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Integrated Assessment Models: Modeling Mitigation (Abatement)

This document explores the various strategies for modeling abatement costs within integrated assessment models, focusing particularly on the DICE-2007 model. It explains different methodologies, such as econometric analysis and engineering estimates, and emphasizes the importance of understanding marginal costs as a function of emissions reduction rates. The discussion includes the derivation of mitigation cost functions, highlights from the McKinsey study, and contrasts with estimates derived from the IPCC Fourth Assessment Report, shedding light on the convex nature of cost functions and associated policy implications.

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Integrated Assessment Models: Modeling Mitigation (Abatement)

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  1. Integrated Assessment Models:Modeling Mitigation (Abatement) Economics 331b Spring 2009

  2. Slightly Simplified Equations of DICE-2007 Model

  3. Modeling Strategies (IV): Abatement costs IA models use different strategies to model abatement: • Some use econometric analysis of costs of reductions • Some use engineering/mathematical programming estimates (McKinsey) • DICE model generally uses “reduced form” estimates of marginal costs of reduction as function of emissions reduction rate

  4. Derivation of mitigation cost function Start with a reduced-form cost function: (1) C = Qλμ where C = mitigation cost, Q = GDP, μ = emissions control rate, λ,  are parameters. Take the derivative w.r.t. emissions and substitute σ = E0 /Q • dC/dE = MC emissions reductions = Qλβμ-1[dμ/dE] =λβμ-1/σ Taking logs: • ln(MC) = constant + time trend + ( β-1) ln(μ) We can estimate this function from microeconomic/engineering studies of the cost of abatement.

  5. Example from McKinzey Study

  6. Reduced form equation: C=.0657*miu^1.66*Q

  7. Further discussion However, there has been a great deal of controversy about the McKinsey study. The idea of “negative cost” emissions reduction raises major conceptual and policy issues. For the DICE model, we have generally relied on more micro and engineering studies. The next set of slides shows estimates based on the IPCC Fourth Assessment Report survey of mitigation costs. The bottom line is that the exponent is much higher (between 2.5 and 3). This has important implications that we will see later.

  8. Note that the MC is much more convex than McKinsey: much more diminishing returns Source: IPCC, AR4, Mitigation.

  9. Source for estimates of  (elasticity of cost function) Source: IPCC, AR4, Mitigation, p. 77.

  10. Using the IPCC as data for the cost function Conclusion is that the cost function is EXTREMELY convex.

  11. Alternative abatement cost functions: From IPCC Parameterized as C/Q = aμ2.8 , with backstop price(2005) = $1100/tC

  12. Alternative abatement cost functions: IPCC and MK Parameterized as C/Q = aμ2.8 , with backstop price(2005) = $1100/tC

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