Optimal Climate Policies Spatial Climate-Economic Models in the Design A. Xepapadeas of Optimal Climate Policies across Locations Introduction Energy Balance Climate Anastasios Xepapadeas(*) with William A. Brock and Models Gustav Engstrom A Basic EBCM A Simplified The Macroeconomics of Climate Change Climate Model London School of Economics An Economic EBCM (*) Athens University of Economics and Business and Beijer Fellow Competitive This research has been co-financed by the European Union (European Social Fund — ESF) and Greek Equilibrium national funds through the Operational Program "Education and Lifelong Learning" of the National Strategic Reference Framework (NSRF) - Research Funding Program: Thalis — Athens University of Optimal Carbon Taxes Economics and Business - Optimal Management of Dynamical Systems of the Economy and the Environment” The Impact of Thermal Transportation LSE, 13 December, 2012 Concluding Remarks A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 1 / 58
Introduction The Spatial Dimension of Climate Change Optimal Climate The spatial dimension of damages from climate change can be Policies associated with two main factors: A. Xepapadeas 1 Natural mechanisms which produce a spatially non-uniform Introduction distribution of the surface temperature across the globe. Energy Balance Heat transport that balances incoming and outgoing Climate radiation. Models Differences among the local heat absorbing capacity - the A Basic EBCM local albedo - which is relatively higher in ice covered A Simplified regions Climate Model An Economic 2 Economic related forces which determine the damages EBCM that a regional (local) economy is expected to suffer from Competitive Equilibrium a given increase of the local temperature. Optimal Carbon Taxes Production characteristics (e.g. agriculture vs services), or The Impact of Local natural characteristics (e.g. proximity to the sea and Thermal elevation from sea level). Transportation Concluding Remarks A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 2 / 58
Introduction The Spatial Dimension of Climate Change Optimal Climate Policies A. Xepapadeas Introduction Energy Balance Climate Models A Basic EBCM A Simplified Climate Model An Economic EBCM Competitive Equilibrium Optimal Carbon Taxes The Impact of Thermal Transportation Concluding Remarks A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 3 / 58
Introduction The Spatial Dimension of Climate Change Optimal IAMs with a carbon cycle and no spatial dimension are Climate Policies “zero-dimensional” models and do not include spatial A. effects due to heat transportation across space. Xepapadeas Existing literature (e.g. the RICE model) provides a spatial Introduction distribution of damages where the relatively higher Energy Balance damages from climate change are concentrated in the Climate Models zones around the equator. Spatial distribution due to A Basic economic forces. EBCM Energy balance climate models (EBCMs) are “one- or A Simplified Climate Model two-dimensional” models which incorporate heat transport An Economic across latitudes or across latitudes and longitudes (e.g. EBCM Competitive Budyko 1969; Sellers 1969,1976; North 1975 a,b; North et Equilibrium al. 1981; Kim and North 1992; Wu and North 2007). Optimal Carbon Taxes Alternative spatial models: Pattern scaling, emulation The Impact of theory. More detailed spatial patterns but may not be as Thermal Transportation useful for incorporating economic forces and nonlinear Concluding feedbacks. Remarks A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 4 / 58
Introduction The Spatial Dimension of Climate Change Optimal One-dimensional EBCMs predict a concave temperature Climate Policies distribution across latitudes with the maximum A. temperature at the equator. Xepapadeas Introduction Energy Balance Climate Models A Basic EBCM A Simplified Climate Model An Economic EBCM Competitive Equilibrium Optimal Carbon Taxes The Impact of Thermal Transportation Concluding North, Cahalan and Coakley (1981) Remarks A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 5 / 58
