Time Discounting and Optimal Emission Reduction: An Application of FUND

Time preferences are a dominant influence in cost-benefit analyses of long-term issues such as climate change. FUND, a model for optimal emission control, is used to spell out this influence. Classic discounting at various rates is contrasted with Heal discounting where the discount factor depends logarithmically on the time distance (it does linearly in the classic case), and Rabl discounting where the discount rate is set to zero at a certain point in the future. The choice of the discount rate has a strong influence on total and short-term emission reduction. The effect of Rabl and Heal discounting is like lowering the classic discount rate. International cooperation has a larger effect on optimal emission reduction, however, than does the discount rate. Larger still is the influence of explicitly taking up long-term goals for atmospheric concentrations in the welfare function, using a modification of the Chichilnisky criterion.     

Potential for forest carbon plantings to offset greenhouse emissions in Australia: economics and constraints to implementation

The theoretical potential for carbon forests to off-set greenhouse gas emissions may be high but the achievable rate is influenced by a range of economic and social factors. Economic returns (net present value, NPV) were calculated spatially across the cleared land area in Australia for ‘environmental carbon plantings’. A total of 105 scenarios were run by varying discount rate, carbon price, rate of carbon sequestration and costs for plantation establishment licenses for water interception. The area for which NPV was positive ranged from zero ha for tightly constrained scenarios to almost the whole of the cleared land (104 M ha) for lower discount rate and highest carbon price. For the most plausible assumptions for cost of establishment and commercial discount rate, no areas were identified as profitable until a carbon price of AUD$40 t CO₂ ^?1 was reached. The many practical constraints to plantation establishment mean that it will likely take decades to have significant impact on emission reductions. Every 1 M ha of carbon forests established would offset about 1.4 % of Australia’s year 2000 emissions (or 7.4 Mt CO₂ year^?1) when an average rate of sequestration per ha was reached. All studies that predict large areas of potentially profitable land for carbon forestry need to be tempered by the realities that constrain land use change. In Australia and globally, carbon plantings can be a useful activity to help mitigate emissions and restore landscapes but it should be viewed as a long-term project in which co-benefits such as biodiversity enhancement can be realised.     

Cost–benefit analysis of climate change dynamics: uncertainties and the value of information

We analyze climate change in a cost–benefit framework, using the emission and concentration profiles of Wigley et al. (Nature 379(6562):240–243, 1996). They present five scenarios that cover the period 1990–2300 and are designed to reach stabilized concentration levels of 350, 450, 550, 650 and 750 ppmv, respectively. We assume that the damage cost in each year t is proportional to the corresponding gross world product and the square of the atmospheric temperature increase (ΔT(t)). The latter is estimated with a simple two-box model (representing the atmosphere and deep ocean). Coupling the damage cost with the abatement cost, we interpolate between the five scenarios to find the one that is optimal in the sense of minimizing the sum of discounted annual (abatement plus damage) costs over a time horizon of N years. Our method is simpler than ‘traditional’ models with the same purpose, and thus allows for a more transparent sensitivity study with respect to the uncertainties of all parameters involved. We report our central result in terms of the stabilized emission level E _o and concentration level p _o (i.e. their values at t = 300 years) of the optimal scenario. For the central parameter values (that is, N = 150 years, a discount rate r _dis = 2%/year and a growth rate r _gro = 1%/year of gross world product) we find E _o  = 8.0 GtCO₂/year and p _o = 496 ppmv. Varying the parameters over a wide range, we find that the optimal emission level remains within a remarkably narrow range, from about 6.0 to 12 GtCO₂/year for all plausible parameter values. To assess the significance of the uncertainties we focus on the social cost penalty, defined as the extra cost incurred by society relative to the optimum if one makes the wrong choice of the emission level as a result of erroneous damage and abatement cost estimates. In relative terms the cost penalty turns out to be remarkably insensitive to errors. For example, if the true damage costs are three times larger or smaller than the estimate, the total social cost of global climate change increases by less than 20% above its minimum at the true optimal emission level. Because of the enormous magnitude of the total costs involved with climate change (mitigation), however, even a small relative error implies large additional expenses in absolute terms. To evaluate the benefit of reducing cost uncertainties, we plot the cost penalty as function of the uncertainty in relative damage and abatement costs, expressed as geometric standard deviation and standard deviation respectively. If continued externality analysis reduces the geometric standard deviation of relative damage cost estimates from 5 to 4, the benefit is 0.05% of the present value G _tot of total gross word product over 150 years (about $3.9 × 10¹⁵), and if further research reduces the standard deviation of relative abatement costs from 1 to 0.5, the benefit is 0.03% of G _tot .     

