Potential Impacts of Climate Change on Agriculture: A Case of Study of Coffee Production in Veracruz, Mexico

This paper explores the relation between coffee production and climatic and economic variables in Veracruz in order to estimate the potential impacts of climate change. For this purpose, an econometric model is developed in terms of those variables. The model is validated by means of statistical analysis, and then used to project coffee production under different climatic conditions. Climate change scenarios are produced considering that the observed trends of climate variables will continue to prevail until the year 2020. An approach for constructing simple probability scenarios for future climate variability is presented and used to assess possible impacts of climate change beyond what is expected from changes in mean values. The model shows that temperature is the most relevant climatic factor for coffee production, since production responds significantly to seasonal temperature patterns. The results for the projected climate change conditions for year 2020 indicate that coffee production might not be economically viable for producers, since the model indicates a reduction of 34% of the current production. Although different economic variables (the state and international coffee prices, a producer price index for raw materials for coffee benefit, the national and the USA coffee stocks) were considered as potentially relevant, our model suggests that the state real minimum wage could be regarded as the most important economic variable. Real minimum wage is interpreted here as a proxy for the price of labor employed for coffee production. This activity in Mexico is very labor intensive representing up to 80% of coffee production costs. As expected, increments in the price of such an important production factor increase production costs and have strong negative effects on production. Different assumptions on how real minimum wage could evolve for the year 2020 are considered for developing future production scenarios.     

Safe policies in an uncertain climate: an application of FUND

Various aspects of the role of uncertainty in greenhouse gas emission reduction policy are analyzed with the integrated assessment model FUND. FUND couples simple models of economy, climate, climate impacts, and emission abatement. Probability distribution functions are assumed for all major parameters in the model. Monte Carlo analyses are used to study the effects of parametric uncertainties. Uncertainties are found to be large and grow over time. Uncertainties about climate change impacts are more serious than uncertainties about emission reduction costs, so that welfare-maximizing policies are stricter under uncertainty than under certainty. This is more pronounced without than with international cooperation. Whether or not countries cooperate with one another is more important than whether or not uncertainty is considered. Meeting exogenously defined emission targets may be more or less difficult under uncertainty than under certainty, depending on the asymmetry in the uncertainty and the central estimate of interest. The major uncertainty in meeting emissions targets in each of a range of possible future is the timing of starting (serious) reduction policies. In a scenario aiming at a stable CO₂ concentration of 550 ppm, the start date varies 20 years for Annex I countries, and much longer for non-Annex countries. Atmospheric stabilization at 550 ppm does not avoid serious risks with regard to climate change impacts. At the long term, it is possible to avoid such risks but only through very strict emission control at high economic costs.     

Delayed action and uncertain stabilisation targets. How much will the delay cost?

Despite the growing concern about actual on-going climate change, there is little consensus on the scale and timing of actions needed to stabilise the concentrations of greenhouse gases. Many countries are unwilling to implement mitigation strategies, at least in the short term, and no agreement on an ambitious global stabilisation target has yet been reached. It is thus likely that international climate policies will be characterized by a high degree of uncertainty over the stringency of the climate objective, and that some countries might delay their participation to global action. What additional economic costs will this delay in the adoption of mitigation measures imply? What would the optimal short-term strategy be given the uncertainty surrounding the climate policy to come? Is there a hedging strategy that decision makers can adopt to cope with delayed action and uncertain targets? This paper addresses these questions by quantifying the economic implications of delaying mitigation action, and by computing the optimal abatement strategy in the presence of uncertainty about a global stabilisation target (which will be agreed upon in future climate negotiations). Results point to short-term inaction as the key determinant for the economic costs of ambitious climate policies. They also indicate that there is an effective hedging strategy that could minimise the cost of climate policy uncertainty over the global stabilisation target: a short-term moderate climate policy would be a good strategy to reduce the costs of delayed action and to cope with uncertainty about the outcome of future climate negotiations. By contrast, failing to curb emissions in the short term imposes rapidly increasing additional costs of compliance.     