Introduction Contribution and Objectives of our Research Optimal Climate Policies The main contribution of our paper is to couple spatial climate A. models with economic models, and use these models to achieve Xepapadeas three objectives: Introduction First Objective: To show the role of heat transport across Energy Balance latitudes in the prediction of the spatial distribution and the Climate Models corresponding temporal evolution of temperature and damages. A Basic EBCM In pursuing this objective we endogenously derive A Simplified temperature and damage distributions. Climate Model To our knowledge, this is the first time that the spatial An Economic EBCM distribution of surface temperature and damages, and their Competitive Equilibrium temporal evolutions, are determined endogenously in the Optimal conceptual framework of a coupled EBCM - economic Carbon Taxes growth model. The Impact of Thermal Transportation Concluding Remarks A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 6 / 58
Introduction Contribution and Objectives of our Research Second Objective: To provide insights regarding the optimal Optimal Climate spatial and temporal profile of policy instruments (carbon Policies taxes), when thermal transport across latitudes is taken into A. Xepapadeas account. Introduction Regarding the spatial profile of fossil fuel taxes, our results Energy suggest higher tax rates for wealthier geographical zones Balance Climate due to the practical inability of implementing without cost Models the international transfers needed to implement a A Basic EBCM competitive equilibrium associated with the Pareto A Simplified optimum, or when Negishi welfare weights are not used. Climate Model One-dimensional model provides a basis for exploring the An Economic EBCM impact of heat transport on the spatial differentiation of Competitive fossil fuel taxes between poor and wealthy regions. Equilibrium Our results provide new insights into a result (non-uniform Optimal Carbon Taxes optimal mitigation) that was first noted by Chichilnisky The Impact of and Heal (1994) by characterizing the spatial distribution Thermal of fossil fuel taxes and linking the degree of spatial Transportation differentiation of optimal fossil fuel taxes to the heat Concluding Remarks transport. A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 7 / 58
Introduction Contribution and Objectives of our Research Optimal Climate Policies Second Objective (Continued): A. Xepapadeas Regarding the temporal profile of optimal mitigation, Introduction among economists dealing with climate change on the Energy mitigation side, the debate has basically settled on whether Balance Climate to increase mitigation efforts that is, carbon taxes, Models gradually (e.g. Nordhaus 2007, 2010, 2011), or whether to A Basic EBCM mitigate rapidly (e.g. Stern 2006, Weitzman 2009 a,b). A Simplified In this paper we locate sufficient conditions for profit taxes Climate Model on fossil fuel firms to be decreasing over time and for unit An Economic EBCM taxes on fossil fuels to grow over time more slowly than Competitive Equilibrium the rate of return on capital (also in Golosov et al. 2011). Optimal We also locate sufficient conditions for the tax schedule to Carbon Taxes be increasing according to the gradualist approach. The Impact of Thermal Transportation Concluding Remarks A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 8 / 58
Introduction Contribution and Objectives of our Research Third Objective: The third objective is to introduce spatial Optimal Climate EBCMs with heat transport and endogenous albedo into Policies A. economics as a potentially useful alternative to simple carbon Xepapadeas cycle models in studying the economics of climate change. Introduction Latitude dependent climate models can address damage Energy Balance reservoirs . Damage reservoirs are sources of climate Climate Models damages which will eventually cease to exist when the A Basic source of the damages is depleted, for example Ice lines EBCM and permafrost A Simplified Climate Model By deriving the spatiotemporal profile for carbon taxes, we An Economic show how the spatial EBCMs can contribute to the current EBCM Competitive debate regarding: Equilibrium how much to mitigate now, 1 Optimal Carbon Taxes whether mitigation policies should be spatially 2 The Impact of homogeneous or not, and Thermal Transportation how to derive geographically specific information regarding 3 Concluding damages and policy measures. Remarks A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 9 / 58
Energy Balance Climate Models Characteristics Optimal Climate Policies A. Xepapadeas Introduction Energy Balance Climate Models A Basic EBCM A Simplified Climate Model An Economic EBCM Competitive Equilibrium Optimal Carbon Taxes The Impact of Thermal Transportation Concluding Remarks A. Xepapadeas (AUEB) Optimal Climate Policies LSE, 13 December, 2012 10 / 58
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