Accounting for uncertainties and time preference in economic analysis of tackling climate change through forestry and selected policy implications for Scotland and Ukraine

The paper discusses the development of economic techniques for dealing with uncertainties in economic analysis of planting trees to mitigate climatic change. In consideration of uncertainty, time preference and intergenerational equity, the traditional cost-benefit analysis framework is challenged with regard to the discounting/non-discounting of carbon uptake benefits, and because it usually uses a constant and positive discount rate. We investigate the influence of various discounting protocols on the outputs of economic analysis. The idea of using the declining discount rate is also considered. Several numerical examples dealing with the analysis of afforestation for carbon sequestration in Scotland and Ukraine are provided. We show that the choice of discounting protocols have a considerable influence on the results of economic analysis, and therefore, on the decision-making processes related to climate change mitigation strategies. The paper concludes with some innovative insights on accounting for uncertainties and time preference in tackling climate change through forestry, several climate policy implications of dealing with uncertainties, and a brief discussion of what the use of different discounting protocols might imply for decision making.     

Understanding public complacency about climate change: adults’ mental models of climate change violate conservation of matter

Public attitudes about climate change reveal a contradiction. Surveys show most Americans believe climate change poses serious risks but also that reductions in greenhouse gas (GHG) emissions sufficient to stabilize atmospheric GHG concentrations can be deferred until there is greater evidence that climate change is harmful. US policymakers likewise argue it is prudent to wait and see whether climate change will cause substantial economic harm before undertaking policies to reduce emissions. Such wait-and-see policies erroneously presume climate change can be reversed quickly should harm become evident, underestimating substantial delays in the climate’s response to anthropogenic forcing. We report experiments with highly educated adults – graduate students at MIT – showing widespread misunderstanding of the fundamental stock and flow relationships, including mass balance principles, that lead to long response delays. GHG emissions are now about twice the rate of GHG removal from the atmosphere. GHG concentrations will therefore continue to rise even if emissions fall, stabilizing only when emissions equal removal. In contrast, most subjects believe atmospheric GHG concentrations can be stabilized while emissions into the atmosphere continuously exceed the removal of GHGs from it. These beliefs – analogous to arguing a bathtub filled faster than it drains will never overflow – support wait-and-see policies but violate conservation of matter. Low public support for mitigation policies may arise from misconceptions of climate dynamics rather than high discount rates or uncertainty about the impact of climate change. Implications for education and communication between scientists and nonscientists (the public and policymakers) are discussed.     

