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MIT OpenCourseWare http://ocw.mit.edu
15.023J / 12.848J / ESD.128J Global Climate Change: Economics, Science, and PolicySpring 2008
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• 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
Economics of GHG Control
• 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)
Cost/Welfare Concepts
• 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?
What to Include?
• What unit of analysis?– Nation– Global, or Annex I vs. Non-Annex I– Other?
• Issues of aggregation– Of nations– Of sub-national components
Cost to Whom?
Shrt Long Trade Tech’nterm term effects detail
Carbon price √ √
Market-based (CGE) ≅√ √ √
Technology-Cost √ √
MAC curves √
HybridsMARKAL-Macro √ √ √
U.S. NEMS √ √
Others (e.g., EPPA) ≅√ √ √ ≅√
Approaches to the Task
• 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)
CGE (EPPA): What Tradeoffs?
• Population growth• Labor productivity growth• Energy efficiency change (AEEI)• Substitution elasticities• Vintaging assumption• Costs of future technologies• Non-CO2 gas assumptions• Fossil energy resources
Factors Determining Results
à Toyà Toy
Examples of EPPA Analyses• Short-term mitigation targets
– Trade effects– Intensity vs. absolute targets – Emissions trading– Inefficient policies– Multi-gas strategies vs. CO2 only
• Long-term atmos. goals• Studies of particular technologies/fuels
– Carbon capture and storage– Biomass, solar and wind, nuclear
à Cap-&-trade bills (4-2)
à Kyoto Protocol
à CCSP study
à Coal study
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”
– Prices of exports (oil, gas, coal) fall– Price of energy-intensive imports rises
• Net of all Ä welfare loss
& view from US?
Kyoto ExampleFigure 1. Reference and Kyoto Carbon
Emissions
0
1000
2000
3000
4000
5000
6000
7000
1995 2000 2005 2010 2015 2020 2025 2030
Time
MtC
Annex BNon-Annex BAnnex-B, Kyoto
Transfer of Costs to Energy Exporters
-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.0
KOR
IDN
CHN
IND
MEX
VEN
BRA
RME
RNF
SAF
Non-Annex B
EV%
Figure 3. Welfare Effects of Kyoto Protocol: EV%(NT-D, 2010)
-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.0
USA
JPN
EEC
OO
E
FSU
EET
Annex B
EV%
• 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
Cost of Long-Term Targets
Emissions price and economic cost
0
400
800
1200
1600
2000
2020 2040 2060 2080 2100
Year
$/to
nne
(200
0$)
IGSM_Level1IGSM_Level2IGSM_Level3IGSM_Level4
IGSM
0
400
800
1200
1600
2000
2020 2040 2060 2080 2100
Year
$/to
nne
(200
0$)
MERGE_Level1MERGE_Level2MERGE_Level3MERGE_Level4
MERGE
0
400
800
1200
1600
2000
2020 2040 2060 2080 2100
Year
$/to
nne
(200
0$)
MINICAM_Level1MINICAM_Level2MINICAM_Level3MINICAM_Level4
MiniCAM
CO
Pric
e P
aths
0%
1%
2%
3%
4%
5%
6%
7%
8%
2000 2020 2040 2060 2080 2100
Perc
enta
ge L
ossi
n G
ross
Wor
ld P
rodu
ct
IGSM_Level2
MERGE_Level2
MINICAM_Level2
% Loss in Global World Product 550 ppmv case (MER)
Origin of the Differences• Required CO2 reduction• Assumptions about post-2050
technology
2
Cumulative Reduction (GtC 2000- 2100) Uncertainty in Ocean UptakeTarget (ppmv)
IGSM MERGE Mini-CAM
750 472 112 97
650 674 258 267
550 932 520 541
450 1172 899 934
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.02000 2020 2040 2060 2080 2100
Year
GTC
/Yea
r
IGSM_Level1IGSM_Level2IGSM_Level3IGSM_Level4IGSM_REF
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.02000 2020 2040 2060 2080 2100
Year
GTC
/Yea
r
MINICAM_Level1MINICAM_Level2MINICAM_Level3MINICAM_Level4MINICAM_REF
• No-policy emissions growth, uncertain over a century
• CO2 uptake by the oceans & terrestrial biosphere, subject to scientific uncertainty
• Potential achievements with the non-CO2 gases
Determinants of the CO2Effort Required
Price vs Percentage Abatement 2050
$0
$400
$800
$1,200
$1,600
$2,000
0% 20% 40% 60% 80% 100%Percentage Abatement
Pric
e ($
/tonn
eC
)
IGSM
MINICAM
MERGE
Price vs Percentage Abatement 2100
$0
$400
$800
$1,200
$1,600
$2,000
0% 20% 40% 60% 80% 100%Percentage Abatement
Pric
e ($
/tonn
eC
)
IGSM
MINICAM
MERGE
• 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
Role of Science &Technology
Example Using Price Only(The MIT Coal Study)
Scenarios of Penalties on CO2 Emissions ($/t CO2 in constant dollars)
100
80
60
40
20
02005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Low CO2 Price
High CO2 Price
CO2 P
rice (
$/t)
Figure by MIT OpenCourseWare.
