The ultimate question policy makers are interested in is how to reduce climate change vulnerability most cost-effectively:

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1 The Opimal Timing and Invesmen Size of Adapaion and Miigaion Sraegies Carlo Carraro, Francesco Bosello, Enrica De Cian Fondazione ENI Enrico Maei Venice, April 2nd 2009 Moivaion Failure of implemening naional and inernaional miigaion policies and increasing awareness of climae ineria gradually pu adapaion under he spoligh of science and policy Alhough UNFCCC (992) already referred o adapaion (Ar. 2 and Ar. 4), adapaion has become a sraegic negoiaion iem only recenly (e.g. he Bali acion pla COP4) The ulimae quesion policy makers are ineresed in is how o reduce climae change vulnerabiliy mos cos-effecively: - knowing he size and he regional disribuion of damages - he cos effeciveness of alernaive policies - heir sraegic complemenariy/rade-off Opimal sraegy mix using miigaion and adapaion

2 Ouine.The Wich model and is damage funcion 2.The adapaion module 3.Model calibraion and baseline 4.Adapaion vs miigaion: resuls 5.Sensiiviy analysis 6.Concluding remarks 2. The Wich Model and is Damage Funcion A dynamic inegraed model of he world economy assessing he opimal response(s) of he economic sysem o climae change impacs and policies based on cos effeciveness or cos efficiency consideraions. Hybrid: i is an opimal growh model wih perfec foresigh (op down view of economic developmen) wih a boom up specificaion of he energy secor, feauring 5 echnologies. Invesmen in each of hem is a sraegic decision variables Regions inerac hrough GHG emissions, echnology spillovers, energy markes, and rade of carbon permis. Hence, gameheoreic approach. Cooperaive and non cooperaive soluions can be compued. Hard linked model: Global mean emperaure feeds back ino each regional economy hrough a reduced-form damage funcion 3 The model is solved numerically.

3 .2 The Wich Model: he non-cooperaive soluion Each region chooses he opimal pah of a se of conrol variables ha maximise own social welfare (ineremporal uiliy of per capia consumpion), wih a declining pure rae of ime preference: subjec o he budge consrain C { log [ c( ) ]} W ( n) = L( ) R( ) [ + ( v) ] R( ) = ρ v = 0 5 ( n ) = Y ( ) I ( ) I ( ) I ( ) O&M ( ), C j R & D, j j j j j Key conrol variables are invesmens in differen energy generaing echnologies, in echnical change and in physical capial The WITCH model: Damage Funcion As in Nordhaus and Boyer (2000), WITCH damage funcion includes adapaion as a componen of oal climae change coss, however i does no separae proecion coss from residual damage. Adapaion (pooled) is hen assumed o be a is opimal level 2 CCD = θ T + θ 2 T Global mean emperaure feeds a n n region-specific quadraic damage funcion (CCD including adapaion coss) ha drives a wedge beween gross and ne YN = YG oupu + CCD When CCD 0, YG YN 5

4 .4 The WITCH model: Regional Damage Regional Damage Funcions 6 Percenage loss in GDP Time horizon Climae change is damaging for all regions only afer 2080, when global mean emperaure increases above 2.5 C (compared o pre-indusrial levels) EASIA LACA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 2. Modelling Adapaion in he WITCH model = YN YG + CCDA CCDA = CCD + AD Climae Change Damage NET of adapaion (residual damage) drives a wedge beween gross (YG) and ne oupu (YN) Adapaion can reduce damages from climae change CCD = θ T +θ n 2 n T γ 3n Climae change damage depends on emperaure Adapaion is cosly => i compees wih alernaive uses of regional income YN = C + I + IR & D + I + IAD j, J n n, 7

5 2.2 Three ypes of Adapaion Toal adapaion can be decomposed ino: - Anicipaory or pro-acive adapaion - Reacive adapaion - Knowledge adapaion The Adapaion Tree Adapaion CES σ = 0.9 Anicipaory or proacive adapaion (modelled as a sock variable e.g. dikes) Reacive Adapaion CES σ =.4 Expendiure in reacive adapaion (modelled as a flow variable e.g. air condiioning) Accumulaion of reacive adapaion knowledge (modelled as a sock variable) 9