An Issue of Permanence: Assessing the Effectiveness of Temporary Carbon Storage

In this paper, we present a method to quantify the effectiveness of carbon mitigation options taking into account the `permanence' of the emissions reduction. While the issue of permanence is most commonly associated with a `leaky' carbon sequestration reservoir, we argue that this is an issue that applies to just about all carbon mitigation options. The appropriate formulation of this problem is to ask `what is the value of temporary storage?' Valuing temporary storage can be represented as a familiar economic problem, with explicitly stated assumptions about carbon prices and the discount rate. To illustrate the methodology, we calculate the sequestration effectiveness for injecting CO₂ at various depths in the ocean. Analysis is performed for three limiting carbon price assumptions: constant carbon prices (assumes constant marginal damages), carbon prices rise at the discount rate (assumes efficient allocation of a cumulative emissions cap without a backstop technology), and carbon prices first rise at the discount rate but become constant after a given time (assumes introduction of a backstop technology). Our results show that the value of relatively deep ocean carbon sequestration can be nearly equivalent to permanent sequestration if marginal damages (i.e., carbon prices) remain constant or if there is a backstop technology that caps the abatement cost in the not too distant future. On the other hand, if climate damages are such as to require a fixed cumulative emissions limit and there is no backstop, then a storage option with even very slow leakage has limited value relative to a permanent storage option.     

A missed opportunity: The Stern Review on climate change fails to tackle the issue of non-substitutable loss of natural capital

The Stern Review on The Economics of Climate Change is one of the few cost-benefit analyses of climate change to come out in favour of immediate and decisive action to reduce greenhouse gas emissions. The choice of a low discount rate is the main reason for the Review's divergence in conclusions compared to other economic studies. I argue that the Review's ethical reasons for a low discount rate are defendable, but unlikely to find wider public support. In order to justify spending a large amount of scarce resources for the purpose of limiting climate change, it is necessary to move beyond the discounting debate. Unfortunately, the Review did not develop a persuasive argument for why climate change threatens to inflict upon future generations irreversible and non-substitutable damage to and loss of natural capital. This represents a missed opportunity as it would have provided a much more compelling case for drastic action than the Review's arguments for a low discount rate.     

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.     

Consumption tradeoff vs. catastrophes avoidance: implications of some recent results in happiness studies on the economics of climate change

Recent discussion of climate change focuses on the trade-off between present and future consumption and hence correctly emphasizes the discount rate. Stern (2007) favours immediate and strong actions of environmental protection, but this has been questioned as the discount rate used is much lower than the market or commonly used rates. Focussed only on consumption trade-off, the use of these higher discount rates completely reverses the need for strong actions. However, an even more important problem has been largely neglected. This is the avoidance of catastrophes that may threaten the extinction of the human species. But ??we lack a usable economic framework for dealing with these kinds of ... extreme disasters?? (Weitzman, J Econ Lit 45(3):703?C724, 2007, p. 723). To analyse this, the comparison of marginal utility with total utility is needed. As happiness studies suggest a low ratio of marginal to total utility and as scientific and technological advances (especially in brain stimulation and genetic engineering) may dramatically increase future welfare, immediate and actions stronger than proposed by Stern may be justified despite high discount rates on future consumption, as discount rates on future utility/welfare should be much lower.     

Why is risk aversion unaccounted for in environmental policy evaluations?

U.S. environmental regulations are increasingly influenced by cost-benefit analyses that are performed based on the guidance of the Office of Management and Budget (OMB). The OMB’s Circular A-4 directs Federal agencies to assume “risk neutrality” in conducting regulatory analysis, and in important instances, this guidance is not supported by economic theory. Risk neutrality is computationally convenient, and it can be justified when only the costs and benefits of regulations themselves are uncertain, because these risks are spread across a large population. However, the Circular A-4 does not distinguish between regulations that cause uncertainty and those that reduce pre-existing (i.e. baseline) uncertainty, such as the potential for catastrophic climate change. Basic economic theory shows that risk aversion should be incorporated into evaluations of policies that reduce pre-existing environmental uncertainty. Regulatory analyses generally ignore these risk-reduction benefits, leading to misinformed policymaking. Quantifying risk premiums is difficult and controversial, but no more so than discounting future costs and benefits to present value terms. Similar to how OMB has established discount rates for use in regulatory analyses, a method for when and how to incorporate risk aversion into policy evaluations should replace the blanket guidance for risk neutrality.     

