1. INTEGRATED ECONOMIC AND
CLIMATE MODELLING1
by
William D. Nordhaus
December 2011
Cowles Foundation Discussion Paper No. 1839
(page 30-last)
Lia Puspitasari
Department of MBA-MPP
Graduate School of Systems and Information Engineering
Presented at Environmental Policy Class
University of Tsukuba, Nov 2012

2. III. Illustrative Model Results:
The Copenhagen Accord
IIIA. Model Outputs
The most important applications of IAMs are:
Making consistent projections
Calculating the impacts of alternative assumptions on important
variables such as output, emissions, temperature change, and impacts.
Tracing trough the effects of alternative policies on all variables in a
consistent manner
Estimating the uncertainties associated with alternatives variables and
strategies.
Calculating the effects of reducing uncertainties about key parameters
or variables.

3. IIIB. Modeling the Copenhagen Accord
Focus analysis of the Copenhagen
Accord and similar policies. Review histories of
the international agreements on climate
change, the prospect for climate change and the
economic implications.

4. IIIC. Policy Scenarios
Baseline
• No climate-change policies are adopted
Optimal
• Climate change policies maximize economic welfare, with full participation by all nations
starting in 2010 and without climatic constraints
Temperature-limited
• The optimal policies are undertaken subject to a further constraint that global tempeature
does not exceed 2 ºC above the 1900 average
Copenhagen Accord
• High-income countries implement deep emissions reductions similar to those included in
the current U.S. proposals, with developing countries following in the next 2-5 decades.
Copenhagen Accord with only rich countries
• As in Copenhagen Accord, but developin countries do not participate until the 22nd
century.

5. IIID. Major Results
a. Global CO2 Emissions

6. b. Global temperature projections

8. c. Carbon Prices

10. d. Aggregate Cost and Benefits

12. IIIE. Comparisons with Other Studies
a. RICE-2010 compare to its early vintages

13. b. RICE-2010 compare to EMF-22

14. IIIF. Qualification with the Results
Major
Analysis Difficulties Key issue
cautions
Different
The problems vintages of
Unrealistically associated
smooth picture of the same
with model show
the functioning of estimation and Whether
economic and dramatic they have a
validation of changes in
political the models large impact
systems, In much the results upon current
the same way that policies
global climate
models abstract Find a reliable
from the approach to
turbulence of estimating the
Different
weather systems. relationships
models have
from
widely
appropriate
varying
historical or
projections
cross-
of future
sectional data
conditions
Some of
elements have
no obvious
empirical
counterpart

15. IV. Some Major Issues for Research in
Integrated Assessment Modeling
IV.A Introduction
Nordhaus review some major issues that arise in
construction, design, and interpretations of IAMs.
IV. The Social Cost of Carbon
Definition of SCC
The change in the discounted value of utility of consumption
denominated in terms of current consumption per unit of
additional emissions.
This concept represents the economic cost caused by an
additional ton of carbon dioxide emissions (or more succinctly
carbon) or its equivalent

16. Mathematical Programming
• SCC is the shadow price of carbon emissions
along a reference path of output, emissions and
climate change.
Optimized Climate Policy
• SCC=carbon price or carbon tax
Uncontrolled regime
• SCC will generally exceed the (zero) carbon price

17. Application of SCC
✔Critical ingredient in climate-change policy
- provide policy makers a guidepost to aim for if they are seeking an economically efficient policy
for carbon pricing.
✔For rulemaking where countries do not have comprehensive
policies covering all GHGs
- regulators might use the SCC in a calculation of social costs and benefits of policies involving
energy or climate-affecting decisions.
Three different estimates for the SCC