6 3. Calibraion A se of adapaion sraegies has been idenified for each ype of adapaion Proacive Adapaion Aciviies Consiuing Coasal Proecion Aciviies Selemens and Oher Infrasrucures (Excluding Waer) Proecion Aciviies Waer Supply (Agriculure and Oher) Proecion Aciviies Seing-up of Early Warning Sysems SAD n, Modelled as sock variable Reacive adapaion aciviies consiuing ERAD, Modelled as flow variable Agriculural Adapaion Pracices Treamen of Climae-Relaed Diseases Space Heaing and Cooling (OWM) Innovaion in adapaion consiuing KRAD, Modelled as sock variable Research Aciviies for he Developmen of Climae-Resilien Crops Research Aciviies in he Healh Secor Calibraion: mehodology Saring from Nordhaus aggregaed esimaes oal climae change damage = adapaion coss + residual damage Coss and effeciveness (% of damage reduced) for each of he sraegies idenified and for each region of he WITCH model, has been specified according o exrapolaions and mea analysis of he laes available lieraure a one specific calibraion poin: doubling of CO2 concenraion (ha in he WITCH model occurs beween 2060 and 2065) Then he parameers of he adapaion funcion(s) have been calibraed in order o replicae wih he model observed daa a he chosen calibraion poin

7 3.3 Calibraion: mehodology Adapaion coss: exrapolaion from he lieraure and calibraed values wih he AD-WITCH model The new baseline By running WITCH wih he adapaion module, a new baseline has been produced. I s characerized by he following feaures: () All adapaion sraegies are used: he opimal porfolio of sraegies includes reacive, anicipaory measures and invesmens in dedicaed knowledge (2) Proacive adapaion sars before reacive adapaion: i is he main adapaion measure unil 2080, bu hen reacive measures prevail, when he damage is sufficienly high. (3) Regional paerns of adapaion modes are deermined by regional vulnerabiliy. In NON-OECD regions reacive adapaion is used more. (4) Adapaion R&D is no performed in NON OECD counries (where i would be needed he mos), bu in OECD counries where he required resources and infrasrucures are locaed. (5) The possibiliy o adap reduces he need o miigae and emissions increase, however damage is lower (6) Wih adapaio consumpion and welfare are higher in he BaU. 3

8 3.5 The baseline: all adapaion sraegies are used; proacive adapaion firs Anicipaory adapaion implies building a sock of defensive capial ha mus be ready when he damage occurs. Given economic ineria, invesmen in defensive capial needs o be underaken well in advance. Reacive adapaion is more rapidly effecive and i can be pu in place when he damage effecively maerializes PROTECTION COSTS - WORLD % GDP REACTIVE ADAPTATION ANTICIPATORY ADAPTATION KNOWLEDGE % GDP (Knowledge) The baseline: reacive adapaion prevails in NON OECD counries In OECD counries he higher share of CC damages originaes from infrasrucures and coasal areas, whose proecion requires a form of adapaion ha is largely anicipaory (of he sock ype) % GDP PROTECTION COSTS - OECD REACTIVE ADAPTATION ANTICIPATORY ADAPTATION KNOWLEDGE % GDP (Knowledge) In NON-OECD counries a higher share of CC damages originaes from agriculure, healh, and energy secor (space heaing and cooling). These ypes of damages can be accommodaed more effecively wih reacive measures (of he flow ype) % GDP PROTECTION COSTS - NON OECD REACTIVE ADAPTATION ANTICIPATORY ADAPTATION KNOWLEDGE % GDP (Knowledge)

9 3.7 The baseline: Adapaion R&D performed mainly in OECD counries only R&D invesmen in developing counries which in 200 is roughly /0 and /5 of ha of developed regions in % of GDP and absolue values respecively. % GDP PROTECTION COSTS - OECD REACTIVE ADAPTATION ANTICIPATORY ADAPTATION KNOWLEDGE % GDP (Knowledge) Invesmens in R&D increase he produciviy of reacive adapaion. Needed in developing counries, bu performed in developed counries: marke failure o be correced wih an appropriae policy % GDP PROTECTION COSTS - NON OECD REACTIVE ADAPTATION 0.70 ANTICIPATORY ADAPTATION KNOWLEDGE % GDP (Knowledge) 3.8 The baseline: emission increase Adapaio offering an addiional opion o reduce he negaive impacs of climae change, diminishes he need o curb emissions which increase higher increase where damages are larger 2.00% 0.00% Percenage change w.r.. BAU 8.00% 6.00% 4.00% 2.00% USA OLDEURO NEWEURO KOSAU CAJAZ TE MENA SSA SASIA CHINA EASIA LACA 0.00% % 7

10 3.9 The baseline: damages are reduced However even wih higher emissions, adapaion reduces he damage infliced by climae change RESIDUAL DAMAGE - WORLD % GDP WITHOUT ADAPTATION 3.0 WITH ADAPTATION 2.5 TOTAL DAMAGE Toal proecion coss The baseline: consumpion and GDP are higher As wih adapaion higher emissions can be oleraed, he new baseline scenario is characerized by higher invesmens, oupu and also consumpion (welfare).40%.20%.20% % change w.r.. o BAU.00% 0.80% 0.60% 0.40% 0.20% 0.46% 0.5% GROSS WORLD PRODUCT CONSUMPTION INVESTMENTS 0.00% NPV (3% discouning) 9

