Uncertainty in Integrated Assessment Models of Climate Change: Alternative Analytical Approaches

Uncertainty plays a key role in the economics of climate change, and research on this topic has led to a substantial body of literature. However, the discussion on the policy implications of uncertainty is still far from being settled, partly because the uncertainty of climate change comes from a variety of sources and takes diverse forms. To reflect the multifaceted nature of climate change uncertainty better, an increasing number of analytical approaches have been used in the studies of integrated assessment models of climate change. The employed approaches could be seen as complements rather than as substitutes, each of which possesses distinctive strength for addressing a particular type of problems. We review these approaches—specifically, the non-recursive stochastic programming, the real option analysis, and the stochastic dynamic programming—their corresponding literatures and their respective policy implications. We also identify the current research gaps associated with the need for further developments of new analytical approaches.     

Correcting the carbon cycle representation: How important is it for the economics of climate change?

Economic analyses of the greenhouse effect are typically carried out within the framework of computable general equilibrium models which represent the climate system by simple two box proxies based upon the pioneering work of Nordhaus. Since errors in predicting the carbon budget can imply high costs, there is some need to include more sophisticated climate models into the economics of global climate change. This paper presents a non-linear pulse representation of the process-based and data-validated Bern carbon model. Compared to the Nordhaus approach this leads to different results with respect to optimal climate policy and atmospheric carbon dioxide concentration. In particular, our results suggest that economic studies which use a Nordhaus representation of the climate system are biased towards high carbon emission and low abatement levels.     

Combining Stochastic Optimization and Monte Carlo Simulation to Deal with Uncertainties in Climate Policy Assessment

In this paper, we explore the impact of several sources of uncertainties on the assessment of energy and climate policies when one uses in a harmonized way stochastic programming in a large-scale bottom-up (BU) model and Monte Carlo simulation in a large-scale top-down (TD) model. The BU model we use is the TIMES Integrated Assessment Model, which is run in a stochastic programming version to provide a hedging emission policy to cope with the uncertainty characterizing climate sensitivity. The TD model we use is the computable general equilibrium model GEMINI-E3. Through Monte Carlo simulations of randomly generated uncertain parameter values, one provides a stochastic micro- and macro-economic analysis. Through statistical analysis of the simulation results, we analyse the impact of the uncertainties on the policy assessment.     

Environmental degradation and remediation: is economics part of the problem?

It is argued that standard environmental economic and 'ecological economics', have the same fundamentals of valuation in terms of money, based on a demand curve derived from utilitymaximization. But this approach leads to three different measuresof value. An invariant measure of value exists only if the consumer has 'homothetic preferences'. In order to obtain a numerical estimate of value, specific functional forms are necessary, but typically these estimates do not converge. This is due to the fact that the underlying economic model is not structurally stable.According to neoclassical economics, any environmental remediation can be justified only in terms of increases in consumer satisfaction, balancing marginal gains against marginal costs. It is not surprising that the optimal policy obtained fromthis approach suggests only small reductions in greenhouse gases.We show that a unidimensional metric of consumer's utility measured in dollar terms can only trivialize the problem of global climate change.     

Human Capital,Innovation, and Climate Policy: an Integrated Assessment

This paper looks at the interplay between human capital and innovation when climate and educational policies are implemented. Following recent empirical studies, human capital and general purpose research and development (R&D) are introduced in an integrated assessment model used to study the dynamics of climate change mitigation. Our results suggest that climate policy stimulates general purpose as well as clean R&D but reduces the incentive to invest in human capital formation. Both innovation and human capital have a scale effect, which increases pollution, as well as a technique effect, which saves emissions for each unit of output produced. While the energy-saving effect prevails when innovation increases, human capital is pollution-using, also because of the gross complementarity between the labor and energy input. When the role of human capital is the key input in the production of general purpose and energy knowledge is accounted for, the crowding-out of education induced by climate policy is mitigated, though not completely offset. By contrast, a policy mix that combines educational as well as climate objectives offsets the human capital crowding-out, at moderate and short-term costs. Over the long run, the policy mix leads to global welfare gains.     

Intergenerational equity and discounting

A standard framework is presented as an underlying model for the discounting debate. Views and proposals for the techniques and rates of discounting are assessed. Alternative modeling frameworks for studying intergenerational equity issues are evaluated with the result that the basic insights they provide do not differ very much. Results from model experiments involving different discount rate proposals show that fudging the discount rate does not lead to efficient climate policy. Three major clusters of opinions are identified regarding the applicability of cost-benefit analysis to the climate change problem and the appropriate discount rate to use. It is concluded that under some very special circumstances the cost-benefit rule should be abandoned and cost-effective strategies implying standard discount rates should be sought to reach clearly defined and justified environmental targets. This revised version was published online in July 2006 with corrections to the Cover Date.     

