Rob Dellink

Economic Aspects of Adaptation to Climate Change: Integrated Assessment Modelling of Adaptation Costs and Benefits

The present report seeks to inform critical questions with regard to policy mixes of investments in adaptation and mitigation, and how they might vary over time. This is facilitated here by examining adaptation within global Integrated Assessment Modelling frameworks. None of the existing Integrated Assessment Models (IAMs) captures adaptation satisfactorily. Many models do not specify the damages from climate change, and those that do mostly assume implicitly that adaptation is set at an “optimal” level that minimizes the sum total of the costs of adaptation and the residual climate damages that might occur. This report develops and applies a framework for the explicit incorporation of adaptation in Integrated Assessment Models (IAMs). It provides a consistent framework to investigate “optimal” balances between investments in mitigating climate change, investments in adapting to climate change and accepting (future) climate change damages. By including adaptation into IAMs these already powerful tools for policy analysis are further improved and the interactions between mitigation and adaptation can be analysed in more detail. To demonstrate the approach a framework for incorporating adaptation as a policy variable was developed for two IAMs– the global Dynamic Integrated model for Climate and the Economy (DICE) and its regional counterpart, the Regional Integrated model for Climate and the Economy (RICE). These modified models – AD-DICE and AD-RICE – are calibrated and then used in a number of policy simulations to examine the distribution of adaptation costs and the interactions between adaptation and mitigation. Using the limited information available in current models, and calibrating to a specific damage level, so-called adaptation cost curves are estimated for the world. Adaptation cost curves are also estimated for different regions, although given the limited information available to calibrate the regional curves these should be considered as rough approximations of the actual adaptation potential in the different regions. These adaptation cost curves reflect how different adaptation levels will provide a wedge between gross damages (i.e. damages that would occur in the absence of adaptation) and residual damages. The analysis presented suggests that a good adaptation policy matters especially when suboptimal mitigation policies are implemented. Similarly, a good mitigation strategy is more important when optimal adaptation levels are unattainable. The rationale for this result is that both policy control options can compensate to some extent for deviations from the efficient outcome caused by non-optimality of the other control option. It should be noted, however, that in many cases there are limits to adaptation with regard to the magnitude and rate of climate change. The higher the current value of damages, the more important mitigation is as a policy option in comparison to adaptation. The comparison between adaptation and mitigation therefore depends crucially on the assumptions in the model, and especially on the discount rate and the level of future damages. The policy simulations also suggest that to combat climate change in an efficient way, short term optimal policies would consist of a mixture of substantial investments in adaptation measures, coupled with investments in mitigation, even though the latter will only decrease damages in the longer term. The costs of inaction are high, and thus it is more important to start acting on mitigation and adaptation even when there is limited information on which to base the policies, than to ignore the problems climate change already poses. Ongoing increases in expected damages over time imply that adaptation is not an option that should be considered only for the coming decades, but it will be necessary to keep investing in adaptation options, as both the challenges and benefits of adaptation increase. The results of these policy simulations confirm the findings of the Intergovernmental Panel on Climate Change (IPCC) on the relationship between adaptation and mitigation as described in the Synthesis Report of the Fourth Assessment Report. The framework developed in this report opens the door for further simulations that examine adaptation cost issues within other, more complex IAMs. The model additions investigated in this report can also shed light on how the next generation of IAMs will look. These tools can also be further strengthened by the incorporation of more detailed regional knowledge on the impacts of climate change and of adaptation options. Le present rapport entend apporter un eclairage sur certaines problematiques essentielles concernant les politiques qui associent investissements dans l’adaptation et investissements dans l’attenuation et leur evolution possible dans le temps. Un tel objectif suppose d’analyser l’adaptation dans le cadre de modeles d’evaluation integree. Aucun modele d’evaluation integree ne rend compte de maniere satisfaisante de l’adaptation. Bon nombre d’entre eux ne tiennent pas compte des dommages causes par le changement climatique et ceux qui le font partent implicitement de l’hypothese que l’adaptation est fixee a un niveau « optimal » qui reduit au minimum le montant total represente par les couts d’adaptation et les dommages climatiques residuels risquant d’apparaitre. Dans ce rapport, un cadre permettant d’inclure explicitement l’adaptation dans les modeles d’evaluation integree a ete cree et applique. On dispose ainsi d’un cadre coherent pour examiner les compromis « optimaux » entre l’attenuation du changement climatique, l’adaptation au changement climatique et l’acceptation des (futurs) dommages induits par ce changement. Inclure l’adaptation dans les modeles d’evaluation integree permet d’ameliorer ces instruments, deja performants, d’analyse des politiques et d’examiner de maniere plus precise les interactions entre adaptation et attenuation. Plus precisement, pour les besoins de ce rapport, un cadre a ete mis au point pour inclure l’adaptation parmi les variables de politique publique dans deux modeles d’evaluation integree – le Dynamic Integrated model for Climate and the Economy (DICE), qui est un modele mondial, et son equivalent regional, le Regional Integrated model of Climate and the Economy (RICE). Les modeles modifies – AD-DICE et AD-RICE – ont ete calibres et utilises dans plusieurs simulations de politiques pour examiner la composition des couts de l’adaptation au changement climatique et les interactions entre adaptation et attenuation. Les courbes des couts d’adaptation ont ete estimees a l’echelle mondiale a partir des quelques informations disponibles dans les modeles actuels et apres calibrage en fonction d’un niveau de dommages donne. Les memes courbes ont ete estimees pour differentes regions mais doivent etre considerees comme des evaluations approximatives du potentiel reel d’adaptation dans ces regions, compte tenu de la rarete des informations disponibles pour effectuer le calibrage. Ces courbes montrent l’ecart que differents niveaux d’adaptation induisent entre les dommages bruts (ceux qui seraient subis en l’absence de mesures d’adaptation) et les dommages residuels. L’analyse presentee demontre qu’il importe de mettre en place une bonne politique d’adaptation, en particulier lorsque les strategies d’attenuation sont d’une efficacite insuffisante. De meme, la mise en place d’une bonne strategie d’attenuation est d’autant plus importante que les niveaux d’adaptation optimaux sont impossibles a atteindre. Ce resultat s’explique par le fait que l’une et l’autre de ces options peuvent, dans une certaine mesure, compenser les ecarts par rapport au resultat efficient lies a l’insuffisance de l’autre option. Plus la valeur actuelle des dommages est elevee, moins l’adaptation occupe une place importante par rapport a l’attenuation. L’interet relatif des deux strategies depend beaucoup des hypotheses retenues dans le modele, en particulier en ce qui concerne le taux d’actualisation et le niveau des futurs dommages. Les simulations de politiques montrent egalement que pour, lutter de maniere efficiente contre le changement climatique, les politiques de court terme devraient associer des investissements substantiels dans des mesures d’adaptation et des investissements dans des mesures d’attenuation, meme si la reduction des dommages induite par les mesures d’attenuation ne concerne que des periodes ulterieures. Le cout de l’inaction etant eleve, il vaut mieux agir meme lorsque l’on dispose de peu d’informations a l’appui de l’elaboration des politiques qu’ignorer les problemes qu’entraine deja le changement climatique. Les dommages attendus augmentant continument au fil du temps, il convient de ne pas considerer que l’adaptation est une option a n’envisager que dans les decennies a venir et, au contraire, de continuer a investir dans les mesures d’adaptation puisque les benefices de ces mesures et les problemes qu’elles posent augmentent. Les resultats de ces simulations de politique confirment les conclusions du Groupe d’experts intergouvernemental sur l’evolution du climat (GIEC) sur la relation entre l’adaptation et l’attenuation decrite dans le Resume du Quatrieme Rapport d’evaluation. Le cadre elabore dans le present rapport ouvre la voie a d’autres simulations, qui feront appel a des modeles d’evaluation integree plus complexes pour examiner les questions en lien avec les couts de l’adaptation. Les modeles modifies utilises peuvent egalement fournir des informations sur ce que sera la prochaine generation de modeles d’evaluation integree. Ces outils peuvent aussi etre renforces en integrant des connaissances regionales plus approfondies sur les effets du changement climatique et les options d’adaptation.

