1. What is the economic issue? Bruce A. McCarl Distinguished Professor of Agricultural Economics Texas A&M University mccarl@tamu.edumccarl@tamu.edu http://agecon2.tamu.edu/people/faculty/mccarl-bruce/ Energy Climate Change Adaptation Climate Change Mitigation Climate Change Effects

2. Theme + Climate Change + Emissions + Water = Social and Agricultural Risk + Energy Plan of presentation Sources of Risk Manifestation Decisions to be made

3. So what is the Economic issue Externality is the uncompensated impact of one group’s actions on the well-being of bystanders. If effect on bystanders is adverse, a negative externality. If effect is beneficial, a positive externality. Fossil fuel emissions can be a negative externality. Market failure Because buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply, the market equilibrium is not efficient when there are externalities. Income distribution - who gains/ who loses and where – high vs low latitudes Intergenerational equity -- Bystanders are those damaged by warmer climate now and in future Co-benefits some actions that can be undertaken also clean up air and water and enhance farm incomes and damage trade. How do we consider Policy issue - Do we act now to benefit those in future

4. Wait for more information –do little and live with it Plan to adapt Try to reduce future change Mitigate emissions Policy Alternatives

5. So What could we do? Reactions to climate change basically consist of four directions: Live with the effects – do little Reduce future extent by limiting GHG net emissions - Mitigation Alter the way we do things adapting so as to reduce the impact of change - Adaptation Monitor what is happening- Information Last three compete with traditional investment Monitoring Reducing Drivers Adapt McCarl, B.A., "Some Thoughts on Climate Change as an Agricultural Economic Issue", Journal of Agricultural and Applied Economics, vol 44 no 5, 299-305, 2012.

6. Striking a Balance Climate Monitoring Adaptation Mitigation NonClimate Consumption R&D Infrastructure Education & Much more Inevitability of adaptation Likely need adaptation and monitoring Attention to mitigation as we grow

7. Policy Challenge Most effects in future Mitigation and adaptation costs now Exact nature of effects and effectiveness of adaptation and mitigation are uncertain + controversial Unilateral action on mitigation not effective but collective no action means nothing gets done Resource and investment competition between current production/R&D and needs for mitigation/adaptation So grand challenge is How much to invest now in mitigation and adaptation in interest of future parties at likely cost of current?

8. Economic Needs Cost Benefit Analysis –Do damages merit action? Vulnerability costing –How economic are mitigation actions How costly are they – lost income How beneficial are they – avoided climate change –How beneficial are adaptation actions How costly are they – lost income How beneficial are they – avoided climate change

9. Economic Needs Income distribution Analysis –Who gains – who loses –Economic fairness Price D S Quantity P* Q*

10. Economic Needs Income distribution Analysis –Who gains – who loses –Economic fairness Price S’ D S Quantity P’ Q’ P Q

11. Economic Needs Income distribution Analysis –Who gains – who loses –Economic fairness Price S’ D S Quantity P’ Q’ P Q a b c d e f g Consumer welfare Before= a+b+e+f Consumer welfare after= a Consumer welfare loss= -b-e-f

12. Economic Needs Income distribution Analysis –Who gains – who loses –Economic fairness Price S’ D S Quantity P’ Q’ P Q a b c d e f g Consumer welfare loss= -b-e-f Producer welfare Before= c+d+g Producer welfare after= b+c Producer welfare Change= +b-d-g

13. Economic Needs Intergenerational equity analysis –Who gains – who loses –Economic fairness Suppose we have a 4% discount rate Suppose damages from 2052 on are $100 per year How much can you spend now to avoid?

14. Economic Needs Intergenerational equity analysis –Who gains – who loses –Economic fairness Suppose we have a 4% discount rate Suppose damages from 2052 on are $100 per year How much can you spend now to avoid? NPV of $1 realized 40 years from now is (1/(1.04)^50)=$0.14

15. Economic Needs Intergenerational equity analysis –Who gains – who loses –Economic fairness Suppose we have a 4% discount rate Suppose damages from 2052 on are $100 per year NPV of $1 realized 40 years from now is (1/(1.04)^50)=$0.14 NPV of 100 annuity is 2500 (100/0.04) So willingness to pay now is $351 (2500*0.14). Would you do it? Is it fair to those in the future?

16. Economic Needs Co benefit analysis –Direct gains from actions –Indirect gains Weighing them off Incentive design analysis Tax, Subsidy, Market, Quota Accepting proposals

17. 17 Share of a given amount of emissions control Share of a given amount of emissions control CNCN CACA Q C A is cost of abatement by Ag, C N is cost of abatement by Non Ag, All ag All Non-ag Economic Needs

18. Global perspective Common property atmosphere and climate Free rider Who should pay Sheer size of market Global perspective Common property atmosphere and climate Free rider Who should pay Sheer size of market Economic Needs

19. Ag perspective inelastic vs elastic demand who gains Ag perspective inelastic vs elastic demand who gains Economic Needs Price S’ D S Quantity P’ Q’ P Q S’ D S QuantityQ’ Q

20. Action on Mitigation Limiting emissions

21. Mitigative Actions Reduce emissions Capture Switch fuels Natural GasBiofuels NuclearHydrogen Alter consumption Increase absorption Mechanical sequestration Oceans Mines Aquifers Biological Sequestration Forest Soils

22. 1- Source: IEA WEO 2007 and Socolow presentation at Americas Climate Choices Per-capita fossil-fuel CO2 emissions, 2005 World emissions: 27 billion tons CO 2 STABILIZATION AVERAGE TODAY

23. Greenhouse Gas Forcing and Climate Change As above Lagged time between action and response Compliance with International Agreements Domestic Policy Bush Rose Garden an 18 percent reduction in emissions intensity between now and 2012 - will allow actual emissions to increase 12 percent. International attitudes toward US emission levels Need for cheap emission offsets Linkage to other goals for agriculture and environmental impacts Potential emergence of a market Industry Attitudes Why Mitigate

24. Types of Adaptation Actions

25. Adaptation can be “autonomous” or “planned.” Autonomous adaptations are actions taken voluntarily by decision-makers (such as farmers or city leaders) Planned adaptations are interventions by governments to address needs judged unlikely to be met by autonomous actions Public sector plays important roles in both cases. Support autonomous adaptation by providing information, shaping market conditions and developing technologies Act more directly by developing plans and strategies, providing resources, and undertaking projects (such as infrastructure development).

