15.023-12.848-ESD.128 Climate Change: Economics, Science and PolicyProblem Set #4Global Policy Analysis Using the Toy IGSMMIT OpenCourseWare http://ocw.mit.edu 15.023J / 12.848J / ESD.128J Global Climate Change: Economics, Science, and Policy Spring 2008 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.Massachusetts Institute of Technology 15.023-12.848-ESD.128 Climate Change: Economics, Science and Policy Problem Set #4 GLOBAL POLICY ANALYSIS USING THE TOY IGSM Due: Monday, 28 April 2008 BACKGROUND This homework is divided into two sections: Problem 1 investigates the economic impacts of near term policies: Lieberman-Warner in the US, and the European Trading System (which encompasses the EU and EET in the EPPA definitions). Problem 2 is an uncertainty analysis of the climate impacts of the business-as-usual case. PROBLEM 1 – THE ETS AND LIEBERMAN-WARNER Part A: Independent EU and US Systems. Estimated targets for the Lieberman-Warner bill draw on “Assessment of US Cap and Trade Proposals” (Paltsev et al., 2008, from the course reading, and Appendix D of Joint Program Report #146), and approximation of EU ETS uses information from “An Analysis of the European Trading Scheme” (Reilly and Paltsev, 2005, Joint Program Report #127). Use the following guidance in setting up the analysis. Basic Model Procedures: Before implementing constraints in the model, use the Clear Display button on the GHG_Constraints sheet to ensure that all regions outside the US and the EU have no constraints. Also, for the purposes of this problem select the 2020 radio button on the EPPA 4.0 worksheet. This will make the model stop in 2020, keeping runtime to about 3 minutes for simulation runs. To save runs and compare data, you can manually cut and paste the Ref_Results and/or the EPPA_Results worksheets. Also, saving the entire workbook using “Save As…” (Excel’s File Menu) might be useful for you. If you want to save graphs, you can manually copy and paste the graphs into another worksheet before running the model again. If you do this, don’t forget to de-link the graphs (use “paste special”), or they will update when the Toy is run again. Approximating the Lieberman-Warner Bill: Assume that emissions are to be held to 2005 levels in 2010, and returned to1990 levels by 2020. (Note: the bill regulates emissions through 2050, but we only examine the bill through 2020 for this assignment.) These provisions can be approximated by returning to 2005 levels in 2010, 1997 levels in 2015, and 1990 levels in 2020. While the bill is designed to cover all gases, the first part of the exercise will only address CO2. Therefore, we can set the constraints on CO2 as follows: Year 2010 2015 2020 US Target (MMT C eq) 1680 1480 1350 Fill these values in on the GHG_Constraints worksheet (after pressing the Clear button)m, and make sure that the CO2 radio button is active in the upper left hand corner.15.023 – 12.848 – ESD.128 Spring 2008 p. 2 In addition to not addressing non-CO2 GHGs, the approximation also ignores any restriction on covered versus non-covered sources. Nor does it allow for banking between time periods.Approximating the ETS: The initial ETS target is about 1104 MMT carbon-equivalent. This policy covers both the EU and EET. In this first period (2010), the allocation to EU nations is about 896 MMT and the allocation to EET nations is 208 MMT. The EU has adopted a 2020 target that is 20% below 1990 levels, which can be approximated by the following constraints: Year EU Target (MMT Ceq) EET Target (MMT Ceq) 2010 896 208 2015 836 208 2020 776 208 Fill these values in on the GHG_Constraints worksheet. The EU and the EET form one trading system, therefore activate trading in both regions for all time periods (2010, 2015, 2020). (Note on policy reality: The ETS covers only CO2 in 2010, but will be extended to other GHGs in later time periods. It actually covers a rather limited number of sectors – about 54% of the total CO2 emissions. The Toy Model does not allow partial sectoral coverage.) Running the Model: With EU and the EET trading enabled (but not the US!), you can run the model. Click the “Run EPPA Policy Scenario” button. A command window (black with white text) will pop up. The model will take about 3-5 minutes torun, during which time Excel will be inoperable and unresponsive to mouse clicks. Part A: Independent Systems, CO2 Only Policy A1: Report the carbon prices in the US, EU, and EET (listed in the EPPA_Resultsworksheet). Comment briefly on these prices. A2: Now consider the GDP impacts (the GDP/reference graph in EPPA_Graphs). Which nations (considering both Annex B1 and Non-Annex B) have the largest losses measured by percent GDP, and which nations gain? Briefly explain these results, including why there are differences. A3: If the US decided not to implement a climate policy, how would the results in Part A2 change? Why would these results occur?Part B: Full Annex B Trading, CO2 Only Policy Now examine what happens if the US decides to allow trade between Lieberman-Warner and the ETS system. Activate trading in the US and run the model again. 1 Note that Mexico is not in Annex B despite its listing in the Toy.15.023 – 12.848 – ESD.128 Spring 2008 p. 3 B1: What are the new carbon prices in the three regions? How did they change fromPart A1 and why? Explain the benefits of “where” flexibility.B2: In the EPPA_Analysis Worksheet, the Toy reports how many carbon permits are bought and sold. How much does the EU buy (or sell) in 2010? How does this number compare to the original (pre-trade) reduction of carbon emissions required?B3: The EPPA_Analysis Worksheet also lists GDP/capita (in tens of thousands of US$). What is the cost per person in the US of the policy compared to BAU GDP/capita in 2010, 2015, and 2020? If you take the 2010 cost and assume a 5% increase per year, what would the cost be in 2020? How does this compare to the actual cost? What does this imply in terms of banking?Part C: All-Gas Policy.The US policies include all gases. The EU ETS may include all gases in later periods. Therefore it is instructive to examine a case in which all greenhouse gases are constrained. Use the same total carbon-equivalent reductions, but now impose the constraint on all gases. Keep trading enabled for all three regions. Make sure the GHG radio