Climate Change and Structural Transformation Min Qiang (Kent) Zhao V. Kerry Smith Xiamen University Arizona State University December 13, 2012
Overview Climate change resulting from the emissions of greenhouse gases is an example of global externality. The design of policies to take into account of externalities should be based on the nature of the damages caused by externalities. Nordhaus’ DICE/RICE models largely focus on physical damages, but ignore the feedback effect of damages in environmental amenities.
Overview Facts of both developed and developing countries cannot reconcile the CO 2 /Output path by abatement technologies and energy sources alone. We need consistent descriptions that integrate structural transformation with climate change models.
United States Share of GDP Carbon (kg) per Constant I$ 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.05 0.15 0.25 0.35 0 0.1 0.2 0.3 0.4 0 1947 1950 1950 1952 Share of the Agriculture, Industry and Services Sectors 1954 1953 1956 1956 1958 1959 1960 Ratios of Carbon Emissions to GDP 1962 1962 1964 1965 1966 1968 1968 1970 1971 1972 1974 1974 Agriculture 1976 1977 Industry 1978 1980 1980 1982 1983 1984 Services 1986 1986 1989 1988 1990 1992 1992 1995 1994 1996 1998 1998 2001 2000 2004 2002 2004 2007 2006
China Share of GDP Carbon (kg) per Constant I$ 0.15 0.25 0.35 0.45 0.55 0.05 0.15 0.25 0.35 0.45 0.1 0.2 0.3 0.4 0.5 0.1 0.2 0.3 0.4 0.5 0 1952 1952 1954 1954 1956 1956 Share of the Agriculture, Industry and Services Sectors 1958 1958 1960 1960 1962 1962 Ratios of Carbon Emissions to GDP 1964 1964 1966 1966 1968 1968 1970 1970 1972 1972 1974 1974 1976 1976 1978 1978 1980 1980 1982 Industry 1982 1984 1984 1986 1986 1988 Agriculture 1988 1990 1992 1990 1994 1992 1996 1994 1998 1996 Services 2000 1998 2002 2000 2004 2002 2006 2004 2008 2006
Decomposition of CO 2 /GDP United States China 18 30 CO 2 /Energy 16 25 CO 2 /Energy 14 20 12 15 10 Energy/GDP Energy/GDP 10 8 6 5 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 CO 2 /Energy: metric ton of carbon per quadrillion Btu Energy/GDP: quadrillion Btu per million of international dollar
Counterfactual Experiment Replace natural gas and petroleum levels during 1980-2007 with coal under the constraint of generating the same amount of energy. CO 2 Emission Intensity From Energy Consumption Million Tons of carbon per Quadrillion 26 Coal 24 22 Btu 20 Petroleum 18 16 Natural Gas 14 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Counterfactual Experiment Replace natural gas and petroleum levels during 1980-2007 with coal under the constraint of generating the same amount of energy. Fuel Switching 0.35 kg of carbon per Constant I$ 0.3 Counterfactual CO 2 /GDP 0.25 0.2 Actual CO 2 /GDP 0.15 0.1 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Simple Regression Analysis Y ct = β 1 A ct + β 2 S ct + D c + D t + e et Time period: 1960-2007 Y ct : CO 2 /GDP ratio of country c at time t (1Kg carbon per constant international dollar) A ct : a dummy indicator for an agriculture-based economy S ct : a dummy indicator for a services-based economy Coef. SE P>|t| A ct -0.0193 0.0029 0.000 S ct -0.0124 0.0022 0.000
This Paper Non-separable environmental amenities impacted by climate change are introduced into the preference functions to generate dynamic, non-market feedback effects Global warming is described in a framework that recognizes the role of the structural transformation of economic activities The analysis builds on Nordhaus’ (2008) DICE/RICE structures so that it includes consistent treatment of the geophysical relationships linking the stock of greenhouse gases to the inter-temporal externalities associated with climate changes
Basic Model with Non-Separable Environmental Quality Channels that Drive Structural Transformation Non-homothetic preference (e.g. Echevarria 1997, Laitner 2000, Caselli and Coleman II 2001, Kongsamut et al. 2001, Gollin et al. 2002, Gollin et al. 2007): requires some income elasticities � = 1. Uneven productivity progress across sectors (e.g. Baumol 1967, Ngai and Pissarides 2007): requires substitution elasticities across goods � = 1
