ENERGY 721- Climate Change Assignment

Wan Atikah

745821833

2/05/2019
Question 1

a) Business as usual. Set the control parameter μ(t) to zero for each time period. Calculate
the optimum Savings path using solver. Set up a square which is the sum of discounted
social welfare over the next 300 years that is to 2315. Take as your control variables
Savings rate from now till 2115 after 2115 set the saving rate to be the same as the 2115
value. Copy and paste graphs from Excell of the (1) atmospheric concentration of CO2,
and the temperature each year till 2200 (on the same graph with primary and secondary
axis), (2) the control parameter and the emissions each year, (3) The cost of emission
control as a percentage of GDP.

1)

2500
CO2 vs Atmospheric Temp 8

2000
6

Temperature (°C)
1500
CO2(ppm)

4
1000

2
500

0 0
2000 2050 2100 2150 2200
Years
CO2 Baseline A. Temp Baseline

2)

300
Emission & Emission Control 2

250
Emission Control (μt)

1.5
200
Emission (GT)

150 1

100
0.5
50

0 0
2000 2050 2100 2150 2200
Years
Emissions (GT per 10 years) μ(t)
 3)

1
Cost of Emission Control

Cost (% GDP) 0.8

0.6

0.4

0.2

0
2000 2050 2100 2150 2200
Years
abatement percent GDP

b) Now calculate the optimum emission reduction path using solver and Nordhaus
parameters.. As before set up a square which is the sum of discounted social welfare
over the next 300 years. Take as your control variables μ(t) and the Savings rate from
now till 2115 with subsequent years taking the 2115 value. Use solver to maximise this
with the constraints that 0< μ(t)<1. Copy and paste graphs from Excell of: (1)
atmospheric concentration of CO2, and the temperature each year till 2215 as well as
the baseline temperature and CO2 concentration from (a) (on the same graph with
primary and secondary axis); (2) the control parameter and the emissions each year for
the same time period; (3) The cost of emission control as a percentage of GDP.
1)

2500
CO2 & Atmospheric Temp 8

2000
6

Temp. (°C)
1500
CO2(ppm)

4
1000

2
500

0 0
2000 2050 2100 2150 2200
Years
CO2 Baseline CO2 (ppm) Nordhaus
A. Temp Baseline A.Temp (Nordhaus)

2)

100
Emission & Emission Control 2
90
80
1.5

Emission Control (μt)

70
Emission (GT)

60
50 1
40
30
0.5
20
10
0 0
2000 2050 2100 2150 2200
Years
Emissions (GT per 10 years) μ(t)
 3)

1.4
Cost of Emission Control

1.2

1
Cost (% GDP)

0.8

0.6

0.4

0.2

0
2000 2050 2100 2150 2200
Years
abatement percent GDP

c) Now calculate the optimum emission reduction path using solver and Stern’s
parameters. Go back to using the original world population path in (b). Set η=1.1 and
δ=0.001. Use the same method as in (b) to find the optimal control and savings paths.
As above graph (1), (2) and (3). Your graphs for T and CO2 should have your results
here as well as comparisons with the baseline and the standard Nordhaus results in (b).

1)

2500
CO2 & Atmospheric Temp 8

2000
6
Temp. (°C)

1500
CO2(ppm)

4
1000

2
500

0 0
2000 2050 2100 2150 2200
Years
CO2 Baseline CO2 (ppm) Nordhaus CO2 (ppm) - Stern
A. Temp Baseline A.Temp (Nordhaus) A.Temp - Stern
2)

25
Emission & Emission Control 2

20
1.5

Emission Control (μt)

15
Emission (GT)

10 1

5
0.5
0

-5 0
2000 2050 2100 2150 2200
Years
Emissions (GT per 10 years) μ(t)

3)

4
Cost of Emission Control
3.5

3
Cost (% GDP)

2.5

1.5

0.5

0
2000 2050 2100 2150 2200
Years
abatement percent GDP
d) Reset the parameter values to those used by Nordhaus in part (b). Now suppose that the
damage function is one of the ones suggested by Weitzman. D=exp(0.00048*T4). (So
Climate damage is Y-Y/exp(0.00048*T4 ))Re-do (b) using the new damage function.
As above graph (1), (2) and (3). Your graphs for T and CO2 should have your results
here as well as comparisons with the baseline and the standard Nordhaus results in (b).

