Models used and developed in Project 2

The Simple Climate-Economy Model RICE
A well-known Climate-Economy or Integrated Assessment Model (IAM) is RICE, developed by William Nordhaus and others at Yale University.  RICE quantifies not only how human activity affects the climate, but also feedbacks in the other direction: a warming climate alters the economy´s productive capacity, as well as many other dimensions of human welfare. While many IAMs just describe the emissions caused by the economy by forecasting how GDP will grow over time, RICE models explicitly the underlying processes of population growth, productivity increases, energy use, and capital accumulation. In RICE, the time horizon is 400 years, where one time period is taken to be ten years. The world is divided into eight regions based on geography and level of development. In each region, population and productivity grows according to given processes, whereas consumption of fossil fuels and additions to the capital stock (investment) are chosen optimally in each time period. The model has a supply function for fossil fuels, so global carbon prices go up as energy supplies are emptied. Carbon use emits carbon dioxide into the atmosphere that, along with emissions caused by changes in land use, raises atmospheric concentrations of GHGs, even though some carbon is absorbed by the biosphere and the oceans (via the carbon cycle). Rising concentrations lead to higher radiative forcing, which — given climate sensitivity — raises global temperature. In Mistra-SWECIA, we have used the RICE model to form a comprehensive assessment about the uncertainty about future global warming.
 
Quantitative policy analysis in a one-region model of the world
Using similar modeling as in RICE of the carbon cycle and the climate, including its economic damages, an economic framework more in line with modern macroeconomic theory is developed. The economic model is a neoclassical growth model with an infinite time horizon and a (fossile fuel) exhaustible resource stock along with a stock of physical capital and technical change. The goal of this analysis is twofold: to analyze broad questions of optimal world policy, and to take a first quantitative step toward a multi-region model (see below). The policy analysis will have three parts. First, a planning problem is solved, yielding "ideal" world policy. Second, a decentralized world is considered, where consumers and firms are self-interested without a concern for how their individual behavior influences the climate; in economic jargon, we consider a competitive world equilibrium with an externality. In this world, economic policy can be included, potentially altering the incentives to use energy. The third step is to perform optimal-policy analysis using the decentralized model: optimize over tax sequences, with the assumption that the world governments can agree on and commit to such a path. Extensions of the core model will be considered, including analyses of the role of resource extraction costs, market power in the supply of energy, alternative assumptions regarding the substitutability between energy and other inputs, endogenous technical change, and aggregate climate uncertainty. The model is analyzed using numerical methods, describing and computing key model outcomes as functions of a state vector that includes economic as well as environmental variables.
 
A many-region model of the world
Conceptually, the many-region model is a straightforward extension of the one-region model. However, the world is modeled in great geographic and economic detail. A possible level of resolution to let one region be a one-latitude by one-longitude square on the world land map; this would amount to about 2000 (landmass) regions in the world. Each region will have its own economic and environmental characteristics, including indicators of economic development and sensitivities to climate. The modeling of damages from climate change will be more detailed than in RICE because it will include an elaborate model of the world climate region by region. The aim is to separately model the effects of adverse effects of climate change on health/life expectancy, production, and depreciation of capital and to derive these damages from various weather outcomes, such as the incidence and severity of storms, floods, droughts and heat waves. The model allows for different assumptions regarding trade, insurance, production-factor mobility, and capital mobility between regions; it is also possible to consider blocs of regions that are defined based on these factors. Thus, adaptation in the form of economic cooperation, e.g., insurance against adverse climate effects, can be considered explicitly.

 

Updated: 2010-06-18