Between economics and ecology: some historical and philosophical considerations for modelers of natural capital

Natural capital models attempt to remediate the relationship between economics and ecology either by conjoining models and theories from each discipline or by finding a type of phenomena that can be meaningfully measured by both fields. The developmentof a widely accepted model which integrates economics and ecologyhas eluded researchers since the early 1970s. This paper offers an historical and philosophical perspective on some of the conceptual problems or obstacles that hinder the development ofnatural capital models. In particular, the disciplinary assumptions of economic science and ecological science are examined and it is argued that these assumptions are antithetical. Hence, the development of an effective and acceptednatural capital model will require that economics and ecology reconsider their self-conceptions as sciences. For the purposesof theoretical research and practical policy, the paper cautionsagainst confusing the issue of whether or not economic models accord with ecological models with the issue of whether or not economic activities accord with ecological realities.     

Economic models for climate policy analysis: A critical discussion

Climate policy analysis has come to rely heavily on large‐scale numerical simulation models of increasing complexity, posing a challenge to policy‐makers and other non‐specialists who must interpret and apply the models. This paper provides a “user's guide” to economic models used in climate analysis. We review basic features, underlying design issues, and basic research questions bearing on the models' foundations. We also provide an overview of five such global or world models currently in use.     

The FAIR model: A tool to analyse environmental and costs implications of regimes of future commitments

This article describes the policy decision-support tool, FAIR, to assess the environmental and abatement costs implications of international regimes for differentiation of future commitments. The model links long-term climate targets and global reduction objectives with regional emission allowances and abatement costs, accounting for the Kyoto Mechanisms used. FAIR consists of three sub-models: a simple climate model, an emission-allocation model and a cost model. The article also analyses ten different rule-based emission allocation schemes for two long-term concentration stabilisation targets for greenhouse gases. This analysis shows that evaluating regimes requires not only an assessment of the initial allocation, but also of the distribution of abatement costs and the impacts from emissions trading. The Multi-Stage approach (with a gradual increase of Parties adopting emission intensity or reductions targets) and the Triptych approach (with sectoral targets for all Parties) seem to provide the best prospects for most of the Parties when compared to the other allocation schemes analysed.     

Mitigation Costs in a Globalized World: Climate Policy Analysis with REMIND-R

Within this paper, we present the novel hybrid model REMIND-R and its application in a climate policy context based on the EU target to avoid a warming of the Earth’s atmosphere by more than 2°C compared to the pre-industrial level. This paper aims to identify necessary long-term changes in the energy system and the magnitude of costs to attain such a climate protection target under different designs of the post-2012 climate policy regime. The regional specification of mitigation costs is analyzed in the context of globalization where regions are linked by global markets for emission permits, goods, and several resources. From simulation experiments with REMIND-R, it turns out that quite different strategies of restructuring the energy system are pursued by the regions. Furthermore, it is demonstrated that the variance of mitigation costs is higher across regions than across policy regimes. First-order impacts, in particular, reduced rents from trade in fossil resources, prevail regardless of the design of the policy regime.     

Mind the gap in SEA: An institutional perspective on why assessment of synergies amongst climate change mitigation, adaptation and other policy areas are missing

This article takes its point of departure in two approaches to integrating climate change into Strategic Environmental Assessment (SEA): Mitigation and adaptation, and in the fact that these, as well as the synergies between them and other policy areas, are needed as part of an integrated assessment and policy response. First, the article makes a review of how positive and negative synergies between a) climate change mitigation and adaptation and b) climate change and other environmental concerns are integrated into Danish SEA practice. Then, the article discusses the implications of not addressing synergies. Finally, the article explores institutional explanations as to why synergies are not addressed in SEA practice. A document analysis of 149 Danish SEA reports shows that only one report comprises the assessment of synergies between mitigation and adaptation, whilst 9,4% of the reports assess the synergies between climate change and other environmental concerns. The consequences of separation are both the risk of trade-offs and missed opportunities for enhancing positive synergies. In order to propose explanations for the lacking integration, the institutional background is analysed and discussed, mainly based on Scott's theory of institutions. The institutional analysis highlights a regulatory element, since the assessment of climate change synergies is underpinned by legislation, but not by guidance. This means that great focus is on normative elements such as the local interpretation of legislation and of climate change mitigation and adaptation. The analysis also focuses on how the fragmentation of the organisation in which climate change and SEA are embedded has bearings on both normative and cultural-cognitive elements. This makes the assessment of synergies challenging. The evidence gathered and presented in the article points to a need for developing the SEA process and methodology in Denmark with the aim to include climate change in the assessments in a more systematic and integrated manner.     