Global Primary Energy Consumption under High CO2 Prices(Limited Nuclear Generation and EPPA-Ref Gas Prices)
Energy Reduction from ReferenceNon-Biomass RenewablesCommercial Biomass�NuclearCoal w/ CCSCoal w/o CCSGas w/o CCSOl w/o CCS
2005 2010 2015 2020 2025 2030 2035 2040 2045 205020000
200
400
600
800
1000
EJ/Y
ear
Global Primary Energy Consumption under High CO2 Prices(Expanded Nuclear Generation and EPPA-Ref Gas Prices)
Energy Reduction from ReferenceNon-Biomass RenewablesCommercial Biomass�NuclearCoal w/ CCSCoal w/o CCSGas w/o CCSOl w/o CCS
2005 2010 2015 2020 2025 2030 2035 2040 2045 205020000
200
400
600
800
1000
EJ/Y
ear
Figure by MIT OpenCourseWare.
Figure by MIT OpenCourseWare.
Exajoules of Coal Use (EJ) and Global CO2 Emissions (Gt/yr) in 2000 and 2050 with and withoutCarbon Capture and Storage*
Coal Use: Global
Global CO2 Emissions
CO2 Emissions from Coal
U.S.
China
Business As Usual Limited Nuclear Expanded Nuclear
2000 2060
2060 2050
With CCS With CCSWithout CCS Without CCS
100
24
24
24
27
9 9
448
58
88
62
32
161
40
39
28
5
116
28
32
121
25
31
26
3
78
13
17
29
6
* Universal, simultaneous participation, High CO2 prices and EPPA-Ref gas prices.
Figure by MIT OpenCourseWare.
AbatementkjO
Marginal Cost
p
How to Construct?
Marginal Abatement Curve
Total cost
O
pC
O
CO2
Aggregating Gases
O
pOT
pCOM
Other GHG or sink
Total
kC kOT kCOM
2004
O
2005
Cut
Discount rate = 5%/year
MACs and Banking
O
$10/ton
k07
$20/ton
k08 Cut
MAC MAC
5%
Marginal Cost
p
Shortcomings of MACs
kjO Abatement
Trade effects
Distortions in markets
Calculation procedures
?
National Academies - 1991
100
80
60
40
20
0
-20
-40
-60
-80
-1000 2 4 6 8
Emission Reduction (billion tons CO2 equivalent per year)
25% Implementation/High Cost
Energy Modeling
100% Implementation/Low Cost
100% Annual U.S. CO2equivalent emissions
Cos
t ($/
t CO
2 eq
uiva
lent
)
Figure by MIT OpenCourseWare.
Comparison of mitigation options using technological costing and energy modeling calculations.
McKinsey - 2007
Cost basis
Discount rate
What is in baseline?
What use?
Courtesy of McKinsey & Company. Used with permission.
What is Happening to Cost?
250
200
150
100
2000 2001 2002 2003 2004 2005 2006 200750
Overall Portfolio
Portfolio Minus Nuclear
231
179
IHS/CERA Power Capital Costs Index
Inde
x Va
lue
Figure by MIT OpenCourseWare.
• Market failures: decision-makers don’t see correct price signals– Lack of information– Principal-agent problems (e.g., landlord-
tenant)– Externalities & public goods
• Market barriers– Hidden costs (e.g., transactions costs)– Disadvantages perceived by users– “High” discount rates
Explaining Why Technologies Are Not Used
Alternative Views of the Options
Figure by MIT OpenCourseWare, adapted from Resources for the Future.
Baseline Increasing economic efficiency
Incr
easi
ng e
nerg
y ef
ficie
ncy
Technologists'optimum
Theoreticalsocial optimum
True socialoptimum
Economists' narrow optimum Net effect of corrective
policies that can pass acost-benefit test
Set aside correctivepolicies that cannot be
implemented at acceptable cost
Eliminate environmental
externalities andmarket failures in
energy supply
Eliminate "market barriers" to
energy efficiency, suchas high discount rates
and inertia; ignoreheterogeneity
Alternative Notions of the Energy Efficiency Gap
Eliminate market failures inthe market for energy-efficient
technologies
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”
• How to distinguish tech change from– Change in inputs (in response to price)– Economies of scale
P
∑Q
• Carbon capture and storage– From electric power plants– From the air
• Renewables– Wind & solar– Biomass– Tidal power– Geothermal
• New generation of fission, and fusion• Solar satellites• Demand-side technology
– Fuel cells and H2 fuel– Other? (lighting, buildings, ind. process, etc.)
“New” Technologies
What determines the likely contribution of each?
