Assessing Optimal Mitigation Policies

with a Game Theoretic, Optimal Growth Model:

WITCH
Massimo Tavoni: CMCC, FEEM and Princeton University

Asian Development Bank, Kuala Lumpur, January 2011

 Basic Facts of the Climate Change Problem

Key issues of the Climate Change problem:

Global dimension:
 GHG emissions are a perfect global externality
 Emissions originate from a wide range of countries, activities and
sources

Long-term dimension:
 Large inertia of climate system
 Large inertia of energy systems

Strategic incentives to free-ride on:

 Emissions
 Technology
 Use of fossil fuels
The WITCH Model: An overview
Background info

World Induced Technical Change Hybrid model:

• Developed at FEEM in 2004, from a previous model that was

utilized at FEEM since the mid 90’s.

• Employed in several projects (>20), commissioned by European

Commission, International Organizations (OECD, EBRD),
Private Sector (Deutsche Bank), Governmental (Italian Ministry
of Environment,UK DECC) and NGOs (WWF)

• Member of international modeling fora (Energy Modeling

Forum, Asian Modeling Exercise, IPCC related ones)

• Led to extensive reporting and publication in the peer

reviewed literature

• More info at www.witchmodel.org

 WITCH as an Integrated Assessment Model

Socio-Economic System

Environmental system

Adaptation
STRATEGIC INTERACTIONS IN WITCH
Regional disaggregation
 Mitigation options in each region

- Essential mitigation options for energy related CO2 (about 15

technologies), which is hard linked in the model

- Reduced Deforestation and Land Degradation (REDD),

afforestation, use of residue biomass for land use related
CO2, using marginal abatement costs

- Non-CO2 Kyoto gases (methane, N2O, fluorinated gases),

using marginal abatement costs

- Technological change, both via diffusion (e.g. learning by

doing) and innovation (e.g. R&D), subject to international
spillovers
7
Modeling capacity and output
Potential use

The model features are ideal for analyzing:

- The investment dynamics of low carbon strategies

- Second best policies under multiple externalities

- Technological innovation and policies

- Uncertainty
Mitigation strategies
 Changes in Energy and Carbon Intensities

Energy savings and efficiency should be pursued vigorously in the short term, but
decarbonisation is essential from 2030 onwards already.

100%

80%
2100
Decarbonization

60% 450
550
2050 550
650
40% 2030
2100 BAU

20% 2050 past 30 yrs

2030
2100
2030 2050
0%
0% 20% 40% 60% 80% 100%
-20%
Energy Intensity Improvement
Broad mitigation portfolio is needed

16000

14000
BIOMASS
Cumulatve Primary Energy (EJ)

12000
ADVANCED FUELS
10000

8000 WIND+SOLAR

6000
COAL w CCS

4000
NUCLEAR
2000

ENERGY CONSUMPTION
0
REDUCTION
S1 S2 S3 S4 S5 S6 S7 S8 S9
Mitigation costs strongly depend on climate target…

5.0%
S2
S3 4.5%

S1 4.0%
S9

GDP losses in NPV (at 5% d.r.)

3.5%

3.0%

S8 2.5%

2.0%
S5
1.5%

1.0%
S6
S7 0.5%

0.0%
3.50 3.30 3.10 2.90 2.70 2.50 2.30 2.10 1.90 1.70 1.50
Temperature rise in 2100 (C)
.. and on the availability of mitigation options
Innovation
Copenhagen (and Cancun) pledges
 Investing in clean energy R&D

0.14%
E.E. R&D
0.12%
Total Energy R&D
BAU
0.10%
Historical Public Energy R&D
0.08%

0.06%
Advanced Techs R&D
0.04%

Energy Intensity R&D

0.02%

0.00%
1970 1980 1990 2000 2010 2020 2030 2040 2050
 Mitigation Costs with and wout breakthrough innovation

0.0
% change in GDP with respect to baseline

-1.0

-2.0

-3.0

-4.0

-5.0

-6.0
550ppm w ith backstops

-7.0
550ppm

-8.0
2007 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 2062 2067 2072 2077 2082
Forestry
 Using carbon markets to stop tropical deforestation

Forestry Emissions

1.5

1
GtC

0.5

0
05

15

25

35

45

55

65

75

85

95
20

20

20

20

20

20

20

20

20

-0.5 20
Forest Carbon Sequestration
Table 1: Regional Forest Carbon Sequestration, 2025, 2055, 2095