1)

2500
CO2 & Atmospheric Temp 8

2000
6

Temp. (°C)
1500
CO2(ppm)

4
1000

2
500

0 0
2000 2050 2100 2150 2200
Years
CO2 Baseline CO2 (ppm) Nordhaus CO2 (ppm) Weitzman
A. Temp Baseline A.Temp (Nordhaus) A.Temp- Weitzman

2)

80
Emission & Emission Control 2
70
60 1.5 Emission Control (μt)
50
Emission (GT)

40
1
30
20
10 0.5

0
-10 0
2000 2050 2100 2150 2200
Years
Emissions (GT per 10 years) μ(t)
3)

2.00
Cost of Emission Control
1.80
1.60
1.40
Cost (% GDP)

1.20
1.00
0.80
0.60
0.40
0.20
0.00
2000 2050 2100 2150 2200
Years
abatement percent GDP
e) Consult the literature and discuss the uncertainty in the key parameters discussed above.
I have put a couple of papers up that discusses this to get you started (“Climate risks
and carbon prices: Revising the social cost of carbon” and a paper by Stern) You will
need to quote at least 4 papers in your answer. Comment on your sensitivity tests in
the light of your analysis of the uncertainties and discuss how much weight should be
placed on the slow ramp policy of Nordhaus. The word limit is one thousand words.
Please list the word count at the end and use APA style referencing.

The DICE (Dynamic Integrated Climate-Economy) model by William Nordhaus is the

most popular and most studied economic model of optimal climate policy (Botzen and
van den Bergh, 2012). Nordhaus estimates the costs and benefits of climate change
using an integrated assessment model (IAM) which attempts to capture the key
geophysical and economic dimensions
of climate change through a system of mathematical equations and the benefit of this
approach is that it permits the identification of an optimal emissions trajectory across
time from an infinite number of possible trajectories (Howes et al., 2011). There are
four uncertainties highlighted based on Akerman and Stanton (2012).

a) Climate Sensitivity
According to Akerman et al., (2012), climate sensitivity is the long-term increase
expected from a doubling of the concentration of carbon dioxide in the atmosphere.
Based on their studies, Akerman et al., (2012) found that the average and 95th
percentile results may correspond to climate sensitivity in between 3°C to 7.14°C.
Weitzman argue that it is likely that the climate sensitivity to be in the range 2°C
to 4.5°C with a best estimate of 3°C, and is very unlikely to be less than 1.5°C. as
according to him, the equilibrium climate sensitivity is a measure of the climate
system response to sustained radiative forcing (Weitzman, 2009).

b) Damage Function Estimation

DICE assumes that as temperature increase, an increasing fraction of output is lost
to climate damages following the DICE damage function (Akerman et al., 2012):

R = 1/(1+0.00284T2)…… (1)

Or equivalently

R = 1/[1+(T/18.8)2]…….(2)

Where T is the global temperature increase in C above 1900 and R=1-D

According to Botzen et al., (2012) DICE simulation, increases in global average

temperature under the Weitzman damage function are 2.91°C and 2.70°C in the
years 2155 and 2205, respectively, compared with 3.30°C and 3.44°C in the original
DICE model. Optimal economic damages of climate change are lower under the
 Weitzman specification due to the Weitzman damage function is slightly lower than
the Nordhaus damage function for temperature increases in the range 0.5 to
approximately 2.5 °C.

c) Discount rate
Ramsey’s formula in defining the discount rate follow the equation

r = r+a.g

where r the rate of pure time preference, g the rate of long term economic growth
and a is the elasticity of the marginal utility of consumption. Nordhaus used a
positive approach to determine r and suggest r=1.5 in order to match the interest
or discount rate of 4.1%. Meanwhile, Stern argue that the ratio 1/1-rt should be
interpreted as a rough estimate and making r = 0.1% (Espagne et al., 2012).

d) Abatement cost

Nordhaus has a pessimistic ideology on abatement cost as he defines a backstop

price (BK) at $1200/tCO2 in 2005 which barely decrease down to $950/tCO2 in
2100. On the opposite, Stern has an optimistic belief and estimates that mean cost
of mitigation will dramatically decrease from $61/tCO2 for an abatement level of
7.5% in 2015 to $22/tCO2 in 2050 for an abatement level of 75% (Espagne et al.,
2012).

