JP

Incentive-based Approaches for Mitigating Greenhouse Gas Emissions:Issues and Prospects for India

As a consequence of the flexibility mechanisms incorporated in the Kyoto Protocol, incentive-based policies such as emissions trading and the clean development mechanism are being widely discussed in the context of greenhouse gas (GHG) abatement. This paper examines various issues related to incentive-based approaches for India. Some of the specific questions it addresses are: does India stand to gain or lose if emissions trading is realised even if it remains outside such an arrangement? Are there any other incentive-based approaches, e.g., carbon taxes that India could adopt? In the ultimate analysis, however, market-based instruments (MBIs) for GHG abatement in India cannot be viewed in isolation from an overall incentive-based orientation towards environmental policy as well as broader economic and legal reform that creates a suitable milieu for MBIs. Therefore, the paper goes on to examine problems of implementing MBIs in general, particularly those related to monitoring of emissions and of enforcement. Several specific solutions are also proposed.

Incorporating carbon capture and storage technologies in integrated assessment models

Low-carbon emitting technologies are a key component of technical change in integrated assessment models. We develop a methodology for incorporating technologies into computable general equilibrium economic models and demonstrate this methodology by implementing carbon capture and storage technologies in the MIT Emissions Prediction and Policy Analysis (EPPA) model. Three primary implementation issues are discussed: characterization of the technical system, translation of bottom-up engineering information into an economic model, and the depiction of realistic technology adoption rates. The specification of input substitution, relative costs, and plant dispatch are the most critical factors in technology representation. Technology adoption rates in economic models are governed by exogenous and endogenous constraints. A comparison of the current approaches used in economic models with the theoretical and empirical factors affecting adoption rates highlights opportunities for refining the current methods. © 2006 Elsevier

Incorporating Climate Change Feedbacks into a General Economic Equilibrium Model

To incorporate market and non-market effects of climate change into a computable general equilibrium (CGE) model, we begin with the basic data that supports CGE models, the Social Accounting Matrix (SAM). We identify where environmental damage appears in these accounts, estimate the physical loss, and value the loss within this accounting structure. Our approach is an exercise in environmental accounting, augmenting the standard national income and product accounts to include environmental damage. Examples of applying the approach in two areas are provided: air pollution health effects and economy-atmosphere-land-agriculture interactions.
We estimate market and non-market effects of air pollution on human health for the U.S. for the period from 1970 to 2000. The pollutants include tropospheric ozone, nitrogen dioxide, sulfur dioxide, carbon monoxide, and particulate matter. The health effects from exposure to air pollution are integrated into the MIT Emissions Prediction and Policy Analysis (EPPA) model, a computable general equilibrium model of the economy that has been widely used to study climate change policy. Benefits of air pollution regulations in USA rose steadily from 1975 to 2000 from $50 billion to $400 billion (from 2.1% to 7.6% of market consumption). We also estimate the economic burden of uncontrolled levels of air pollution over that period. In another case study, we examine the health-related economic benefits and costs of policy actions for China. We found that economic burden of uncontrolled levels of air pollution is lower that in the U.S. because of lower wage rates but macroeconomic impact is bigger than in the U.S. (in 2000 the economic burden in the USA is 4.7% of market consumption, in China - it is 10% of market consumption).
For assessing the impacts of environmental change on vegetation (crop productivity, forest productivity, pasture), we have augmented the EPPA model by further disaggregating the agricultural sector. This allows us to simulate economic effects of changes in yield (i.e., the productivity of cropland) on the regional economies of the world, including impacts on agricultural trade. We examine multiple scenarios where tropospheric ozone precursors are controlled or not, and where greenhouse gas emissions are abated or not. In general, a change in food consumption is smaller than a change in agriculture yield due to resource reallocation from or to the rest of the economy.

Incorporating Path Dependency into Decision-Analytic Methods: An Application to Global Climate-Change Policy

Climate policy decisions are necessarily sequential decisions over time under uncertainty, given the magnitude of uncertainty in both economic and scientific processes, the decades-to-centuries time scale of the phenomenon, and the ability to reduce uncertainty and revise decisions along the way. Thus, an appropriate choice of analytical method is decision analysis. However, applying decision analysis in the context of idealized government decision makers over a century raises the question of how to deal with the fact that political systems tend to exhibit path dependency, a force that makes large policy shifts difficult and rare, and limits most decisions to small incremental changes. This paper explores the effect of considering path dependency in an application of decision analysis to climate-change policy decisions, presenting two alternative methods for modeling path dependency. I demonstrate that consideration of path dependence in the context of climate policy justifies greater near-term emissions reductions. The more general result of path-dependency is to shift the near-term strategy towards a more moderate hedging strategy, because drastic shifts later will be difficult.

Indirect Emissions from Biofuels: How Important?

