1. 1 Urbanization and low-carbon growth pathways M odeling the interactions between energy and real estate prices Henri WAISMAN, Jean-Charles HOURCADE (waisman@centre-cired.fr) Urban Energy and Carbon Modeling in Rapidly Urbanizing World IIASA - Vienna, 10/11 March 2011

2. 20 years of a surprising absence in energy-economy modeling  What was “obvious” in the early nineties  Large competitive advantage of oil-based motor and fuels over substitutes (biofuels, electricity, hydrogen)  Apparent low price elasticity of mobility and energy demand for transportation  Mobility and transportation are driven by other “signals” than energy prices  What should have been done A strong collaboration between energy, transportation and urban economists (Hourcade,1993)  What happened : A methodological lock-in due to three converging intellectual dynamics:  The ‘Elephant and rabbit stew metaphor’ legitimates to treat the energy sector independently from the rest of the economy (Hogan & Manne 1977)  The TD/BU controversy about the energy efficiency gap focused the debate on technological efficiency  Extrapolating electricity optimization models to the entire energy system  The overwhelming majority of energy-economy models adopt carbon price as the only driver of decarbonizing economies.

3. The Impasse of the « carbon price only » frameworks Together with political vagaries, harsh lobbying and weak economic reasoning, there may be an economic rationale behind the difficulties in making a deal around policy architectures built around a “pure” pricing of carbon  A carbon price at 50$/tCO2  doubles the cost of cement in India and hurts segments of the steel industry in the EU  …but hardly affects mobility demand (low price-elasticity)  Consequences for cost assessment of climate policies  Underestimated : an often ignored caveat of energy-economy modeling « Most models use a global least cost approach to mitigation portfolios with universal emissions trading, assuming transparent markets, no transaction cost, and thus perfect implementation of mitigation measures throughout the 21st century. » (AR4, WGIII )  Overestimated : in absence of complementary policies in the transport sector very high carbon prices are needed to curve down transport emissions (low elasticity of mobility demand to energy prices) other determinants : non-energy prices and non price signals (real estate prices, risk-adjusted capital cost, infrastructure policies)

4. Housing and Energy prices: Two contrasted dynamics 196019701980199020002006 Real price time series 1960-2006 (index 1=2000 level) Housing real sales price Housing service real price Gasoline real price

5. Intertwined methodological issues to be solved  Modeling 2 nd best economies with  Imperfect foresight  Inertia of capital stocks  Market imperfections (underutilization of production factors)  Representing structural change driving the decoupling between growth and energy  Beyond pure energy efficiency, the fundamentals of the material content of the economy C-T-L (Hourcade 1993):  Consumption styles (preferences)  Technical potentials (resource and technology availability, asymptotes)  Location patterns  Capturing the interplay between energy prices, land prices and the growth engine (productivity, demography, savings) in an opened economy  Endogenizing the urbanization process and location decisions in urban/rural areas

6. IMACLIM, an attempt to model 2 nd best economies in a General Equilibrium framework Economic signals (prices, quantities, Investments) Static Equilibrium (t) under constraints Agricolture Energy Transport Dynamic sub-modules (reduced forms of BU models) Static Equilibrium (t+1) under updated constraints Electricity Oil... Industry Transport Technical and structural parameters (i-o coefficients, population, productivity)  Hybrid matrixes in values, energy and « physical » content (Mtoe, pkm)  Secure the consistency of the engineering based and economic analyses  Explicit accounting of inertias on equipement stocks  Technical asymptotes, basic needs  Solowian growth engine in the long run but transitory disequilibrium  Unemployment, excess capacities  Investments under imperfect foresight (informed by sectoral models)  Trade and capital flows under exogenous assumption about debts

7. Macroeconomic assessment of a “carbon price only” policy (w/o international transfers)

8. Significant short-term losses: Inertia in installed capital and imperfect foresight limit the pace of decarbonization, and requires high carbon prices Increased production costs transmitted to consumers Inertia in changing households equipment reinforces the loss of purchasing power Macroeconomic feedbacks (unemployment, lower wages, lower consumption…) Long-term losses: Inertia of infrastructures, location choices, urban forms Rebound effect of mobility needs requires very high carbon prices in the second half of the century At the roots of our “bad news”

9. Stylised facts in the transportation sector Rebound effect due to energy efficiency improvement, Demand induction by transportation and urban infrastructures, Drivers of demand evolve over different time scales: Location of production, consumption and housing (decades and sometimes one century) Infrastructures (decades) Private equipments (few years) Energy and real estate prices (volatile)  Inertia, ‘lock-in’, risks of maladjustments

10. Modeling modal choice and mobility demand Under two constraints: Utility maximization: With 4 modes

11. Infrastructure investments and congestion effects Under two constraints: Utility maximization: With 4 Modes Capacity Time per pkm Infrastructure investments pkm

12. Transport infrastructure and cost of climate policies  Redirection of investments towards low-carbon transport infrastructure  Relocation of production/distribution towards less transport-dependent processes

13. Urban organizations and constrained mobility Under two constraints: Utility maximization: With Constrained mobility (commuting) 4 modes

14. IMACLIM, a tool to investigate the interplay between Systems of Cities in Interaction and growth patterns 1.Disaggregate the national economy into a System of Cities in Interaction 2.Represent the spatial dynamics among a number of urban agglomerations 3.Capture the feedbacks on growth patterns Spatial disaggregation into a system of cities in interaction Static Equilibrium t Static Equilibrium t+1 Migration of firms and population Aggregate Economic variables: Price, Wage, Profit, Production Re-aggregation of technical coefficients Transport basic needs, productivity, investment costs 1 2 3

15. The system of cities in interaction  Spatial structure of cities  Monocentric and axisymmetrical  Firms are clustered into the adimensionnal centre  Spatial distribution of households : tradeoff on housing/commuting costs  Multi-level interactions  Inter-city trade (iceberg structure)  Monopolistic competition & imperfect substitution among varieties  Agglomeration effect on production  Spatial dynamics  Differentiated attractiveness of cities (investment profitability)  Migration of investments towards the most attractive cities  Migration of firms and associated labor force 0 x Firms Households/ Workers djdj

16. Calibration at base year 2001: « Revealed » parameters  Calibration on 20 largest US cities (52% of sectoral GDP)  « Empirical data » : Population, Density, Production, Wage

17. A consistent view of possible urban dynamics

18. Urban densification policy and CO2 emissions Spatial policy to limit urban sprawl  reduction of constrained mobility (20 cities, only commuting)

19. Urban densification policy and costs of climate policies  Carbon price: 380$/tCO2  360$/ tCO2 (-5%)  Average land price within urban areas: +1.5%  Economic activity : GDP losses discounted at 3% Carbon price only Carbon price + densification policy 450ppm CO2 -0.16%-0.15% 410ppm CO2 -0.84%-0.67%

20. Conclusion IMACLIM, a methodological tool for consistency checks between expertises  material content of economic growth  transport, infrastructure policies and mitigation  endogenizing urban systems in a global energy-economy model Quantification of the impact of urban policies on carbon and real estate prices  important complement to carbon pricing for ambitious mitigation objectives  not only for carbon mitigation : political implementation, social dimensions (welfare effects, distributional issues) On-going research:  real estate markets and scarcity rents  interplay between transport infrastructure, modal choice and the dynamics of real estate at the local level  linkages between labor productivity and agglomeration effects