1. Earth System Economics Richard S.J. Tol Hamburg, Vrije & Carnegie Mellon Universities

2. The Vision A predictive Earth System Model, that is, a model that dynamically links all major components of the earth system, and forecasts their behaviour with only current and past observations, that is, without scenarios This ESM should have current decisions as input, so that it can be used for policy advice

3. Whose Vision? After successfully coupling atmosphere, ocean and ice models, the CGCMs are thirsting for more, turning their immediate attention to terrestrial vegetation, lower trophic levels in the ocean, and atmospheric chemistry The „human dimension“ is lower down the list of priorities but will be steadily moving upwards, hitting the top in 5-10 years

4. Why Do We Care? The ESMs will bring pots of money and influence Initially, they will want interactive greenhouse gas emissions and land use scenarios, followed by detailed spatial patterns of other emissions to air, and variability For some of these things, we have some theoretical insight, but no applied models, and for others we have little clue: There is an intellectual challenge as well

5. Intermediate Steps We already have many simple ESMs, called integrated assessment models Many IAMs are „conditionally predictive“ partly coupled systems, but the crude spatial and temporal resolution makes many problems disappear People are now moving towards IAMs „of the next generation“ or ESMs of intermediate complexity

6. PopulationFertilityMortalityMigration Economic System EconomyEnergy Other gases Phys-Chem System Ocean carbon cycle Climate Other gas cycle Biogeochem System HydrologyVegetationAgricultureForestry Interfaces Water use Land use Recreation Impacts Sea level rise HealthTourism Energy demand & supply

7. Immediate Steps One field, in which I see short-term benefits as well as opportunities for long- term learning, is higher-order impacts of climate change To date, most economic impact studies are based on direct costs estimates, and a few on partial equilibrium models We clearly can do better than that and study the general equilibrium effects, the structural effects, and the growth effects

8. Growth Consider a Ramsey-Cass-Koopmans growth model (maximise utility, accumulate capital, labour and technology exogenous) Climate affects utility (no effect), output, depreciation, and labour Keep savings constant for the moment Less output implies less capital accumulation Faster depreciation implies less capital Less labour implies more capital per worker

9. Growth -2 Now make savings endogenous Less output implies a lower return on capital Less labour implies less need to invest Faster depreciation may implies more savings to make up or less to reflect the reduced returns However, net savings are unambiguously down Capital effect is negative unless black plague

11. General Equilibrium Most studies estimate the direct costs of climate change, that is, price times quantity This is a crude welfare measure CGEs also estimate welfare change, so that we cannot use direct cost studies as inputs to CGE modelling Inputs to CGEs can be changes in endowments, productivity, and demand but the last is a bit more complicated

12. Health impacts: selected results 2050 Implementing Climate-Change Impacts on Health in GTAP-EX

13. Sea-level rise: selected results 2050 Implementing Climate-Change Impacts on Sea Level Rise in GTAP-EX

14. The Immediate Challenge Land and water use are heavily affected by the climate, and affect the climate in return; the spatial pattern matters Land and water markets are distorted, regulated and location-specific package deals I think a lot can be done with spatial equilibrium models and risk-averse farmers; power weights in bargaining games; and Krugman‘s new economic geography, and ideas are being tested

15. Longer-Term Challenges The natural science components of Earth System Models have both short-term and long-term dynamics; variability and equilibrium The same thing will be asked from social science components Complex models are tested by reproducing the past – economic historians are still, by and large, data collectors, but their progress is amazing

16. Conclusions There will be a market for ESM-compatible economic models At the moment, no economic model supplies to that niche, but with a number of adjustment this can be arranged Filling the niche requires quite a bit more in theoretical and applied economics; and prospects are uncertain because of the differences in space, time and closure