Application of a checklist for quality assistance in environmental modelling to an energy model

Large, complex energy models present considerable challenges to develop and test. Uncertainty assessments of such models provide only partial guidance on the quality of the results. We have developed a model quality assistance checklist to aid in this purpose. The model checklist provides diagnostic output in the form of a set of pitfalls for the model application. The checklist is applied here to an energy model for the problem of assessing energy use and greenhouse gas emissions. Use of the checklist suggests that results on this issue are contingent on a number of assumptions that are highly value-laden. When these assumptions are held fixed, the model is deemed capable of producing moderately robust results of relevance to climate policy over the longer term. Checklist responses also indicate that a number of details critical to policy choices or outcomes on this issue are not captured in the model, and model results should therefore be supplemented with alternative analyses.     

Climate change decision-support and the tolerable windows approach

The Tolerable Windows Approach (TWA) to Integrated Assessments (IA) of global warming is based on external normative specifications of tolerable sets of climate impacts as well as proposed emission quotas and policy instruments for implementation. In a subsequent step, the complete set of admissible climate protection strategies which are compatible with these normative inputs is determined by scientific analysis. In doing so, minimum requirements concerning global and national greenhouse gas emission paths can be determined. In this paper we present the basic methodological elements of TWA, discuss its relation to more conventional approaches to IA like cost–benefit analyses, and present some preliminary results obtained by a reduced-form climate model.     

The Biodiversity Crisis and Adaptation to Climate Change: A Case Study from Australia's Forests

If current trends continue, human activities will drastically alter most of the planet's remaining natural ecosystems and their composite biota within a few decades. Compounding the impacts on biodiversity from deleterious management practices is climate variability and change. The Intergovernmental Panel on Climate Change (IPCC) recently concluded that there is ample evidence to suggest climate change is likely to result in significant impacts on biological diversity. These impacts are likely to be exacerbated by the secondary effects of climate change such as changes in the occurrence of wildfire, insect outbreaks and similar disturbances. Current changes in climate are very different from those of the past due to their rate and magnitude, the direct effects of increased atmospheric CO₂ concentrations and because highly modified landscapes and an array of threatening processes limit the ability of terrestrial ecosystems and species to respond to changed conditions. One of the primary human adaptation option for conserving biodiversity is considered to be changes in management. The complex and overarching nature of climate change issues emphasises the need for greatly enhanced cooperation between scientists, policy makers, industry and the community to better understand key interactions and identify options for adaptation. A key challenge is to identify opportunities that facilitate sustainable development by making use of existing technologies and developing policies that enhance the resilience of climate-sensitive sectors. Measures to enhance the resilience of biodiversity must be considered in all of these activities if many ecosystem services essential to humanity are to be sustained. New institutional arrangements appear necessary at the regional and national level to ensure that policy initiatives and research directed at assessing and mitigating the vulnerability of biodiversity to climate change are complementary and undertaken strategically and cost-effectively. Policy implementation at the national level to meet responsibilities arising from the UNFCCC (e.g., the Kyoto Protocol) and the UN Convention on Biological Diversity require greater coordination and integration between economic sectors, since many primary drivers of biodiversity loss and vulnerability are influenced at this level. A case study from the Australian continent is used to illustrate several key issues and discuss a basis for reform, including recommendations for facilitating adaptation to climate variability and change.     

Behavioural determinants of an individual's intention to adapt to climate change: Both internal and external perspectives

Climate change has had a significant negative impact on socio-economic factors and the earth's ecology. To cope with climate change, many countries have employed various policies and measures to reduce damage due to climate change. For individual residents, adaptation behaviour is vital for reducing individual welfare losses. This research analysed how psychological determinants and other external factors influence residents' intention to adapt to climate change. We proposed an extended protection motivation theory (PMT) model, developed a reliable scale and conducted a nationwide field survey. We interviewed 1402 residents in 29 provinces, and 874 valid questionnaires were collected, providing data that were used in a structural equation model. The results show that our model can serve as a reliable framework for analysing the determinants of residents' intention to adapt to climate change. Policy is the most important factor for stimulating the formation of residents' adaptation intention. Risk appraisals and adaptation appraisals have positive and significant impacts on the intention of residents to adopt climate change adaptation behaviour. Information and climate perception do not directly influence residents' behavioural intentions but indirectly affect their intentions through the process of risk appraisal and adaptation appraisal. Corresponding policy suggestions are made that may be helpful for the formulation of adaptation policies.     

