Adjustment costs for investments in the abatement of climate change under uncertainty

This paper studies optimal abatement of CO2 emissions, when investments in abatement measures are subject to adjustment costs. Decisions are made under uncertainty about the damages of climate change. Optimal abatement is determined in a Ramsey model for economic growth in which the damages of climate change affect productivity. A numerical approximation of the solution of the dynamic programming model in continuous time is developed. The results indicate that uncertainty leads to a significant reduction in the level of abatement, but there is also a strong tendency to postpone action when the uncertainties are large, compared with decisions made under full certainty. The adjustment costs may be decisive for the question of when emission ought to be reduced, but have less impact on the level of abatement. The model also allows for an analysis of the irreversibility of investments in climate measures. The results indicate that abatement is little affected by the fact that investments in climate measures may be irreversible

Sosioøkonomiske virkninger av klimaendringer: Metoder for å anslå virkninger på aggregert nivå

I denne rapporten drøftes metoder for å beregne samfunnsøkonomiske virkninger av klimaendringer med eksempler fra Hordaland fylke. Utgangspunktet for beregningene er anslag over klimaendringer fra RegClim prosjektet. Med bakgrunn i kunnskap om sammenhengen mellom økonomisk aktivitet og klima på disaggregert nivå beregnes endringer i produksjon og etterspørsel av varer og tjenester innen aggregerte sektorer, som er definert i fylketsregnskapet for Hordaland. Totale virkninger for fylket kommer da til uttrykk gjennom kjente størrelser fra nasjonalregnskapets definisjoner, som "nasjonalprodukt" for fylket, samlet konsum, investering osv. Anslag over virkninger av klimaendringer på disaggregert nivå i Hordaland er i liten grad kvantifisert. Beregningene som er gjort i denne rapporten egner seg derfor bare til å illustrere metoder og tolkninger. Etter de ulike aktivitetenes betydning for økonomien i fylket er det imidlertid sannsynlig at vannkraftsektoren er den som i størst grad vil bli berørt. Økt nedbør vil gi et større produksjonspotensiale, men lønnsomheten vil i stor grad avhenge av forventede kraftpriser og invsteringskostnadene ved en utvidelse. Også landbruket og skogbruket vil øke sitt produksjonspotensiale, men dette er relativt små sektorer i fylket. Sammenliknet med usikkerheten om produksjonsvirkningene av klimaendringer er imidlertid usikkerheten om endringer i etterspørselen langt større. Særlig etterspørselen etter persontransport og bygg- og anlegg kan vise seg få betydelige konsekvenser for fylkets økonomi

Option values and the timing of climate policy

This paper reconsiders the importance of irreversibilities in climate change policy. The model presented here captures the irreversibility of both climate change due to greenhouse gas emissions and abatement technology investments, both of which are subject to uncertainty that will necessarily change gradually over time as a result of learning. The climate irreversibility adds an option value to the ‘early action’ strategy as long as there is a positive probability of encountering the climate irreversibility constraint. In contrast, irreversibility in abatement investments scales down the future climate effects in the same way as an increase in the discount factor would. The effect the option value of early abatement has on policy making is reduced the more irreversible investments are, but this effect decreases with the length of the time periods. The preferred policy option depends on the relative size of these option values and the possible adjustment costs. If the sum of the climate option value plus the adjustment costs resulting from too low initial abatement exceeds the sum of the investment option value plus the adjustment costs resulting from too high initial abatement, the net option value is positive, the climate irreversibility effect dominates, and ‘early action’ should be preferred over the ‘wait-and-see’ policy

Economic impacts of climate change on tuna fisheries in Fiji islands and Kiribati

This paper discusses the possible economic consequences of a change in the tuna fisheries in the Pacific Ocean resulting from climate change. On the background of Lehodey's (2000) study of potential changes in the tuna fisheries, we survey possible economic impacts in terms of quantities and values and give examples of macroeconomic impacts. The two main effects of climate change on tuna fishing are likely to be a decline in the total stock and a migration of the stock westwards. This will lead to various changes in the catch in different countries. The price of the fish in the export market may also change as a result. The Pacific islands are generally dependent on fisheries, and may therefore be vulnerable to these changes, although some will probably gain while others will lose. Based on a very simple macroeconomic model, it is shown that the resulting effects for the national economy in general may diverge substantially from the expected. This applies, in particular, if the national economies are inflexible and a large part of the population relies on subsistence production, which is the case for many developing countries