Sensitivity Analysis on Nordhaus, Stern and Weitzman

Sensitivity Analysis on Nordhaus, Weitzman and Stern

Based on the sensitivity analysis of emission control plotted for 10 year, it shown that
Nordhaus and Weitzman parameters shows longer period of time emission control
compared to Stern. This might be due to the temperature range used were different
between Stern, Weitzman and Nordhaus. The temperature range for Weitzman is 1°C
to 5°C, Stern with 1°C to 3°C and Nordhaus 1°C to 4.8°C. Secondly, as the emission
control, μ is dependent on Λ(t)=θ1(t)*μ(t)2.8 where Λ(t) is cost of reducing emissions
and θt define by the trend of CO2 emission.
 Sensitivity Analysis Emission Contol µ(t) (%)
1.2

0.8
µ(t) %

0.6

0.4

0.2

0
0 5 10 15 20 25
Period (per 10years)

Nordhaus Weitzman Stern

How much weight should be placed on the slow ramp policy of Nordhaus?

Nordhaus’s damaged function includes costs from non-market losses and the risk of
catastrophic damage, in addition to market losses. The quantification of these difficult-
to-predict losses appears to be conservative (Howes et al., 2011). Besides, different
eclectic approach using a different model and techniques rather than relying on a single
IAM should be taken for the slow ramp policy of Nordhaus. Even though Nordhaus did
not changed his approach continues relying on model-based cost-benefit analysis, his
results have shifted dramatically (Howes et al., 2011). According to Howes et al.,
(2011), a lower limit temperature target and higher business as usual emissions both
lead to the conclusion that more mitigation is needed and this quantitative cost-benefit
analysis suffers from artificial precision.
Question 2

(a) Suppose there are three sectors in the NZ economy –transport, electricity and agriculture.
The marginal abatement cure for agriculture is MACA =30XA , for transport MACT=10XT and
for electricity it is MACE=4XE. Initial emissions for electricity are 10 Mt, for transport 30Mt
and for agriculture they are 40Mt. Total emissions are 80Mt.

(i)Derive and draw the economy wide marginal abatement curve. [hint. remember the most any
sector can abate emissions is up to total initial emissions]. Note points of interest on your graph.

MACt= MACE= MACT= MACA

MACE= 4XE= MACT= 10XT MACA= 30XA

𝑋 = 𝑋) + 𝑋+ + 𝑋,

𝑀𝐴𝐶) 𝑀𝐴𝐶+ 𝑀𝐴𝐶,

𝑋= + +
4 10 30

60
𝑀𝐴𝐶 = 𝑋 − 𝑇𝑜𝑡𝑎𝑙 𝐴𝑏𝑎𝑡𝑒𝑚𝑒𝑛𝑡
23

Total range of marginal for the 3 sectors:

Abatement Electricity: 0£ XE £10

Max MAC: MACE= (4)(10)

= 40

MACE Range: 0£ MAC £40

Abatement Transport: 0£ XE £30

Max MAC: MACT= (10)(30)

= 300

MACT Range: 0£ MAC £300

Abatement Agriculture: 0£ XA £40

Max MAC: MACA= (30)(40)

= 1200

MACA Range: 0£ MAC £1200

Min MAC for all sectors = 0

At 0£ MAC £40

𝑋 = 𝑋) + 𝑋+ + 𝑋,

23 𝑀𝐴𝐶
𝑋=
60
60
𝑀𝐴𝐶 = 𝑋
23

At 0£ MAC £300

𝑋 = 𝑋+ + 𝑋,

2 𝑀𝐴𝐶
𝑋=
15
15
𝑀𝐴𝐶 = 𝑋
2
At 0£ MAC £1200

𝑋 = 𝑋,

𝑀𝐴𝐶
𝑋=
40
𝑀𝐴𝐶 = 40 𝑋

Total Abatement Curve (MAC)

1400
1200
1000 40X
MAC ($/Mt)

800
600 15/2X
400 60/23X
200
0
0 10 20 30 40 50 60 70 80
Emission (Mt)

MAC

(ii) What carbon tax would be needed to ensure a 50% reduction in emissions?