18. IVC. Complexity and Transparency
The They remain complex non-
The DICE models shown has 18 dynamic equations
which contain 44 non-trivial parameters. Some of
them are relatively inconsequential, others are
complexity linear systems with several central. The structural equations are invariably
and poorly determined aggregates of complicated non-linear spatial and
temporal relationships, likely to be difficult to
relationships determine exactly and are probably misspecified
transparen
cy of DICE RICE-2010 is very
RICE 2010 requires Excel Macro because of the need
to solve the model using the Negishi algorithm (to
and RICE complicated (requires Excel solve Negishi weights). It is difficult for users other
than the model developers to actually use such
models Macro) complex models.
Small and transparent models are sometimes adopted
Large models are very by other researchers or used by students. The DICE
model is sufficiently simple that many researchers
seldom transferrable. have used it. The example of complex models is OECD
GREEN model.
Major way in which large models can be tested and validated is trough construction of
alternative models by other research groups

19. IVD. Positive versus Normative Models
Description of Recommendations
Action Positive Ex: Stern Review
Ex: Baseline Normative
Projections
Positive Models Normative Models
As a description of how Seen as the recommendations of
economies and real world decision a central planner, a world
makers (consumers, firms, and environmental agency, or a
govenments) actually behave disinterested observer
incorporating a social welfare
function
This issue arises particularly in the analysis of the discount rate

20. IVE. The Discount Rate
Economic theory of discounting
✔ assumes great prominence in climate-change IAMs because of
the long delays between investments in abatement and returns
in averted damages.
2 concepts
Discount rate on Real return on capital, real interest rate, the opportunity
goods cost of capital, the real return
• A market based concept that measures a relative
price of goods at diffeent points of time
Generational
discount rate Pure rate of social time preference
• Involves the relative weight of the economic
welfare of different households or generations
over time

21. Most analysis of the discounting issue in the economic and IAM
literatures use the approach of The Ramsey-Koopmans-Cass model of
optimal economic growth
Ramsey equation: r*= ρ + αg*
it shows that in a welfare optimum under simplified condition, the
rate of return on capital (r*) is determined by the general
discount rate (ρ), the consumption elasticity (α), and the rate of
growth of generational per capita consumption (g*)
Prescriptive view Descriptive approach
Analysis argue for particular values of the Assumes that investments to slow
ethical parameters , ρ and α, and from climate change must compete with
this derive the ethically appropriate investments in other areas. The
discount rate on goods (Cline:1994, and benchmark for should therefore reflect
Stern Review:2007) the opportunity cost of investment.

22. IVF. Uncertainty for thin-tailed distributions
The important uncertainties are:
☑ pace of economic growth in different regions
☑ the damage in different regions
☑ the pace at which developing countries move their labor
forces and economies out of agriculture
Thin-tail uncertainty
Second-order uncertainty which examines the impact of the
second moment or distributions (dispersion around the
mean) assuming that distributions are normal or close to
normal.

23. IVG. Higher-moment uncertainty (“fat tails”) and
catastrophic climate change
Higher-moment uncertainty
The potential for “fat tails” in the distribution of uncertain
parameters and the risk of catastrophic climate change.
Catastrophic outcomes
One in which world per capita consumption declines at least fifty
percent below current levels for an extended period.
By catastrophic, the damages from climate change far larger
than what is envisioned in the direst of current IAM projections

24. IVH. Strategic considerations and the game-
theoretic aspects of climate change policy
Central issues in climate change:
The facts that it involves many countries for many time periods.
- No single country or generation can reduce emissions
sufficiently to ensure that there are no dangerous
interferences with the climate system.
- The world is locked into a non-cooperative equilibrium
with no effective mechanism to break out.

25. IVI. Modeling Technological Change
Most studies and models of environmental and climate-change
policy have sidestepped endogeneous technological
change/induced innovation.
Approaches to include induced innovation
• To understand why technological change
appears to have been largely labor saving
Research
Model • Technological change is a public good that is
produced by research, development, and
innovation
• Models to increase the granularity of the
technological description down to individual
technologies
Learning Model
• Rationalize early investments in
technologies, of being competitive in the
future

26. V. Final Thoughts
• The present survey of IAM models shows the enormous
progress that the field has made over the two decades since
its emergence.
• The most important results from IAMs is the concepts and
estimation of efficient paths of abatement and carbon pricing
required for slowing climate change
• Much works remaining for modelers, require further
refinement and better modeling, particularly in isssues
surrounding uncertainty, technological change, and the need
for mechanisms to break the non-cooperative

27. Thank You