On the regional distribution of mitigation costs in a global cap-and-trade regime

This paper analyzes the regional distribution of climate change mitigation costs in a global cap-and-trade regime. Four stylized burden-sharing rules are considered, ranging from GDP-based permit allocations to schemes that foresee a long-term convergence of per-capita emission permits. The comparison of results from three structurally different hybrid, integrated energy-economy models allows us to derive robust insights as well as identify sources of uncertainty with respect to the regional distribution of the costs of climate change mitigation. We find that regional costs of climate change mitigation may deviate substantially from the global mean. For all models, the mitigation cost average of the four scenarios is higher for China than for the other macro-regions considered. Furthermore, China suffers above-world-average mitigation costs for most burden-sharing rules in the long-term. A decomposition of mitigation costs into (a) primary (domestic) abatement costs and (b) permit trade effects, reveals that the large uncertainty about the future development of carbon prices results in substantial uncertainties about the financial transfers associated with carbon trade for a given allocation scheme. This variation also implies large uncertainty about the regional distribution of climate policy costs.     

Where are Germany’s gains from Kyoto? Estimating the effects of global warming on agriculture

Motivated by the high abatement costs of the Kyoto Protocol for Germany, this paper is estimating the economic impact of global warming on agriculture in that country. The hedonic approach is used as theoretical background. Stating that land prices are – among others – determined by climatic factors, this approach can consequently be used to value global warming. To avoid a priori restrictions stemming from functional forms, the land price function is modeled as quadratic Box–Cox function that nests a wide range of specifications. In a second step, the estimated results are used to forecast the impact of climate change. The results indicate that German farmers will be winners of climate change in the short run, with maximum gains occurring at a temperature increase of +0.6°C against current levels. In the long run, there may be losses from global warming. However, the net present value from climate change is under the most probable scenarios positive.     

The Impacts of Climate Variability on Near-Term Policy Choices and the Value of Information

Variability is one of the most salient features of the earth's climate, yet quantitative policy studies have generally ignored the impact of variability on society's best choice of climate-change policy. This omission is troubling because an adaptive emissions-reduction strategy, one that adjusts abatement rates over time based on observations of damages and abatement costs, should perform much better against extreme uncertainty than static, best-estimate policies. However, climate variability can strongly affect the success of adaptive-abatement strategies by masking adverse trends or fooling society into taking too strong an action. This study compares the performance of a wide variety of adaptive greenhouse-gas-abatement strategies against a broad range of plausible future climate-change scenarios. We find that: i) adaptive strategies remain preferable to static, best-estimate policies even with very large levels of climate variability; ii) the most robust strategies are innovation sensitive, that is, adjust future emissions reduction rates on the basis of small changes in observed abatement costs but only for large changes in observed damages; and iii) information about the size of the variability is about a third to an eighth as valuable as information determining the value of the key parameters that represent the long-term, future climate-change state-of-the-world.     

