Better water, better jobs

By Taher Kahil, IIASA Water Program

This year’s theme of the UN World Water Day is “Water and Jobs.” It focuses on how adequate water management can change workers’ lives. Indeed, water management and job creation are tightly linked. Nearly all jobs depend on water, and without reliable and safe access to water, neither small activities nor major global industries can endure. Similarly, labor is necessary to build, maintain, operate, and manage the water system, and to run water-based projects. Furthermore, job creation can be a thirsty business in both developing and developed countries. In many developing countries irrigation projects, requiring significant amounts of water, are considered the main engine for the economy and source of employment. In developed countries, less water is needed but it still requires sufficient quality for manufacturing and service projects creating job opportunities.

© Albert Gonzlez Farran - UNAMID

(cc) Albert Gonzlez Farran – UNAMID

Freshwater bodies such as rivers and aquifers supply the water that people and businesses rely on. But pressures on these bodies have been mounting worldwide during the last century. Population and economic growth have led to greater water use and increased pollution, with many basins around the world undergoing pervasive water shortages and quality degradation. Researchers expect the impacts of climate change to exacerbate these damages. At the same time, the global economy needs to continue growing to be able to adequately sustain the world’s rising population. However, the linkage between water and economic growth has increased global concerns about the impacts of water-related risks such as scarcity, droughts, floods, and pollution on economies’ ability to grow and create jobs. In fact, the World Economic Forum’s 2016 Global Risks Report ranks water as the highest global risk on economies over the next ten years.

When we talk about water and jobs, it is also important to mention that nearly 750 million people lack access to safe water and 2.5 billion live without adequate sanitation across the developing countries. People in these countries are constantly searching for water, which leaves limited time for productive work and skills building that yield better employment.

As we look towards the future, the link between water and employment becomes even more crucial. Water-related risks, which are expected to intensify due to climate change, will likely have adverse impacts on economy and employment, leading to major consequences beyond the water industry. For instance, researchers have linked the extreme drought in Syria between 2007 and 2010 to the uprising that began there in 2011. Several years of drought caused an extensive crop failure and massive losses of livestock, which resulted in 2 to 3 million people driven into unemployment and poverty. This situation contributed to a mass rural exodus into economically depressed cities, deepening existing instability in that country.

How do we avoid more crises like this? The complex and evolving water challenges of the future can only be addressed by investing in sustainable and integrated water management solutions such as those being identified and tested by the Water Futures and Solutions (WFaS) initiative at IIASA . WFaS is a cross-sector, collaborative, global initiative aimed at developing plausible scenarios of future water supply and demand, and identifying robust and no-regret portfolio of solutions for balancing water systems. The initiative brings together researchers and decision makers from governmental and non-governmental organizations as well as from the private industry and from a wide variety of sectors influencing water management. The potential water solutions include improved water policies and governance structures and the adoption of more innovative and environmentally friendly water technologies. Sustainable water resource management does not only address water-related risks, but it can also create green job opportunities for local and disadvantaged communities, for example in efficiency improvement works, in the production of alternative water sources, and in aquatic ecosystem restoration projects.

World Water Day © UN-Water

World Water Day © UN-Water

 

Note: This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.

How coordination can boost the resilience of complex supply chains

By Célian Colon, PhD student at the Ecole Polytechnique in France & IIASA Mikhalevich award winner

How can we best tackle risks in our complex and interconnected economies? With globalization and information technologies, people and processes are increasingly interdependent. Great ideas and innovations can spread like wildfire. However, so can turbulence and crises. The propagation of risks is a key concern for policymakers and business leaders. Take the example of production disruption: with global supply chains, local disasters or man-made accidents can propagate from one place to another, and generate significant impact. How can this be prevented?

Risk propagation is like a domino effect. Credit: Martin Fisch (cc) via Flickr

Risk propagation is like a domino effect. Credit: Martin Fisch (cc) via Flickr

As part of my PhD research, I met professionals on the ground and realized that supply risk propagation is a particularly tricky issue, since most parts of the chains are out of their control. Supply chains can be very long, and change with time. It is difficult to keep track of who is working with whom, and who is exposed to which hazard. How then can individual decisions mitigate systemic risks? This question directly connects to the deep nature of systemic problems: everyone is in the same boat, shaping it and interacting with each other, but no one is individually able to steer it. Surprising phenomena can emerge from such interactions, wonderfully illustrated by bird flocking and fish schooling.

As an applied mathematician thrilled by such complexities, I was enthusiastic to work on this question. I built a model where firms produce and interact through supply chain relationships. Pen and paper analyses helped me understand how a few firms could optimally react to disruptions. But to study the behavior of truly complex chains, I needed the calculation power of computers. I programmed networks involving a large number of firms, and I analyzed how localized failures spread throughout these networks, and generate aggregate losses. Given the supply strategy adopted by each firm, how could systemic risk be mitigated?