26. Means to Adapt Investment to facilitate adaptation Research Extension Capital investment Ag Adaptation Irrigation Drought resistant varieties Tolerant breeds and varieties Crop and livestock mix Tree rotation age Abandonment McCarl, B.A., Adaptation Options for Agriculture, Forestry and Fisheries, A Report to the UNFCCC Secretariat Financial and Technical Support Division, 2007. http://unfccc.int/files/cooperation_and_support/financial_mechanism/application/pdf/mccarl.pdf

27. Why Adapt - Inevitability [1] The best estimate of climate sensitivity is 3ºC [WG 1 SPM]. [2] Note that global mean temperature at equilibrium is different from expected global mean temperature at the time of stabilization of GHG concentrations due to the inertia of the climate system. For the majority of scenarios assessed, stabilisation of GHG concentrations occurs between 2100 and 2150. [3] Ranges correspond to the 15 th to 85 th percentile of the post-TAR scenario distribution. CO 2 emissions are shown so multi-gas scenarios can be compared with CO 2 -only scenarios. Stabilization level (ppm CO 2 -eq) Global mean temp. increase at equilibrium (ºC) Year CO2 needs to peak Year CO2 emissions back at 2000 level Reduction in 2050 CO2 emissions compared to 2000 445 – 4902.0 – 2.42000 - 20152000- 2030-85 to -50 490 – 5352.4 – 2.82000 - 20202000- 2040-60 to -30 535 – 5902.8 – 3.22010 - 20302020- 2060-30 to +5 590 – 7103.2 – 4.02020 - 20602050- 2100+10 to +60 710 – 8554.0 – 4.92050 - 2080+25 to +85 855 – 11304.9 – 6.12060 - 2090+90 to +140 Characteristics of stabilization scenarios IPCC WGIII Table SPM.5: Characteristics of post-TAR stabilization scenarios WG3 [Table TS 2, 3.10], SPM p.23

28. Greenhouse Gas Forcing and Climate Change Lagged time between action and response Inevitability of climate change Slow mitigation action Why Adapt

29. Policy Implementation Choices Carbon Mkt Like for SO2 Farm Program Green aspects Govt Carbon Program Adaptation Investment

30. Adaptation versus Mitigation Investment Allocation Economic Considerations ActivityConsequences ConsumptionCurrent Utility Conventional investmentFuture production and consumption benefits Adaptation investmentAvoided climate change damages to production now and possibly in future- more consumption Mitigation investmentAvoided extent of climate change with lessened to production in future- more consumption Next few pages based on Wang, W.W., and B.A. McCarl, "Temporal Investment in Climate Change Adaptation and Mitigation", 2010.

31. Optimal Time Path of Adaptation and Mitigation Investment Reasons for Differences: The different mechanism of adaptation and mitigation The different timing of results from adaptation and mitigation Figure 5. Optimal investment of adaptation and mitigation in the model with both allowed Figure 6. Temporal investment distributions between adaptation and mitigation

32. So Where Does an Economist Come In? Example issues What are effects/costs of climate change, now and in future? What Adaptation actions are possible and what are best (those having best cost benefit results in reducing impact of change) What Mitigation actions are possible and best (most effective in reducing the extent of climate change) How can we determine who/what gains, who/what loses and how do we adapt How do we configure measurement and monitoring (best system for finding out what is occurring and where) How can we predict what private and public actions will do to climate change extent and effects plus how that will that affect the ecosystem, economy and social groups

33. Adaptation Ag/Ecosystem items R&D - Heat tolerant crops, Low water using crops, Pest and disease resistance/treatment, Heat tolerant livestock breeds, Invasive species management Risk management assistance Variability insurance Information Dissemination Adaption practices Altered enterprises Infrastructure investment - water control, application efficiency, migrated processing Managing previously unmanaged items – ecosystems, species migration, other? Non Ag items (but ag related) Non ag water conservation including landscape alteration Land conservation Aisabokhae, R.A., B.A. McCarl, and Y.W. Zhang, "Agricultural Adaptation: Needs, Findings and Effects", Handbook on Climate Change and Agriculture, Edited by Robert Mendelsohn and Ariel Dinar, Published by Edward Elgar, Northampton, MA, pp 327-341, 2011. McCarl, B.A., Adaptation Options for Agriculture, Forestry and Fisheries, A Report to the UNFCCC Secretariat Financial and Technical Support Division, http://unfccc. int/files/cooperation_and_support/financial_mechanism/application/pdf/mccarl. pdf, 2007.

34. Effects Monitoring Information Development Identify threats Current Projected Identify observed adaptations Natural Autonomous Identify adaptation alternatives and responses Autonomous Adaption practices Places where public assistance may be needed Threat and adaptation action assessment Likely consequences Unanticipated consequences Identify limits to adaptation

35. Bringing in Mitigation Ag and range and ecosystems small part of the issue Identify emission threats Permafrost Peat Fires Identify feasible, cheap mitigation possibilities For threats For existing systems Identify ways to grow without growing emissions Identify ways to maintain and grow food production Without more emissions Protecting environment Incentive design