The economics (or lack thereof) of aerosol geoengineering

Anthropogenic greenhouse gas emissions are changing the Earth’s climate and impose substantial risks for current and future generations. What are scientifically sound, economically viable, and ethically defendable strategies to manage these climate risks? Ratified international agreements call for a reduction of greenhouse gas emissions to avoid dangerous anthropogenic interference with the climate system. Recent proposals, however, call for a different approach: to geoengineer climate by injecting aerosol precursors into the stratosphere. Published economic studies typically neglect the risks of aerosol geoengineering due to (i) the potential for a failure to sustain the aerosol forcing and (ii) the negative impacts associated with the aerosol forcing. Here we use a simple integrated assessment model of climate change to analyze potential economic impacts of aerosol geoengineering strategies over a wide range of uncertain parameters such as climate sensitivity, the economic damages due to climate change, and the economic damages due to aerosol geoengineering forcing. The simplicity of the model provides the advantages of parsimony and transparency, but it also imposes severe caveats on the interpretation of the results. For example, the analysis is based on a globally aggregated model and is hence silent on intragenerational distribution of costs and benefits. In addition, the analysis neglects the effects of learning and has a very simplistic representation of climate change impacts. Our analysis suggests three main conclusions. First, substituting aerosol geoengineering for CO₂ abatement can be an economically ineffective strategy. One key to this finding is that a failure to sustain the aerosol forcing can lead to sizeable and abrupt climatic changes. The monetary damages due to such a discontinuous aerosol geoengineering can dominate the cost-benefit analysis because the monetary damages of climate change are expected to increase with the rate of change. Second, the relative contribution of aerosol geoengineering to an economically optimal portfolio hinges critically on, thus far, deeply uncertain estimates of the damages due to aerosol forcing. Even if we assume that aerosol forcing could be deployed continuously, the aerosol geoengineering does not considerably displace CO₂ abatement in the simple economic optimal growth model until the damages due to the aerosol forcing are rather low. Third, substituting aerosol geoengineering for greenhouse gas emission abatement can fail an ethical test regarding intergenerational justice. Substituting aerosol geoengineering for greenhouse gas emissions abatements constitutes a conscious risk transfer to future generations, in violation of principles of intergenerational justice which demands that present generations should not create benefits for themselves in exchange for burdens on future generations.     

The impact of potential abrupt climate changes on near-term policy choices

We investigate an important scientific uncertainty facing climate-change policymakers, namely, the impact of potential abrupt climatic change. We examine sequential decision strategies for abating climate change where near-term policies are viewed as the first of a series of decisions which adapt over the years to improving scientific information. We compare two illustrative near-term (1992–2002) policies - moderate and aggressive emission reductions - followed by a subsequent long-term policy chosen to limit global-mean temperature change to a specified ‘climate target’. We calculate the global-mean surface temperature change using a simple climate/ocean model and simple models of greenhouse-gas concentrations. We alter model parameters to examine the impact of abrupt changes in the sinks of carbon dioxide, the sources of methane, the circulation of the oceans, and the climate sensitivity, ΔT _2x. Although the abrupt changes increase the long-term costs of responding to climate change, they do not significantly affect the comparatively small cost difference between near-term strategies. Except for an abrupt increase in ΔT _2x, the investigated abrupt climate changes do not significantly alter the values of the climate target for which each near-term strategy is preferred. In contrast, innovations that reduce the cost of limiting greenhouse-gas emissions offer the potential for substantial abatement cost savings, regardless of which level of near-term abatement is selected.     

White Knights: will wind and solar come to the rescue of a looming capacity gap from nuclear phase-out or slow CCS start-up?

In the wake of the Fukushima nuclear accident, countries like Germany and Japan have planned a phase-out of nuclear generation. Carbon capture and storage (CCS) technology has yet to become a commercially viable technology with little prospect of doing so without strong climate policy to spur development. The possibility of using renewable power generation from wind and solar as a non-emitting alternative to replace a nuclear phase-out or failure to deploy CCS technology is investigated using scenarios from EMF27 and the POLES model. A strong carbon price appears necessary to have significant penetration of renewables regardless of alternative generation technologies available, but especially if nuclear or CCS are absent from the energy supply system. The feasibility of replacing nuclear generation appears possible at realistic costs (evaluated as total abatement costs and final user prices to households); however for ambitious climate policies, such as a 450 ppm target, CCS could represent a critical technology that renewables will not be able to fully replace without unbearable economic costs.     