With my collaborators at IIASA, Åke Brännström, Elena Rovenskaya, and Ulf Dieckmann, we have highlighted the key role of coordination in managing risks. Each individual firm affects how risks propagate along the chain. If they all solely focus on maximizing their own profit, significant amounts of risk remain. But if they cooperate, and take into account the impact of their decisions on the risk profile of their trade partners, risk can be effectively mitigated. Reducing systemic risks can thus be seen as a common good: costs are heterogeneously borne by firms while benefits are shared. Interestingly, even in long supply chains, most systemic risks can be mitigated if firms only cooperate with only one or two partners. By facilitating coordination along critical supply chains, policy-makers can therefore contribute to the reduction of risk propagation.

Colon's model analyzes how firms produce and interact through supply chain relationships. Credit: Jan Buchholtz (cc) via Flickr

Colon’s model analyzes how firms produce and interact through supply chain relationships. Credit: Jan Buchholtz (cc) via Flickr

Drawing robust conclusions from such models is a real challenge. On this matter, I benefited from the experience of my IIASA supervisors. Their scientific intuitions greatly helped me focusing on the most fertile ground. It was particularly exciting to borrow techniques from evolutionary ecology and apply them to an economic context. Conceptually, how economic agents co-adapt and influence each other shares many similarities with the co-evolution of individuals in an ecological environment. To address such complex issues, I strongly believe in the plurality of approaches: by illuminating a problem from different angles, we can hope to see it more clearly!

Note: This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.

Flourishing within limits to growth

By Brian Fath, IIASA Advanced Systems Analysis Program and Towson University

Brian Fath. © Matthias Silveri | IIASA

Brian Fath. © Matthias Silveri | IIASA

The seminal book The Limits to Growth by Donella Meadows and colleagues was a first attempt to make a world model that integrated environment, economics, population, and industrial pollution. Without drastic changes to curb human population growth, consumption of non-renewable resources and industrial effluence, the model scenario projected a collapse of the world social-industrial system, because physically it is not possible to keep growing on a finite planet.  This important message spurred many people in the environmental sciences, but was largely ignored, or worse ridiculed, by the dominant economic and political leaders.  Perhaps their work was too pessimistic (although some could say realistic) and called for change for which society was not yet ready.

My co-authors and I  feel their message was interpreted incorrectly.  The restrictions imposed by The Limits to Growth do not entail stagnation and strife but rather give us an opportunity for new priorities, greater equity, and greater well-being.  Living within the limits can offer agreeable, pleasant, even thriving and wonderful living conditions.

Therefore we have written a book, which shows that following nature provides guidance and pathways to Flourishing within Limits to Growth.

People today are confronted with a number of very serious problems: poverty, increased inequalities among countries and people, refugees, regional conflicts and civil wars, global climate change, accelerating exploitation of the global non-renewable and renewable resources, rapid land use change and urbanization, and increased emissions of harmful chemicals into the environment. History has shown us that we cannot solve these problems using traditional methods based on short-sighted economic growth.

Additionally, we know from natural laws that continuous growth in a finite environment is not possible. How can we ensure sustainable development for society on Earth? It would be possible by imitating the system that understands how to sustain long-term development: to learn from nature and follow nature’s way. Nature shifts from quantitative biomass growth when the resources become limiting to qualitative development by increasing resource use efficiency, in terms of both improved network connectivity and information on process regulation and feedbacks. The two main ecosystem functions, flow of energy and transfer of nutrients, are accomplished by renewable energy and complete recycling of the needed elements.  Nature also originated and perfected the use the 3Rs: Reduce, Reuse, and Recycle.

“The restrictions imposed by The Limits to Growth do not entail stagnation and strife but rather give us an opportunity for new priorities, greater equity, and greater well-being" Innsbruck Austria - architecture and nature background. ©Nikolai Sorokin | Dollar Photo Club

“The restrictions imposed by The Limits to Growth do not entail stagnation and strife but rather give us an opportunity for new priorities, greater equity, and greater well-being” Photo: Innsbruck, Austria ©Nikolai Sorokin | Dollar Photo Club

Our book employs a global model to experiment with applying these properties of nature in society. Using global statistics, the model considers how the development will change if:

  • A revenue-neutral, resource-based Pigovian tax is increased significantly and along with commensurate tax reduction to enhance recycling and application of renewable energy
  • We increase investment in education, innovation, and research significantly to raise the level of understanding by the population and to develop new progressive ideas to address our global problems.
  • We increase pollution abatement considerably to reduce its negative impacts on our health, nature, and production.
  • We increase aid from the developed to the developing countries to 0.8% of GNP, which would enhance the cooperation among countries, reduce poverty and population growth and thereby also the number of refugees. In this context, it is important that the aid is given as support to education, health care, and family planning and not at all as military aid.

flourishingbookThe model calculations show that it is possible to obtain a win-win situation, where both industrialized and developing nations can achieve a better standard of living – the developing countries mostly quantitatively and the developed countries mostly qualitatively. The calculations are compared with scenarios based on “business as usual” practices. The business as usual scenario shows a major collapse around the year 2060, which is in accordance to the Limits to Growth results from 1972 and the follow-up-publications from the Club of Rome.