A measure of sustainable national income for the Netherlands

Abstract We present calculations on the sustainable national income (SNI) indicator, first proposed by Hueting, which corrects net national income (NNI) for the costs to bring back environmental resource use to a ‘sustainable’ level. Using an applied general equilibrium (AGE) model specifying 27 production sectors, we calculate different variants of SNI for the Netherlands in 1990, given a set of pre-determined sustainability standards. The AGE model is extended with emissions and abatement cost curves, based on large data sets for nine environmental themes. The model combines the advantages of a top-down approach (the AGE model) with the information of a bottom-up approach (the environmental data and data on emissions reductions costs). The presented numerical results show that in 1990 Dutch SNI is about 50% below NNI, though many uncertainties are still present in the data and the model. The enhanced greenhouse effect is the most expensive environmental theme.

Sharing the burden of adaptation financing: An assessment of the contributions of countries

Climate change may cause most harm to countries that contribute least to greenhouse gas emissions. This paper identifies deontology, solidarity and consequentialism as the principles that can serve as a basis for a fair international burden sharing scheme of adaptation costs. We translate these principles into criteria that can be applied in assigning contributions of individual countries, namely historical responsibility, equality and capacity to pay. Specific political and scientific choices are discussed, highlighting implications for international burden-sharing. Combining historical responsibility and capacity to pay seems a promising starting point for international negotiations on the design of burden-sharing schemes. From the numerical assessment, it is clear that UNFCCC Annex I countries carry the greatest burden under most scenarios, but contributions differ substantially subject to the choice of an indicator for capacity to pay. The total financial contribution by the Annex I countries could be in the range of

The Economics of Climate Change Mitigation

55-68 billion annually.