The REMIND-R model: the role of renewables in the low-carbon transformation—first-best vs. second-best worlds

Can near-term public support of renewable energy technologies contain the increase of mitigation costs due to delays of implementing emission caps at the global level? To answer this question we design a set of first and second best scenarios to analyze the impact of early deployment of renewable energy technologies on welfare and emission timing to achieve atmospheric carbon stabilization by 2100. We use the global multiregional energy?Ceconomy?Cclimate hybrid model REMIND-R as a tool for this analysis. An important design feature of the policy scenarios is the timing of climate policy. Immediate climate policy contains the mitigation costs at less than 1% even if the CO₂ concentration target is 410?ppm by 2100. Delayed climate policy increases the costs significantly because the absence of a strong carbon price signal continues the carbon intensive growth path. The additional costs can be decreased by early technology policies supporting renewable energy technologies because emissions grow less, alternative energy technologies are increased in capacity and their costs are reduced through learning by doing. The effects of early technology policy are different in scenarios with immediate carbon pricing. In the case of delayed climate policy, the emission path can be brought closer to the first-best solution, whereas in the case of immediate climate policy additional technology policy would lead to deviations from the optimal emission path. Hence, technology policy in the delayed climate policy case reduces costs, but in the case of immediate climate policy they increase. However, the near-term emission reductions are smaller in the case of delayed climate policies. At the regional level the effects on mitigation costs are heterogeneously distributed. For the USA and Europe early technology policy has a positive welfare effect for immediate and delayed climate policies. In contrast, India looses in both cases. China loses in the case of immediate climate policy, but profits in the delayed case. Early support of renewable energy technologies devalues the stock of emission allowances, and this effect is considerable for delayed climate policies. In combination with the initial allocation rule of contraction and convergence a relatively well-endowed country like India loses and potential importers like the EU gain from early renewable deployment.     

Economic consequences of the US withdrawal from the Kyoto/Bonn Protocol

Abstract

The US decision not to ratify the Kyoto Protocol and the recent outcomes of the Bonn and Marrakech Conferences of the Parties have important implications for both the effectiveness and the efficiency of future climate policies. Among these implications, those related with technical change and with the functioning of the international market for carbon emissions are particularly relevant, because these variables have the largest impact on the overall abatement cost to be borne by Annex B countries in the short and in the long run. This paper analyses the consequences of the US decision to withdraw from the Kyoto/Bonn Protocol both on technological innovation and on the price of emission permits (and, as a consequence, on abatement costs). In particular, the analysis highlights mechanisms and feedbacks related to technological innovation, technological spillovers and R&D which could be relevant and which modify some policy relevant conclusions. First, we identify two feedback effects which explain why our results lead to a less significant fall in the price of permits than in most empirical analyses recently circulated. We show that the US defection from the Kyoto Protocol, by inducing a decline in the demand and price of emission permits, lowers the incentives to undertake energy-saving R&D. As a consequence, emissions increase and feed back on the demand and supply of permits, thus implying a lower decline in the price of permits than previously estimated. At the same time, as a result of the reduced R&D investments and the augmented emissions, climate change damages intensify and require an increase in investments that are again coupled with a growth of emissions. By thus again increasing the demand for permits and reducing their supply, this effect enhances the previous mechanism. Notwithstanding the lower decline in the price of permits, the paper still identifies a smaller price than would occur with a US participation. Therefore, we emphasise in a second step the crucial role of Russia in climate negotiations due to a large increase in Russia's bargaining power.     

Economic consequences of the US withdrawal from the Kyoto/Bonn Protocol

The US decision not to ratify the Kyoto Protocol and the recent outcomes of the Bonn and Marrakech Conferences of the Parties have important implications for both the effectiveness and the efficiency of future climate policies. Among these implications, those related with technical change and with the functioning of the international market for carbon emissions are particularly relevant, because these variables have the largest impact on the overall abatement cost to be borne by Annex B countries in the short and in the long run. This paper analyses the consequences of the US decision to withdraw from the Kyoto/Bonn Protocol both on technological innovation and on the price of emission permits (and, as a consequence, on abatement costs). In particular, the analysis highlights mechanisms and feedbacks related to technological innovation, technological spillovers and R&D which could be relevant and which modify some policy relevant conclusions. First, we identify two feedback effects which explain why our results lead to a less significant fall in the price of permits than in most empirical analyses recently circulated. We show that the US defection from the Kyoto Protocol, by inducing a decline in the demand and price of emission permits, lowers the incentives to undertake energy-saving R&D. As a consequence, emissions increase and feed back on the demand and supply of permits, thus implying a lower decline in the price of permits than previously estimated. At the same time, as a result of the reduced R&D investments and the augmented emissions, climate change damages intensify and require an increase in investments that are again coupled with a growth of emissions. By thus again increasing the demand for permits and reducing their supply, this effect enhances the previous mechanism. Notwithstanding the lower decline in the price of permits, the paper still identifies a smaller price than would occur with a US participation. Therefore, we emphasise in a second step the crucial role of Russia in climate negotiations due to a large increase in Russia’s bargaining power.     