A global biofuels program will lead to intense pressures on land supply and can increase greenhouse gas emissions from land-use changes. Using linked economic and terrestrial biogeochemistry models, we examined direct and indirect effects of possible land-use changes from an expanded global cellulosic bioenergy program on greenhouse gas emissions over the 21st century. Our model predicts that indirect land use will be responsible for substantially more carbon loss (up to twice as much) than direct land use; however, because of predicted increases in fertilizer use, nitrous oxide emissions will be more important than carbon losses themselves in terms of warming potential. A global greenhouse gas emissions policy that protects forests and encourages best practices for nitrogen fertilizer use can dramatically reduce emissions associated with biofuels production.

Induced Technical Change and the Cost of Climate Policy

This paper investigates the potential for a carbon tax to induce R&D, and for the consequent induced technical change (ITC) to lower the macroeconomic cost of abating carbon emissions. ITC is modelled within a general equilibrium simulation of the U.S. economy by the effects of emissions restrictions on the level and composition of aggregate R&D, the accumulation of the stock of knowledge, and the industry-level reallocation and substitution of intangible services derived therefrom. Contrary to other authors, I find that ITC's impact is large, positive and dominated by the latter "substitution effect," which mitigates most of the deadweight loss of the tax.

Induced Technical Change in Computable General Equilibrium Models for Climate-Change Policy Analysis

Policies to avert the threat of dangerous climate change focus on stabilizing atmospheric carbon dioxide concentrations by drastically reducing anthropogenic emissions of carbon. Such reductions require limiting the use of fossil fuels-which supply the bulk of energy to economic activity, and for which substitutes are lacking-which is feared will cause large energy price increases and reductions in economic welfare. However, a key determinant of the cost of emissions limits is technological change-especially innovation induced by the price changes that stem from carbon abatement itself, about which little is understood.

This thesis investigates the inducement of technological change by limits on carbon emissions, and the effects of such change on the macroeconomic cost of undertaking further reductions. The analysis is conducted using a computable general equilibrium (CGE) model of the US economy-a numerical simulation that determines aggregate welfare based on the interaction of prices with the demands for and supplies of commodities and factors across different markets. Within the model induced technical change (ITC) is represented by the effect of emissions limits on the accumulation of the economy's stock of knowledge, and by the reallocation of the intangible services generated by the stock, which are a priced input to sectoral production functions.

The results elucidate four key features of ITC: (1) the inducement process, i.e., the mechanism by which relative prices determine the level and the composition of aggregate R&D; (2) the effects of changes in R&D on knowledge accumulation in the long-run, and of contemporaneous substitution of knowledge services within and among industries; (3) the loci of sectoral changes in intangible investment and knowledge inputs induced by emissions limits; and (4) the ultimate impact of the accumulation and substitution of knowledge on economic welfare.

Influence of Air Quality Model Resolution on Uncertainty Associated with Health Impacts

We evaluate the uncertainty associated with regional air quality modeling grid resolution when calculating the health benefits of proposed air quality regulations. Using a regional photochemical model (CAMx), we ran two modeling episodes (a 2006 basecase and a 2018 attainment demonstration, both for Houston, Texas) at 36, 12, 4 and 2 km resolution. The basecase model performance was evaluated for each resolution for both monitor-based and population-weighted calculations of daily maximum 8-hour averaged ozone. Results from each resolution were more similar to each other than they are to actual measured values. However, the model performance improved when population weighted ozone concentration was used as the metric versus the standard daily maximum ozone concentrations at monitor site locations. Then population-weighted ozone concentrations were used to calculate the estimated health impacts of modeled ozone reduction from the basecase to the attainment demonstration including the 95% confidence intervals associated with each impact from concentrationresponse functions. We found that estimated avoided mortalities were not significantly different using coarse resolution, although 36 km resolution may over predict some potential health impacts. Given the cost/benefit analyses requirements of the Clean Air Act, the uncertainty associated with human health impacts and therefore the results reported in this study, we conclude that population weighted ozone concentrations obtained using regional photochemical models at 36 km resolution are meaningful relative to values obtained using fine (12 km or finer) resolution modeling. This result opens up the possibility for uncertainty analyses on 36 km resolution air quality modeling results, which are on average 10 times more computationally efficient.

Informing climate policy given incommensurable benefits estimates

The determination of long-term goals for climate policy, or of near-term mitigation effort, requires a shared conception among nations of what is at stake. Unfortunately, because of different attitudes to risk, problems of valuing non-market effects, and disagreements about aggregation across rich and poor nations, no single benefit measure is possible that can provide commonly accepted basis for judgment. In response to this circumstance, a portfolio of estimates is recommended, including global variables that can be represented in probabilistic terms, regional impacts expressed in natural units, and integrated monetary valuation. Development of such a portfolio is a research task, and the needed program of work suggested.

Informing Climate Policy Given Incommensurable Benefits Estimates

MIT Global Change

JP

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