Evaluating the environmental sustainability of biomass-based energy strategy: Using an impact matrix framework

A roadmap for a more sustainable energy strategy is complex, as its development interacts critically with the economic, social, and environmental dimensions of sustainable development. This paper applied an impact matrix method to evaluate the environmental sustainability and to identify the desirable policy objectives of biomass-based energy strategy for the case of Alberta. A matrix with the sustainability domains on one axis and areas of environmental impact on the other was presented to evaluate the nexus effect of policy objectives and bioenergy production.As per to our analysis, economic diversification, technological innovation, and resource conservation came up as the desirable policy objectives of sustainable development for Alberta because they demonstrated environmental benefits in all environmental impact categories, namely climate change, human health, and ecosystem. On the other hand, human health and ecosystem impacts were identified as trade-offs when the policy objectives for sustainability were energy security, job creation, and climate change. Thus, bioenergy can mitigate climate change but may impact human health and ecosystem which then in turn can become issues of concern. Energy strategies may result in shifting of risks from one environmental impact category to another, and from one sustainable domain to another if the technical and policy-related issues are not identified.     

Mitigation Portfolio and Policy Instruments When Hedging Against Climate Policy and Technology Uncertainty

In this paper, we use a stochastic integrated assessment model to evaluate the effects of uncertainty about future carbon taxes and the costs of low-carbon power technologies. We assess the implications of such ambiguity on the mitigation portfolio under a variety of assumptions and evaluate the role of emission performance standards and renewable portfolios in accompanying a market-based climate policy. Results suggest that climate policy and technology uncertainties are important with varying effects on all abatement options. The effect varies with the technology, the type of uncertainty, and the level of risk. We show that carbon price uncertainty does not substantially change the level of abatement, but it does have an influence on the mitigation portfolio, reducing in particular energy R&D investments in advanced technologies. When investment costs are uncertain, investments are discouraged, especially during the early stages, but the effect is mitigated for the technologies with technological learning prospects. Overall, these insights support some level of regulation to encourage investments in coal equipped with carbon capture and storage and clean energy R&D.     

On the representation of impact in integrated assessment models of climate change

The paper provides an overview of attempts to represent climate change impact in over twenty integrated assessment models (IAMs) of climate change. Focusing on policy optimization IAMs, the paper critically compares modeling solutions, discusses alternatives and outlines important areas for improvement. Perhaps the most crucial area of improvement concerns the dynamic representation of impact, where more credible functional forms need to be developed to express time‐dependent damage as a function of changing socio‐economic circumstances, vulnerability, degree of adaptation, and the speed as well as the absolute level of climate change.     

INASUD project findings on integrated assessment of climate policies

This communication summarizes the main findings of INASUD, an European-wide research project on integrated assessment of climate policies. The project aimed at improving the framing of climate policy analysis through the parallel use of various existing integrated assessment models. It provides a comprehensive examination of the link between uncertainty regarding damages and inertia in economic systems. Results show that the Kyoto targets and timing are consistent with the precautionary principle but offers little insurance for longer-term climate protection. Flexibility mechanisms offer potentials for cooperation with developing countries, and are necessary to tap the environmental and economic benefits of joint carbon and sulfur emissions abatement.     

Quantifying the effect of trend,fluctuation, and extreme event of climate change on ecosystem productivity

Climate change comprises three fractions of trend, fluctuation, and extreme event. Assessing the effect of climate change on terrestrial ecosystem requires an understanding of the action mechanism of these fractions, respectively. This study examined 11 years of remotely sensed-derived net primary productivity (NPP) to identify the impacts of the trend and fluctuation of climate change as well as extremely low temperatures caused by a freezing disaster on ecosystem productivity in Hunan province, China. The partial least squares regression model was used to evaluate the contributions of temperature, precipitation, and photosynthetically active radiation (PAR) to NPP variation. A climatic signal decomposition and contribution assessment model was proposed to decompose climate factors into trend and fluctuation components. Then, we quantitatively evaluated the contributions of each component of climatic factors to NPP variation. The results indicated that the total contribution of the temperature, precipitation, and PAR to NPP variation from 2001 to 2011 in Hunan province is 85 %, and individual contributions of the temperature, precipitation, and PAR to NPP variation are 44 % (including 34 % trend contribution and 10 % fluctuation contribution), 5 % (including 4 % trend contribution and 1 % fluctuation contribution), and 36 % (including 30 % trend contribution and 6 % fluctuation contribution), respectively. The contributions of temperature fluctuation-driven NPP were higher in the north and lower in the south, and the contributions of precipitation trend-driven NPP and PAR fluctuation-driven NPP are higher in the west and lower in the east. As an instance of occasionally triggered disturbance in 2008, extremely low temperatures and a freezing disaster produced an abrupt decrease of NPP in forest and grass ecosystems. These results prove that the climatic trend change brought about great impacts on ecosystem productivity and that climatic fluctuations and extreme events can also alter the ecosystem succession process, even resulting in an alternative trajectory. All of these findings could improve our understanding of the impacts of climate change on the provision of ecosystem functions and services and can also provide a basis for policy makers to apply adaptive measures to overcome the unfavorable influence of climate change.