Climate policy under uncertainty: a case for solar geoengineering

Solar Radiation Management (SRM) has two characteristics that make it useful for managing climate risk: it is quick and it is cheap. SRM cannot, however, perfectly offset CO₂-driven climate change, and its use introduces novel climate and environmental risks. We introduce SRM in a simple economic model of climate change that is designed to explore the interaction between uncertainty in the climate’s response to CO₂ and the risks of SRM in the face of carbon-cycle inertia. The fact that SRM can be implemented quickly, reducing the effects of inertia, makes it a valuable tool to manage climate risks even if it is relatively ineffective at compensating for CO₂-driven climate change or if its costs are large compared to traditional abatement strategies. Uncertainty about SRM is high, and decision makers must decide whether or not to commit to research that might reduce this uncertainty. We find that even modest reductions in uncertainty about the side-effects of SRM can reduce the overall costs of climate change in the order of 10%.     

Climate Protection Strategies: International Allocation and Distribution Effects

In international climate policy discussions, one of the centralissues for medium- to long run climate protection strategiesis the uncertainty about the costs and the distributional effectsof specific unilateral or multilateral emission reductions. Thispaper looks at the world-wide effects of climate protection strategieson the allocation of resources, on economic growth in differentregions, and on the regional welfare effects. The analysis isbased on a global recursively dynamic, multi-region, multi-sectorcomputable general equilibrium model parameterized accordingto the ICLIPS (Integrated Assessment of Climate Protection Strategies)integrated assessment model. The simulations show that nationalclimate policies will have important international repercussions.It is therefore important to consider international allocationeffects in the analysis of national climate protection strategies.The welfare costs of greenhouse gas emission reductions risemore than proportionally with lower emission targets. The analysisof the carbon leakage rate indicates that most of the leakagerapidly disappears if emission reduction moves towards an efficientdistribution of emission targets.     

Does the CDM discourage emission reduction targets in advanced developing countries?

Under the Kyoto Protocol, developing countries can voluntarily participate in climate change mitigation through the Clean Development Mechanism (CDM), in which industrialized countries, in order to meet their mitigation commitments, can buy emission reduction credits from projects in developing countries. Before its implementation, developing-country experts opposed the CDM, arguing that it would sell-off their countries’ cheapest emission reduction options and force them to invest in more expensive measures to meet their future reduction targets. This ‘low-hanging fruit’ argument is analysed empirically by comparing marginal abatement cost curves. Emissions abatement costs and potentials for CDM projects are estimated for different technologies in eight countries, using capital budgeting tools and information from project documentation. It is found that the CDM is not yet capturing a large portion of the identified abatement potential in most countries. Although the costs of most emissions reduction opportunities grasped are below the average credit price, there are still plenty of available low-cost opportunities. Mexico and Argentina appear to use the CDM predominantly for harvesting the low-hanging fruit, whereas in the other countries more expensive projects are accessing the CDM. This evidence at first sight challenges the low-hanging fruit claim, but needs to be understood in the light of the barriers for the adoption of low-cost abatement options.     