From the MAC graph, carbon tax needed to ensure 50% reduction in emissions is $225

Marginal Abatement Curve (MAC) Per Sector

1400
1200
1000
MAC ($/Mt)

800
600
400
200
0
0 10 20 30 40 50 60 70 80
Emission (Mt)

MAC MACt MACe MACa

(iii) What is the abatement for each sector to achieve the 50% reduction in emissions

Total abatement at 50% emission:

MAC=$225

From the MAC graph,

Electricity abatement (Based on the MAC graph, electricity has achieved the maximum
abatement)

MACE= 10 Mt

Transport abatement

MACT= 10 XT

XT= 20 Mt

Agriculture abatement

MACA= 10 XA

XA= 8 Mt
(iv) Calculate the total cost

The area under the 50% emission curve reflect to the abatement per sector

Triangle 1; Area cover from 0 to 10x with corresponding to MAC(Y)= 26

Area 1 = ½ B x H

= (1/2) (10)(26)

= 130

Triangle 2; Area cover from 10x to 30x with a base starting at 26

Area 2 = ½ B x H

= (1/2)(30)(225-26)

= 2985

Rectangle 3; Area cover from 10x to 30x with a width of 26

Area 3 = L x W

= (30)(26)

= 780

Total Cost = Area 1 + Area 2 + Area 3

= 130 + 2985 + 780

= $3895
(v) Suppose the government decided not to include agriculture (so no carbon tax on agriculture
is imposed). Calculate the tax needed for the two remaining sectors and total costs now as well
as the abatement for each sector.

MACt= MACE= MACT= MACA

MACE= 4XE= MACT= 10XT

𝑋 = 𝑋) + 𝑋+

𝑀𝐴𝐶) 𝑀𝐴𝐶+
𝑋= +
4 10

20
𝑀𝐴𝐶 = 𝑋 − 𝑇𝑜𝑡𝑎𝑙 𝐴𝑏𝑎𝑡𝑒𝑚𝑒𝑛𝑡
7

Total range of marginal for the 3 sectors:

Abatement Electricity: 0£ XE £10

Max MAC: MACE= (4)(10)

= 40

MACE Range: 0£ MAC £40

Abatement Transport: 0£ XE £30

Max MAC: MACT= (10)(30)

= 300

MACT Range: 40£ MAC £300

From the graph, carbon tax $300 is required to reduce the emission at 50% of 80Mt

Total abatement at 50% emission:

MAC=$300

From the MAC graph,

Electricity abatement (Based on the MAC graph, electricity has achieved the maximum
abatement)

MACE= 10 Mt

Transport abatement

MACT= 10 XT

XT= 30 Mt
Total Cost

The area under the 50% emission curve reflect to the abatement per sector

Triangle 1; Area cover from 0 to 10x with corresponding to MAC(Y)= 26

Area 1 = ½ B x H

= (1/2) (10)(28.6)

= 142.9

Triangle 2; Area cover from 10x to 30x with a base starting at 26

Area 2 = ½ B x H

= (1/2)(30)(300-28.6)

= 4071.4

Rectangle 3; Area cover from 10x to 30x with a width of 26

Area 3 = L x W

= (30)(28.6)

= 857.1

Total Cost = Area 1 + Area 2 + Area 3

= 142.9 + 4071.4 + 857.1

= $5071.4

(vi) What is the difference in total costs between (iv) and (v)? Comment

The difference in total cost = $5071.4 - $3895

= $1176.4

Comment: The total cost is lower when including the agriculture sector because the abatement
cost is split among the 3 sectors are more wider compared to only two sectors. Without the
agriculture, the burden was transformed into electricity and transportation sectors making a
huge different of carbon tax need to be imposed.
 References

Ackerman, F., & Stanton, E. A. (2012). Climate Risks and Carbon Prices: Revising the Social
Cost of Carbon. Economics: The Open-Access, Open-Assessment E-Journal, 6(2012-10), 1.
doi:10.5018/economics-ejournal.ja.2012-10

Botzen, W. W., & Van den Bergh, J. C. (2012). How sensitive is Nordhaus to Weitzman?
Climate policy in DICE with an alternative damage function. Economics Letters, 117(1), 372-
374. doi:10.1016/j.econlet.2012.05.032

Espagne, E., Fabert, B. P., Pottier, A., Nadaud, F., & Dumas, P. (2013, March 25).
Disentangling the Stern/Nordhaus Controversy : Beyond the Discounting Clash. Retrieved
from https://hal.archives-ouvertes.fr/hal-00804294

Howes, S., F. Jotzo, and P. Wyrwoll (2011) Nordhaus,Stern, and Garnaut: The changing case
for climate change mitigation, CCEP Working Paper 1107, Centre for Climate Economics &
Policy, Crawford School of Economics and Government, The Australian National University,
Canberra.

Weitzman, M. L. (2009). On Modeling and Interpreting the Economics of Catastrophic Climate

Change. Review of Economics and Statistics, 91(1), 1-19. doi:10.1162/rest.91.1.1