Environmental impacts of sequestering carbon through forestation

An issue that arises when considering the potential damages of climate change is whether it is possible to slow or stop human caused climate change. One suggestion to reduce the threat of global warming is to change our management of forests to offset carbon emissions. This study examines the impacts of such a policy on environmental amenities in existing Douglas-fir forests. In this analysis Douglas-fir forest management is modelled in a Faustmann framework, where the forest produces three goods: timber, carbon sequestration and amenities. Using this framework, the level of amenities under profit-maximizing and carbon-sequestration management regimes are compared. The change in the level of seven specific amenities is modelled. These amenities include trout, wildlife diversity, visual aesthetics, soil stability, deer populations, elk populations, and water yield. The study finds that the effect of a carbon sequestration policy will depend on the discount rate chosen. In most situations externalities vary less than plus or minus ten percent. However, those externalities that exhibit discontinuities in their relationship to forest age may vary a hundred percent or more depending on the discount rate used.     

Projection of economic impacts of climate change in sectors of Europe based on bottom up analysis: human health

This paper scopes a number of the health impacts of climate change in Europe (EU-27) quantitatively, using physical and monetary metrics. Temperature-related mortality effects, salmonellosis and coastal flooding-induced mental health impacts resulting from climate change are isolated from the effects of socio-economic change for the 2011–2040 and 2071–2100 time periods. The temperature-induced mortality effects of climate change include both positive and negative effects, for winter (cold) and summer (heat) effects, respectively, and have welfare costs (and benefits) of up to 100 billion Euro annually by the later time-period, though these are unevenly distributed across countries. The role of uncertainty in quantifying these effects is explored through sensitivity analysis on key parameters. This investigates climate model output, climate scenario, impact function, the existence and extent of acclimatisation, and the choice of physical and monetary metrics. While all of these lead to major differences in reported results, acclimatisation is particularly important in determining the size of the health impacts, and could influence the scale and form of public adaptation at the EU and national level. The welfare costs for salmonellosis from climate change are estimated at potentially several hundred million Euro annually by the period 2071–2100. Finally, a scoping assessment of the health costs of climate change from coastal flooding, focusing on mental health problems such as depression, are estimated at up to 1.5 billion Euro annually by the period 2071–2100.     

Sensitivity Study of Optimal CO2 Emission Paths Using a Simplified Structural Integrated Assessment Model (SIAM)

A structurally highly simplified, globally integrated coupled climate-economic costs model SIAM (Structural Integrated Assessment Model) is used to compute optimal paths of global CO₂ emissions that minimize the net sum of climate damage and mitigation costs. The model is used to study the sensitivity of the computed optimal emission paths with respect to various critical input assumptions. The climate module is represented by a linearized impulse-response model calibrated against a coupled ocean-atmosphere general circulation climate model and a three-dimensional global carbon-cycle model. The cost terms are represented by strongly simplified expressions designed for maximal transparency with respect to sensitive input assumptions. These include the discount rates for mitigation and damage costs, the inertia of the socio-economic system, and the dependence of climate damages on the change in temperature and the rate of change of temperature. Different assumptions regarding these parameters are believed to be the cause of the marked divergences of existing cost-benefit analyses based on more sophisticated economic models. The long memory of the climate system implies that very long time horizons of several hundred years need to be considered to optimize CO₂ emissions on time scales relevant for a policy of sustainable development. Cost-benefit analyses over shorter time scales of a century or two can lead to dangerous underestimates of the long term climatic impact of increasing greenhouse-gas emissions. To avert a major long term global warming, CO₂ emissions need to be reduced ultimately to very low levels. However, the draw-down can be realized as a gradual transition process over many decades and even centuries. This should nevertheless not be interpreted as providing a time cushion for inaction: the transition becomes more costly the longer the necessary mitigation policies are delayed. However, the long time horizon provides adequate flexibility for later adjustments. Short term energy conservation alone is insufficient and can be viewed only as a useful measure in support of the necessary long term transition to carbon-free energy technologies. For standard climate damage cost expressions, optimal emission paths limiting long term global warming to acceptable sustainable development levels are recovered only if climate damage costs are not significantly discounted. Discounting of climate damages at normal economic rates yields emission paths that are only weakly reduced relative to business as usual scenarios, resulting in high global warming levels that are incompatible with the generally accepted requirements of sustainable development. The solutions are nevertheless logically consistent with the underlying discounting assumption, namely that the occurrence of global warming damages in the distant future as a result of present human activities is of negligible concern today. It follows that a commitment to long term sustainable development, if it in fact exists, should be expressed by an intertemporal relation for the value of the earth's future climate which does not degrade significantly over the time horizon relevant for climate change. Since the future climate is a common assett whose value cannot be determined on the market, the appropriate discount rate for future climate damages should be determined by an assessment of the public willingness to pay today for the mitigation of future climate change. To translate our general conclusions into quantitative cost estimates required by decision makers, the present exploratory study needs to be extended using more detailed disaggregated climate damage and mitigation cost estimates and more realistic socio-economic models, including multi-actor interactions, inherent variability, the role of uncertainty and adaptive control strategies.     