Temperature control,emission abatement and costs: key EMF 27 results from Environment Canada’s Integrated Assessment Model

This paper investigates the potential impacts of alternative international climate change scenarios based on different policies and technological circumstances on future emission pathways and abatement costs. It also examines if these hypothetical scenarios could result in significant emission reductions required to control the global temperature from rising to no more than 2.5 °C above preindustrial level. Using an integrated assessment model, this paper examines these issues under 12 scenarios derived from four policy perspectives and three technology dimensions. Results show that the no-policy-change baseline scenarios lead to high global average temperatures in the future. To control the temperature efficiently, every global region will be required to undertake considerable abatement efforts. Current country pledges alone, even if fully implemented, cannot control the global temperature in the future to within a comfortable zone. There will still be large gap between the reductions needed to meet the 2.5 degree objective, associated with 550 ppm and the reductions associated with existing abatement efforts. Further stringent policies together with favourable technological conditions may lead to the desired level of temperature control. Participation by only a subset of nations not only makes achieving the temperature goal difficult but also costly. To achieve temperature control efficiently, global coordination and full participation by all regions are necessary and global participation may reduce global abatement costs. It is worth noting that abatement costs vary widely across regions under different policy and technology scenarios.     

Circumspection, reciprocity, and optimal carbon prices

Assessments of the benefits of climate change mitigation—and thus of the appropriate stringency of greenhouse gas emissions abatement—depend upon ethical, legal, and political economic considerations. Global climate change mitigation is often represented as a repeated prisoners’ dilemma in which the net benefits of sustained global cooperation exceed the net benefits of uncooperative unilateral action for any given actor. Global cooperation can be motivated either by circumspection—a decision to account for the damages one’s own actions inflict upon others—or by the expectation of reciprocity from others. If the marginal global benefits of abatement are approximately constant in total abatement, the domestically optimal price approaches the global cooperative optimum linearly with increasing circumspection and reciprocity. Approximately constant marginal benefits are expected if climate damages are quadratic in temperature and if the airborne fraction of carbon emissions is constant. If, on the other hand, damages increase with temperature faster than quadratically or carbon sinks weaken significantly with increasing CO₂ concentrations, marginal benefits will decline with abatement. In this case, the approach to the global optimum is concave and less than full circumspection and/or reciprocity can lead to optimal domestic abatement close to the global optimum.     

Escaping the climate policy uncertainty trap: options contracts for REDD+

Climate policy uncertainty significantly hinders investments in low-carbon technologies, and the global community is behind schedule to curb carbon emissions. Strong actions will be necessary to limit the increase in global temperatures, and continued delays create risks of escalating climate change damages and future policy costs. These risks are system-wide, long-term and large-scale and thus hard to diversify across firms. Because of its unique scale, cost structure and near-term availability, Reducing Emissions from Deforestation and forest Degradation in developing countries (REDD+) has significant potential to help manage climate policy risks and facilitate the transition to lower greenhouse gas emissions. ‘Call’ options contracts in the form of the right but not the obligation to buy high-quality emissions reduction credits from jurisdictional REDD+ programmes at a predetermined price per ton of CO₂ could help unlock this potential despite the current lack of carbon markets that accept REDD+ for compliance. This approach could provide a globally important cost-containment mechanism and insurance for firms against higher future carbon prices, while channelling finance to avoid deforestation until policy uncertainties decline and carbon markets scale up.

Key policy insights

• Climate policy uncertainty discourages abatement investments, exposing firms to an escalating systemic risk of future rapid increases in emission control expenditures.

• This situation poses a risk of an abatement ‘short squeeze,’ paralleling the case in financial markets when prices jump sharply as investors rush to square accounts on an investment they have sold ‘short’, one they have bet against and promised to repay later in anticipation of falling prices.

• There is likely to be a willingness to pay for mechanisms that hedge the risks of abruptly rising carbon prices, in particular for ‘call’ options, the right but not the obligation to buy high-quality emissions reduction credits at a predetermined price, due to the significantly lower upfront capital expenditure compared to other hedging alternatives.

• Establishing rules as soon as possible for compliance market acceptance of high-quality emissions reductions credits from REDD+ would facilitate REDD+ transactions, including via options-based contracts, which could help fill the gap of uncertain climate policies in the short and medium term.