11 4. The relaionship beween adapaion and miigaion - Opimal invesmens in miigaion and adapaion as measures o sabilize concenraions a 550 ppme wihin he cenury - Baseline wih (opimal) adapion(s) bu no miigaion - Firs bes se-up (global and efficien cap and rade scheme) The relaionship beween adapaion and miigaion Sabilizaion policy reduces he damage and hus lowers he need o adap The expendiure on all hree adapaion sraegies decreases. (Bu he ime profile and he opimal composiion of adapaion sraegies remain unchanged) 0.60 PROTECTION COSTS - WORLD 0.50 % GDP REACTIVE ANTICIPATORY REACTIVE WITH MITIGATION ANTICIPATORY WITH MITIGATION

12 4.3 The relaionship beween adapaion and miigaion Cos of miigaion policy as a percenage of GDP is higher in he presence of adapaion recall emissions are higher However residual damage is much lower wih adapaion. This can give an indirec indicaion of he exisence of srong cos saving opporuniies o reducing damages by exploiing miigaion and adapaion joinly. GLOBAL RESIDUAL DAMAGE AS A PERCENTAGE OF GDP % GDP MITIGATION AND OPTIMAL ADAPTATION MITIGATION The Opimal 2005 Timing 200 and 205 Invesmen Size of 2030 Adapaion Sensiiviy analysis The opimal mix beween adapaion and miigaion crucially hinges on he size of climae change damages and he pure rae of ime preference We analyzed hree addiional cases ha consider differen combinaions of discoun rae and damage LDAM_LDR: low damage low discoun rae (0.%) HDAM_LDR: high damage* low high discoun (0.%) HDAM_HDR: high damage high discoun rae (3%) The baseline is characerized by low damage and high discoun rae (LDAM_HDR) *High damage = abou wice he original damage 23

13 5.2 Sensiiviy analysis: adapaion effor Boh higher damage and lower discoun rae increase adapaion effor A lower discoun rae increases also he value of fuure consumpion which reduces he resources available for adapaion 2 Toal Proecion Coss as a percenage of GDP Base case Higher damage Lower discoun rae 5.3 Sensiiviy analysis: adapaion composiion Higher damages and lower discoun raes increase expendiure in all ypes of adapaion A lower discoun rae slighly affecs he composiion of proecion coss. More resources are allocaed o anicipaory and knowledge adapaion raher han reacive adapaion LDAM_LDR HDAM_HDR HDAM_LDR Reacive Adapaion 9% 82% 90% Anicipaory Adapaion 42% 97% 70% Knowledge Adapaion 59% 20% 234% Percenage change wih respec o he base scenario in 200 (LDAM_HDR) 25

14 6. Concluding remarks / Characerisics of he opimal adapaion mix: Composiion The opimal mix of adapaion sraegies consiss of reacive and anicipaory measures and invesmens in dedicaed knowledge. Timing Proacive adapaion is he firs measure o be adoped and is he main adapaion invesmen unil Reacive measures prevail aferwards, when he damage is higher. Regional paerns Regional paerns of adapaion modes are deermined by regional vulnerabiliy. In NON-OECD regions, reacive adapaion is more effecive and hus more widely adoped. Dedicaed R&D R&D is no performed where i would be needed he mos, bu where here are he required resources and infrasrucure, namely OECD regions Concluding remarks / 2 Trade-off The inroducion of adapaion decreases he need o miigae and vice versa. The wo sraegies are sraegic complemens as hey boh concur o reduce vulnerabiliy o climae change. Accordingly, hey should boh be par of an opimal porfolio of policies. This is paricularly imporan for developing counries: being characerized by higher damages, hey are he ones ha can benefi he mos from an opimal combinaion of he wo sraegies. This is a furher suggesion for an inernaional Norh-Souh cooperaion o design an inegraed climae change policy based on coordinaed miigaion and adapaion effors 27

15 Thanks! Corso Magena 63, 2023 Milano - Ialia - Tel Fax Adapaion curves OECD Adapaion coss as a percenage of GDP in % 2.5% 2.0%.5%.0% 0.5% USA WEURO EEURO KOSAU CAJAZ 0.0% Adapaion (fracion by which gross damage is reduced) Corso Magena 63, 2023 Milano - Ialia - Tel Fax

16 Adapaion curves Non OECD 40% Adapaion coss as a percenage of GDP in % 00% 80% 60% 40% 20% 0% Adapaion (fracion by which gross damage is reduced) TE MENA SSA SASIA CHINA EASIA LACA Corso Magena 63, 2023 Milano - Ialia - Tel Fax