DO ABATEMENT QUOTAS LEAD TO MORE SUCCESSFUL CLIMATE COALITIONS

This paper examines the cost of a range of national, regional and global mitigation policies and the corresponding incentives for countries to participate in ambitious international mitigation actions. The paper illustrates the scope for available instruments to strengthen these incentives and discusses ways to overcome barriers to the development of an international carbon price, based on the quantitative assessment from two global and sectorially-disaggregated CGE models. Key step towards the emergence of a single international carbon price will most likely involve the phasing out of subsidies of fossil fuel consumption and various forms of linking between regional carbon markets, ranging from direct linking of existing emission trading systems to more indirect forms through the use of sectoral crediting mechanisms. The paper discusses regulatory issues raised by the expansion of emission trading and crediting schemes as well as the complementary contribution of non-market based instruments such as the imposition of technical standards and R&D policies. Finally, the paper emphasises the important role of international transfers, not least to overcome the relatively strong economic incentives in some countries to free ride on other regions mitigation actions. While they can take various explicit or implicit forms, transfers made primarily through market mechanisms, for instance via the allocation of binding emission reduction commitments across countries, would be most cost-effective.

The Copenhagen Accord/Cancún Agreements Emission Pledges for 2020: Exploring Economic and Environmental Impacts

In this paper we study the effect of different treaty designs on the success of international environmental agreements (IEAs). We analyze the standard assumption of an efficient abatement scheme and three uniform abatement quota schemes. Apart from analytical results, the analysis is supported by simulations based on the STACO (stability of coalitions) model. It turns out that quota agreements where the members decide by majority or unanimity voting are successful in overcoming free-rider incentives within an IEA. Finally, our results provide a rationale for the application of uniform abatement quotas in IEAs.

The Stability and Effectiveness of Climate Coalitions: A Comparative Analysis of Multiple Integrated Assessment Models

Many countries have pledged targets or actions to reduce greenhouse gas emissions; these have been listed in the Appendices to the Copenhagen Accord and, at the time of writing, are being transferred to the UNFCCC Cancun Agreements. This analysis examines the costs and effectiveness of these pledges, as well as the potential for fiscal revenue, using a computable general equilibrium model. The results show that while the pledges are an important and welcome start to a global solution, they are not ambitious enough for a pathway to limit average global temperature increase to below 2°C. This paper estimates the costs of action at around 0.3% of GDP for both Annex I and non-Annex I countries and 0.5–0.6% of global real income. Furthermore, the fiscal revenue potential can exceed 1% of GDP for the Annex I countries if market-based instruments are used. Sensitivity analysis shows that allowing more offsets can reduce the costs of actions substantially, as can direct linking of carbon markets across Annex I countries.

Global implications of joint fossil fuel subsidy reform and nuclear phase-out: an economic analysis

We report results from a comparison of numerically calibrated game theoretic integrated assessment models that explore the stability and performance of international coalitions for climate change mitigation. We identify robust results concerning the incentives of different nations to commit themselves to a climate agreement and estimate the extent of greenhouse gas mitigation that can be achieved by stable agreements. We also assess the potential of transfers that redistribute the surplus of cooperation to foster the stability of climate coalitions. In contrast to much of the existing analytical game theoretical literature, we find substantial scope for self-enforcing climate coalitions in most models that close much of the abatement and welfare gap between complete absence of cooperation and full cooperation. This more positive message follows from the use of appropriate transfer schemes that are designed to counteract free riding incentives.

International Climate Agreements Under Induced Technological Change

This paper uses the OECD’s global recursive-dynamic general equilibrium model ENVLinkages to examine the mid-term economic consequences and the optimal energy supply mix adjustments of a simultaneous implementation of i) a progressive fossil fuel subsidy reform in emerging and developing economies and ii) a progressive phase out of nuclear energy, mostly affecting OECD countries, China and Russia. The analysis is then transposed in the context of climate change mitigation to depict the corresponding implications for CO2 emissions, to assess the interactions between the two energy policies, and to derive how the associated costs are affected by the different policies. The phase-out scenario projects a nuclear capacity halved by 2035 as compared to the Baseline, corresponding to

The Role of Proactive Adaptation in International Climate Change Mitigation Agreements

120 billion losses in value-added of the nuclear industry for that year. The nuclear phase-out leaves GDP and real household consumption marginally affected in energy importing countries. A multilateral subsidy reform is more likely to affect international fossil fuel prices and alter patterns of global energy use. The fossil fuel subsidy reform, when implemented together with nuclear phase-out, more than offsets negative consequences on household consumption but still leads to a decrease in global CO2 emissions. The combined policies help save the equivalent of current energy consumption in the Middle East. Combining a climate policy, an effective fossil fuel subsidy reform, even with a lower nuclear share in the power mix, brings about multiple benefits to OECD countries which reduce their energy bill and achieve large climate change mitigation at lower cost.