factors for unit additions Population, consumption- and production technology including purification, mix of consumption goods Sustainability Current additions to social entropy counterbalanced by current depreciation Global CO2 Economics 7

8 Introducing decay of social entropy Zt () = kntxt () () αzt () Sustainability: Formal sustainability It must be possible to obtain a steady state for social entropy Emissions are balanced by decay Z() t = 0 kn() t x() t = αz() t Technology influences k, maybe α Global CO2 Economics 8

9 The optimisation problem Introducing a separable utility function uxt ( (), Zt ()) = Bxt ( ()) DZt ( ()), B > 0, B < 0, D > 0, D > 0 The social problem rt Max NBxt [ ( ( )) DZt ( ( ))] e dt xt () 0 subject to Z o 0, xt () 0 Zt () = knxt () αzt () Global CO2 Economics 9

10 Solving the problem The current-value Hamiltonian μ H = N( B( x()) t D( Z())) t + ()( t knx() t αz()) t First-order condition for the flow variable H xt () B ( x( t)) = NB ( x( t)) + μ( t) kn = 0 = μ( t) k First-order condition for the stock variable H μ() t = + rμ() t = ND ( Z()) t + μ() t α + rμ() t Zt () μ() t = ND ( Z()) t + μ()( t α + r) Global CO2 Economics 10

11 Steady state No change in the shadow price on social entropy 0 = ND ( Z( t)) + μ( t)( α + r) μ() t = ND ( Z( t)) α + r Steady state for social entropy 0 = knxt ( ) αzt ( ) Zt ( ) = knx() t α Global CO2 Economics 11

12 The role of population growth Total population N The steady state level of social entropy increases in N The constant marginal damage of social entropy in steady state increases in N Possible link between level of Z and population growth Nt () Nt () = nzt ( ( )), n < 0 Z Global CO2 Economics 12

13 Health effects of climate change London smog disaster 1952 Global CO2 Economics 13

14 London smog disaster premature dead in one week In total dead Caused by particles, soot, SO 2 from heating/cooking with coal Air inversion Lead to prohibition of using coal in London Global CO2 Economics 14

15 Global health effects IPCC Fourth Assessment Report (2007), Stern Review (2007) Changing weather patterns More frequent extreme rains, hurricanes, draughts Spread of tropical diseases Death from drowning, dehydration, malnutrition Global CO2 Economics 15

16 Local health effects Heat waves Premature death among elderly and babies London smog equivalents Reduced air quality due to pollution of particles,, soot, SO2, ozone Loss of productivity due to ill health, costs of prevention and hospital treatment Finding willingness to pay for reduced air pollution using economic estimation methods Global CO2 Economics 16

17 Solving local and global problems jointly The GAINS model of IASA Finding purification cost synergies between purifying local air pollutants and global GHG c = c ( e e, e e ), i = 1,..., N o o i i 1i 1i 2i 2i c > 0, s= 1,2, c > 0 is i1,2 Index i is region,e i1 is local air pollution, e i2 is global air pollution Global CO2 Economics 17

18 The cooperative GAINS model Min c ( e e, e e ) st.. N i= 1 i= 1 o o i 1i 1i 2i 2i * ij 1i j j min o 1i 1i 1i i= 1 N ae + b d, j= 1,.., R e e e, i = 1,.., N N e e * 2i 2 e e e, i = 1,.., N min o 2i 2i 2i Global CO2 Economics 18

19 The optimal solution Necessary conditions c ( e e, e e ) λ a μ + γ = 0, i = 1,.., N o o i1 1i 1i 2i 2i o o i2 1i 1i 2i 2i R j= 1 j ij 1i 1i c ( e e, e e ) σ μ + γ = 0, i = 1,.., N 2i 2i Local pollutants: marginal cost equal to weighted marginal damage Global pollutants: marginal costs equal for all regions and equal to shadow price on constraint on global pollutant Global CO2 Economics 19

20 Illustration Marginal costs S(e 1 min ) γ 1 c 1 c 1 e 2 =e 2 o c 1 * e 2 *<e 2 o c 1 S(e 1 o ) μ 1 e 1 min e 1 * e 1 o Emissions Global CO2 Economics 20

21 Challenges and strategies 1 Population growth Resource availability, biodiversity, pollution: all problems easier to solve with fewer people Technological change New energy technologies most important; renewables, nuclear, increased efficiency in using raw materials Change of composition of consumption A change from material goods to services; culture, education, leisure Global CO2 Economics 21

22 Challenges and strategies 2 Control of population growth must be introduced Vulnerability to climate change Sea level rise: the coastal zone, salt water intrusion happens in poor countries pressure for migration of people on a large scale Melting of glaziers, floods, draughts Health effects, pollution, urban heat waves Actions now on urban air quality, will also abate green-house gases Global CO2 Economics 22

23 Challenges and strategies 3 Developing alternative technologies to coal-fired electricity production Renewables, hydropower, wind power, solar, nuclear Promoting efficiency of use of energy in industry, housing and transport International cooperation, the next Kyoto protocol Equity issues versus cost efficiency Technology transfers, cooperation on developing technologies Global CO2 Economics 23