Basic Model with Non-Separable Environmental Quality Preferences 1 − η U ( C , L ) = { C 1 − ν L ν } 1 − η L C Industry Industry Services Services Environmental Environmental Leisure ( l ) Goods ( m ) Composite Amenities ( Q ) 1 Market Services Home C [ [ ( ( m m ) ) ( (1 ) ( ) ( , ) ] F s n ) ] m m m m ( s ) ( ) Production ( n ) d ( ) 1 F s n ( , ) [ s (1 ) n ] s s 1 L [ [ l (1 ( l Q ) ) Q ] ] l l l
Basic Model with Non-Separable Environmental Quality Production Technology Industry Sector: m = A m h m Service Sector: s = A s h s Home Production: n = A n h n
Basic Model with Non-Separable Environmental Quality Case One: Non-homothetic preference ( m > 0 ) and even productivity progress across sectors ( A = A m = A s = A n ) As A increases, h n , h s , l ր ; h m ց h m , Q s h s Q m ր ; P s P m = 1 As Q decreases, 0 < ϕ < 1: (1) l ր ; (2) h n , h s , h m , h s h m ց ϕ < 0: (1) l ց ; (2) h n , h s , h m , h s h m ր ϕ = 0: no impacts
Basic Model with Non-Separable Environmental Quality Case Two: Homothetic preference ( m = 0 ) and uneven productivity progress across sectors As A s and A m A s increase ( A s = A n ) Q m ց ; P s Q s P m ր 0 < χ < 1: h s , h s h m ց ; h m ր χ < 0: h s , h s h m ր ; h m ց χ = 0: no impacts As Q decreases, 0 < ϕ < 1: (1) l ր ; (2) h n , h s , h m ց ; (3) h s h m , Q s Q m unchanged ϕ < 0: (1) l ց ; (2) h n , h s , h m ր ; (3) h s h m , Q s Q m unchanged ϕ = 0: no impacts
Dynamic Model with Non-Separable Environmental Quality Preferences 1 − η U ( C t , L t , g t ) = { C 1 − ν L ν t } t + B ( g t ) 1 − η C t L t Industry Industry Services Services Environmental Environmental Leisure ( l t ) Goods ( m t ) Composite Amenities ( Q t ) 1 C [ ( m m ) (1 ) ( , F s N ) ] t m t m t t Market Market Home Home 1 Services (s t ) Composite F s N ( , ) [ s (1 ) N ] t t s t s t 1 N n (1 ) Q t n t n t Home Environmental Environmental Production 1 Amenities ( Q t ) ( n t ) L [ l (1 ) Q ] t l t l t min{ g g , } if g g t t B g ( ) t if g t if g g g
Dynamic Model with Non-Separable Environmental Quality A representative household maximizes ∞ β t U ( C t , L t , g t ) ∑ t = 0 s . t . p mt I t + p mt m t + p st s t + p gt g t = w t ( 1 − l t − h nt )+ r t ( K t − K nt ) K t + 1 = ( 1 − δ ) K t + I t n t = Ω n ( T At ) A nt K θ nt h 1 − θ nt
Dynamic Model with Non-Separable Environmental Quality Producers A representative firm in the industry sector maximizes p mt Ω m ( T At ) A mt K θ m mt h 1 − θ m − r t K mt − w t h mt mt A representative firm in the service sector maximizes p st Ω s ( T At ) A st K θ s st h 1 − θ s − r t K st − w t h st st A representative firm in the agriculture sector maximizes P gt Ω g ( T At ) A gt h gt − w t h st
Dynamic Model with Non-Separable Environmental Quality Geophysical Equations M At φ 11 φ 21 0 M A , t − 1 E t − 1 = M Ut 1 − φ 11 φ 22 φ 32 M U , t − 1 + 0 M Lt 0 1 − φ 21 − φ 22 1 − φ 32 M L , t − 1 0 F t = a 1 log 2 ( M At / M A , 1750 )+ F EX , t T At = T A , t − 1 + b 1 [( F t − b 2 T A , t − 1 ) − b 3 ( T A , t − 1 − T L , t − 1 )] T Lt = T L , t − 1 + b 4 ( T A , t − 1 − T L , t − 1 ) Climate Damage Functions 1 Ω i ( T t ) = 1 + π i ( T At ) , where i ∈ { g , m , s , n }
Calibration We calibrate each of the following models separately to match the features of the US economy during the period of 1951-2000: Model without Q : without non-separable environmental amenities in preferences. Model with LQ : allow leisure to interact with environmental amenities. Model with CQ : allow home services to interact with environmental amenities.
Calibration Model without Q C t L t Industry Goods Services Leisure ( l t ) ( m t ) Composite 1 C [ [ ( ( m m ) ) ( (1 ) ( , ) ( , F s n ) ] ) ] t t m m t t m m t t t t 1 Market Home F s n ( , ) [ s (1 ) n ] Services (s t ) Production ( n t ) t t s t s t L l t t min{ g g , } if g g t t B g ( ) t if g g t
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