Intertemporal Accounting of Climate Change – Harmonizing Economic Efficiency and Climate Stewardship

Continuing a discussion on the intertemporal accounting of climate-change damages initiated by Nordhaus, Heal and Brown in response to the recent demonstration of Hasselmann et al. that standard exponential discounting applied uniformly to all goods and services invariably leads to a 'climate catastrophe' in cost-benefit analyses, it is argued that (1) there exists no economically satisfactory alternative to cost-benefit analysis for the determination of optimal climate protection strategies, and (2) it is essential to allow for the different long-term evolution of climate damage costs relative to mitigation costs in determining the optimal cost-benefit solution. A climate catastrophe can be avoided only if it is assumed that climate damage costs increase significantly in the long term relative to mitigation costs. Cost-benefit analysis is regarded here in the generalized sense of optimizing a social welfare function that incorporates all relevant 'quality-of-life' factors, including not only consumption and the value of the environment, but also the ethical values of equitable intertemporal and intrasocietal distribution. Thus, economic efficiency and climate stewardship are not regarded as conflicting goals, but as synonyms for a single encompassing economic optimization exercise. The same reasoning applies generally to the problem of sustainable development. To quantify the concept of sustainable development in cost-benefit analyses, the projected time evolution of the future values of natural resources and the environment (judged by the present generation, acting as representative agents of future generations) must be related to the time-evolution of all other relevant quality-of-life factors. Different ethical interpretations of the concept of sustainable development can be readily operationalized by incorporation in a generalized cost-benefit analysis in which the evolution paths of all relevant material and ethical values are explicitly specified.     

Assessing the value of price caps and floors

This article assesses the long-term economic and climatic effects of introducing price caps and price floors in hypothetical global climate change mitigation policy. Based on emission trends, abatement costs and equilibrium climate sensitivity from IPCC and IEA reports, this quantitative analysis confirms that price caps could significantly reduce economic uncertainty. This uncertainty stems primarily from unpredictable economic growth and energy prices, and ultimately unabated emission trends. In addition, the development of abatement technologies is uncertain. Furthermore, this analysis shows that rigid targets may entail greater economic risks with little or no comparative advantage for the climate. More ambitious emission objectives, combined with price caps and price floors, could still entail significantly lower expected costs while driving similar, or even slightly better, climatic outcomes in probabilistic terms.     

