Does climate policy make the EU economy more resilient to oil price rises? A CGE analysis

The European Union has committed itself to reduce greenhouse gas (GHG) emissions by 20% in 2020 compared with 1990 levels. This paper investigates whether this policy has an additional benefit in terms of economic resilience by protecting the EU from the macroeconomic consequences due to an oil price rise. We use the GEM-E3 computable general equilibrium model to analyze the results of three scenarios. The first one refers to the impact of an increase in the oil price. The second scenario analyses the European climate policy and the third scenario analyses the oil price rise when the European climate policy is implemented. Unilateral EU climate policy imposes a cost on the EU of around 1.0% of GDP. An oil price rise in the presence of EU climate policy does impose an additional cost on the EU of 1.5% of GDP, but this is less than the 2.2% of GDP that the EU would lose from the oil price rise in the absence of climate policy. This is evidence that even unilateral climate policy does offer some economic protection for the EU.JRC.J.1-Economics of Climate Change, Energy and Transpor

Climate Impacts in Europe - The JRC PESETA II Project

The objective of the JRC PESETA II project is to gain insights into the sectoral and regional patterns of climate change impacts in Europe by the end of this century. The study uses a large set of climate model runs and impact categories (ten impacts: agriculture, energy, river floods, droughts, forest fires, transport infrastructure, coasts, tourism, habitat suitability of forest tree species and human health). The project integrates biophysical direct climate impacts into a macroeconomic economic model, which enables the comparison of the different impacts based on common metrics (household welfare and economic activity). Under the reference simulation the annual total damages would be around €190 billion/year, almost 2% of EU GDP. The geographical distribution of the climate damages is very asymmetric with a clear bias towards the southern European regions. More than half of the overall annual EU damages are estimated to be due to the additional premature mortality (€120 billion). Moving to a 2°C world would reduce annual climate damages by €60 billion, to €120 billion (1.2% of GDP)

Modelling Energy Futures: A CGE framework for investigating investment in renewable energy applied to the EU electricity sector

The paper addresses the issue of introducing renewable electricity production into a CGE framework. This involves introducing an investment function that considers the relationship between two industries that produce the same commodity. This includes the possibility that a small sector (renewable electricity production) may grow more rapidly than would occur under standard model assumptions. Alternative functional forms for the investment functions are proposed. To analyse these functions, the paper uses the PEP-1-t model, with Europe-27 represented as a single region and the rest of the world exogenous. Each function is introduced into the model code, and tested through a simple simulation (subsidising the purchase of capital equipment). Comparing the functional forms, the paper suggests how improvements can be made to the standard model in cases where there is the potential for a transition between technologies (such as from conventionals to renewables in electricity production). The paper contends that the split in investment between two such industries should be dependent on the relative rental rates. Furthermore, it is argued that this relationship is best represented by a sigmoid curve, such as the logistic

Modelling Energy Futures: A CGE framework for investigating investment in renewable energy applied to the EU electricity sector

The paper addresses the issue of introducing renewable electricity production into a CGE framework. This involves introducing an investment function that considers the relationship between two industries that produce the same commodity. This includes the possibility that a small sector (renewable electricity production) may grow more rapidly than would occur under standard model assumptions. Alternative functional forms for the investment functions are proposed. To analyse these functions, the paper uses the PEP-1-t model, with Europe-27 represented as a single region and the rest of the world exogenous. Each function is introduced into the model code, and tested through a simple simulation (subsidising the purchase of capital equipment). Comparing the functional forms, the paper suggests how improvements can be made to the standard model in cases where there is the potential for a transition between technologies (such as from conventionals to renewables in electricity production). The paper contends that the split in investment between two such industries should be dependent on the relative rental rates. Furthermore, it is argued that this relationship is best represented by a sigmoid curve, such as the logistic

The economic impact of extreme sea-level rise: Ice sheet vulnerability and the social cost of carbon dioxide

Recent thinking about the economics of climate change has concerned the appropriate probability distributions of both climate sensitivity to greenhouse gases and the damages that might occur at high temperatures. Tail-shape is critical, since has important implications for the calculation of the social cost of carbon dioxide. In this paper, the importance of low-probability, high-impact events in the social cost of carbon dioxide calculations is extended to incorporate the possibility of rapid sea-level rise. To estimate its impact, the PAGE09 integrated assessment model is used, which allows a probabilistic assessment of climate change damages based on the linkages between the economic and climate systems. In the model, the generic discontinuity damage is replaced with the possibility of large-scale damage from factors that are taken to be correlated with temperature rise and, crucially, explicit consideration of rapid increases in sea-level. Results indicate that explicit consideration of the possibility of ice sheet collapse significantly increases the estimate of the damages caused by greenhouse gases emissions. Although the likelihood of ice sheet collapse is uncertain, the possibility should be considered and estimates should be made of the consequences were it to occur.JRC.J.1-Economics of Climate Change, Energy and Transpor

The Global Impacts of Extreme Sea-level Rise: A Comprehensive Economic Assessment

This paper investigates the world-wide economic cost of rapid sea-level rise of the kind that could be caused by accelerated ice flow from the West Antarctic and/or the Greenland ice sheets. Such an event would have direct impacts on economic activities located near the coastline and indirect impacts further inland. Using data from the DIVA model on sea floods, river floods, land loss, salinisation and forced migration, we analyse the effects of these damages in a computable general equilibrium model for 25 world regions. We consider three sea-level rise scenarios that correspond to 0.47, 1.12 and 1.75m by the 2080s. By incorporating a wider range of damage categories, implemented in an economy-wide framework and including very rapid sea-level rise, the study offers a new contribution to climate change impact studies. We find that the loss of GDP worldwide is 0.5% in the highest sea-level rise scenario, with a loss of welfare (equivalent variation) of almost 2% world-wide. Within these aggregates, there are large regional disparities, with the Central Europe North region and parts of South-East Asia and South Asia being especially prone to high costs (welfare losses in the range of 4–12 %). The analysis assumes that there is not public adaptation, which would substantially lower the costs. In this way, the analysis demonstrates what is at risk, and could be used to justify adaptation expenses.JRC.J.1-Economics of Climate Change, Energy and Transpor

The Impacts of Passing Climate Change Tipping Points: A CGE assessment for Europe of rapid sea-level rise

The overall impact of sea-level rise (SLR) is one of the reasons of concern related to climate change. SLR could exceed one metre by the end of the century, which would have serious direct impacts on economic activities located near the coastline (e.g. tourist resorts, industries such as refineries, and harbours), and indirect impacts further inland. This article estimates the potential impact of SLR on the world economy. The study takes account of damage estimates for land loss, migration and sea floods taken from the DIVA model. The overall general equilibrium economic effects are estimated used the GEM-E3 model. Different levels of SLR are considered. Our study compares three main SLR scenarios. The first, A1B, is in line with the climate scenario (0.6 metres rise by 2100), the second, ‘Rahmstorf’, with post-IPCC research suggesting higher SLR (1.4 metres rise by 2100) and lastly a ‘2 metres’ SLR by 2100. The damages for the whole EU rise from 0.15% of welfare (A1B scenario) to 0.9% (‘Rahmstorf’) to 1.76% (‘2 metres’). Naturally, the losses for specific countries vary greatly. The study concludes that there is a significant risk of economic damage of these magnitudes, which are somewhat higher than earlier studies. This is due to a wider range of damage impacts being considered. Furthermore, the study notes that further damages beyond those included are possible, such as damages to the water table, to the coastal ecosystem and indirect effects on economic value. As such even these higher damage estimates can be considered conservative figures