2022 2052 2092

MtC/yr
OECD
USA 42 144 193
OLDEURO 37 82 132
NEWEURO 8 18 29
CAJANZ 31 115 125
Total OECD 118 360 479
NON OECD
KOSAU 25 27 36
TE 179 117 134
MENA 73 49 31
SSA 270 175 106
SASIA 34 57 32
CHINA 109 155 431
EASIA 451 481 371
LACA 391 326 330
Total Non-OECD 1649 1746 1950
Total Global 1766 2105 2429
C Price $57 $113 $271
Forest Carbon Sequestration

Table 3: Change in Forestland area and Change in annual timber harvests compared to the baseline.
2022 2052 2092 2022 2052 2092
Million Hectares % Change in Ann. Harvest
OECD
USA 1.5 23.1 94.2 1.2% -9.0% 48.5%
OLDEURO 11.5 34.9 51.9 -5.3% 12.1% 0.3%
NEWEURO 2.6 7.8 11.6 -5.3% 12.1% 0.3%
CAJANZ -4.0 24.5 99.0 -3.8% -3.3% 167.3%
Total OECD 11.6 90.3 256.7 -3.3% 3.0% 54.1%
NON OECD
KOSAU 5.1 17.7 49.1 11.3% 34.5% 42.1%
TE 19.0 52.2 102.7 -20.8% 8.9% -26.1%
MENA 10.3 24.9 38.4 -63.9% -45.9% -6.7%
SSA 37.2 90.7 137.0 -70.1% -52.9% -9.0%
SASIA 5.2 18.8 32.3 -3.7% -3.9% 13.0%
CHINA 8.6 41.9 115.4 -20.1% 0.0% -98.8%
EASIA 25.6 66.0 111.9 -63.3% -57.2% -48.9%
LACA 42.9 129.3 262.4 -24.8% -7.1% 15.5%
Total Non OECD 153.8 441.5 849.2 -31.9% -15.4% -14.9%
Total 165.4 531.8 1105.9 -14.5% -3.3% 25.9%
 Will REDD depress Carbon Prices ?
% reduction of permit price

30.0%

25.0%

20.0%
NO BANKING 15.0%
BR
IIASA
Sohngen
10.0%

5.0%

0.0%
2015 2025 2050

% reduction of permit price

30.0%

BANKING 25.0%

20.0%
BR
15.0% IIASA
Sohngen
10.0%

5.0%

0.0%
2015 2025 2050
Uncertainty
What should we do if we are uncertain about future policies?

20
18
16 no tgt
14
12 550
GtC

10
8 optimal
6
4 450
2
0
05

15

25

35

45

55

65

75

85

95
20

20

20

20

20

20

20

20

20

20
Planning and resources
Building future commitments into current planning

14
No policy
12

10
Billion Tons CO2

8 Future
commitments
6 beginning in
2030
4

0
2000 2010 2020 2030

Emissions in China for a carbon tax from 2030

onwards.
Anticipating future commitments allows to save
25% of the costs
 Financial transfers in an international carbon market

Financial transfers from OECD

700 Current OECD Oil
Imports @
600 70$/bbl
500 Current
USD Billion

OECD Oil
400
Imports
300 @ 50$/bbl
200
100
Current
0 OECD
2020 2025 2030 2035 2040 Gas
Imports
Full trade v20% v15% v10%

A limit to the use of emission trading to 10% of total

abatement would keep the amount of transferred
resources around 100 USD Billion

2
8
Mitigation vs Adaptation
 Timing of adaptation and mitigation

4500

4000

3500

3000
US$ Billion

2500

2000

1500

1000

500

0
2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100
Residual Damage Adaptation Mitigation

3
0
Reactive and Proactive Regional Adaptation
What to expect from this model
What WITCH is best at:

• Long term dynamics of mitigation strategies

• International climate negotiations
• Regional strategic incentives
• Deal with uncertainty
• Innovation mechanisms and policies
• Mitigation and adaptation interplay

What WITCH is not best at:

• Country level analysis
• Detailed technology roadmaps
• Sectoral implications and feedbacks
• Short term
Thanks!
massimo.tavoni@feem.it
2030: number of people who emit > 10tCO2/capita

400.0

350.0

300.0

250.0

200.0

150.0

100.0

50.0

0.0
Co-benefits of mitigation

• Energy security
• Local pollution
• Biodiversity and ecosystems

Co-damages of mitigation
• Land competition (also with food) from renewables
and biofuels
• Nuclear proliferation
• CCS inefficiency and coal mining
• Potentially regressive distributive impacts
Thanks!
massimo.tavoni@feem.it