碳税和碳交易机制的行业减排成本比较优势研究

碳税和碳交易机制是控制温室气体排放的环境管理工具,对工业行业的减排成本造成不同的影响。以污染控制政策的稳态总期望社会成本函数为基础构建碳减排成本函数,比较碳税和碳交易机制下水泥行业减排成本,发现影响两种环境管理工具成本的要素。以广东和山东水泥行业的实证数据进行模拟分析,得到如下结论：当碳价和碳税税率差距不大时,由于碳交易机制需要较高的建设成本,碳税更具成本优势;短期内,由于减排技术投入成本较高,与强制性的行政管理手段相比,碳交易机制更具成本效益;碳价、碳税税率、最佳可获得技术的价格、企业预期、碳交易建设与管理成本都会影响碳交易机制和碳税在减排成本上的比较优势。建议设计互补型碳排放管理政策组合,使碳税和碳交易机制发挥各自的制度优势。     

Integrated assessment of abrupt climatic changes

One of the most controversial conclusions to emerge from many of the first generation of integrated assessment models (IAMs) of climate policy was the perceived economic optimality of negligible near-term abatement of greenhouse gases. Typically, such studies were conducted using smoothly varying climate change scenarios or impact responses. Abrupt changes observed in the climatic record and documented in current models could substantially alter the stringency of economically optimal IAM policies. Such abrupt climatic changes — or consequent impacts — would be less foreseeable and provide less time to adapt, and thus would have far greater economic or environmental impacts than gradual warming. We extend conventional, smooth IAM analysis by coupling a climate model capable of one type of abrupt change to a well-established energy–economy model (DICE). We compare the DICE optimal policy using the standard climate sub-model to our version that allows for abrupt change — and consequent enhanced climate damage — through changes in the strength (and possible collapse) of the North Atlantic thermohaline circulation (THC). We confirm the potential significance of abrupt climate change to economically optimal IAM policies, thus calling into question all previous work neglecting such possibilities — at the least for the wide ranges of relevant social and climate system parameters we consider. In addition, we obtain an emergent property of our coupled social–natural system model: “optimal policies” that do consider abrupt changes may, under relatively low discount rates, calculate emission control levels sufficient to avoid significant abrupt change, whereas “optimal policies” disregarding abrupt change would not prevent this non-linear event. However, there is a threshold in discount rate above which the present value of future damages is so low that even very large enhanced damages in the 22nd century, when a significant abrupt change such as a THC collapse would be most likely to occur, do not increase optimal control levels sufficiently to prevent such a collapse. Thus, any models not accounting for potential abrupt non-linear behavior and its interaction with the discounting formulation are likely to miss an important set of possibilities relevant to the climate policy debate.     

Hygroscopic behavior of aerosol particles from biomass fires using environmental transmission electron microscopy

We used both a conventional transmission electron microscope and an environmental transmission electron microscope (ETEM) to determine morphology, composition, and water uptake of 80 individual aerosol particles collected from the young smoke of flaming and smoldering fires during SAFARI-2000, a comprehensive air quality campaign in southern Africa. Six representative carbonaceous particle types are described, including soot, tar balls, and heterogeneously internally mixed particles containing C with S-, K-, Mg- or Na-rich inorganic phases. The hygroscopic behavior of these particles over the range 0–100% relative humidity (RH) was studied in detail. Soot and tar balls did not take up water, whereas the mixed organic–inorganic particles took up water between 55 and 100% RH, the exact value depending on the composition of their water-soluble phases. The inorganic phase appeared to determine the hygroscopic properties of all mixed organic–inorganic particles. Thus, incorporation of inorganic plant material or reactions with inorganic atmospheric components can dramatically alter the hygroscopic properties of carbonaceous particles in smoke plumes. The fraction of these mixed organic–inorganic particles plausibly increases with time, which will modulate the effects of smoke on radiative budgets.     

Investigation of tropopause characteristics in the polar zone with the use of radio sounding data at Barrow station

Characteristics of the thermal tropopause are computed and analyzed on the base of 18-year series (1990–2007) of radio sounding data at Barrow station. The seasonal and interannual variability of tropopause height and temperature values, as well as of the relative humidity and wind speed at this level are investigated. Investigation of the tropopause “contrast” value, which defines the tropopause as the separating layer, is carried out. It is shown that during the period under review the tropopause has become stronger pronounced, mainly due to the temperature lapse rate increase in the lower stratosphere.