Furthermore, the book demonstrates calculations of ecological footprints and sustainability by assessing our consumption and loss of work energy due to our use of resources and destruction of nature. These calculations lead to the following conclusions:

  • Maintain natural areas and the ecosystem services they provide.
  • Improve agricultural production by increasing efficiencies and technologies.
  • Shift our thoughts and actions from quantitative growth to qualitative development, for instance by using the three R’s.
  • Shift to renewable energy.
  • Leave today’s policy focused entirely on short-sighted economic considerations and start to discuss how we can improve environmental management, increase the level of education and research, and achieve greater equality in society.
  • Develop and promote alternative measures of welfare and well-being.
  • Reduce, rather than reward, financial speculations, exorbitant profits, and stock market gambling.

More information: Listen to an interview with Brian Fath on WCBN Radio.

References
Jørgensen SE, Fath BD, Nielsen SN, Pulselli F, Fiscus D, Bastianoni S. 2015. Flourishing Within Limits to Growth: Following nature’s way. Earthscan Publisher.

Meadows, DH, Meadows, DL, Randers J., Behrens, W.H.  III, (1972) Limits to Growth, New York: New American Library.

Note: This article gives the views of the author, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.

Global carbon taxation: a back of the envelope calculation

By Armon Rezai, Vienna University of Economics and Business Administration and IIASA,
and Rick van der Ploeg, University of Oxford, U.K., University Amsterdam and CEPR 

The biggest externality on the planet is the failure of markets to price carbon emissions appropriately (Stern, 2007). This leads to excessive fossil fuel use which induces global warming and all the economic costs that go with it. Governments should cease the moment of plummeting oil prices and set a price of carbon equal to the optimal social cost of carbon (SCC), where the SCC is the present discounted value of all future production losses from the global warming induced by emitting one extra ton of carbon (e.g., Foley et al., 2013; Nordhaus, 2014). Our calculations suggest a price of $15 per ton of emitted CO2 or 13 cents per gallon gasoline. This price can be either implemented with a global tax on carbon emissions or with competitive markets for tradable emission rights and, in the absence of second-best issues, must be the same throughout the globe.

The most prominent integrated assessment model of climate and the economy is DICE (Nordhaus, 2008; 2014). Such models can be used to calculate the optimal level and time path for the price of carbon. Alas, most people including policy makers and economists view these integrated assessment models as a “black box” and consequently the resulting prescriptions for the carbon price are hard to understand and communicate to policymakers.

© Cta88 | Dreamstime.com - Operating Oil And Gas Well Contour, Outlined On Sunset Photo

© Cta88 | Dreamstime.com 

New rule for the global carbon price
This is why we propose a simple rule for the global carbon price, which can be calculated on the back of the envelope and approximates the correct optimal carbon price very accurately. Furthermore, this rule is robust, transparent, and easy to understand and implement. The rule depends on geophysical factors, such as dissipation rates of atmospheric carbon into oceanic sinks, and economic parameters, such as the long-run growth rate of productivity and the societal rates of time impatience and intergenerational inequality aversion. Our rule is based on the following premises.

  • First, the carbon cycle dynamics are much more sluggish than the process of growth convergence. This allows us to base our calculations on trend growth rates.
  • Second, a fifth of carbon emission stays permanently in the atmosphere and of the remainder 60 percent is absorbed by the oceans and the earth’s surface within a year and the rest has a half-time of three hundred years. After 3 decades half of carbon has left the atmosphere. Emitting one ton of carbon thus implies that is left in the atmosphere after t years.
  • Third, marginal climate damages are roughly 2.38 percent of world GDP per trillion tons of extra carbon in the atmosphere. These figures come from Golosov et al. (2014) and are based on DICE. It assumes that doubling the stock of atmospheric carbon yields a rise in global mean temperature of 3 degrees Celsius. Hence, the within-period damage of one ton of carbon after t years is
  • Fourth, the SCC is the discounted sum of all future within-period damages. The interest rate to discount these damages r follows from the Keyes-Ramsey rule as the rate of time impatience r plus the coefficient of relative intergenerational inequality aversion (IIA) times the per-capita growth rate in living standards g. Growth in living standards thus leads to wealthier future generations that require a higher interest rate, especially if IIA is large, because current generations are then less prepared to sacrifice current consumption.
  • Fifth, it takes a long time to warm up the earth. We suppose that the average lag between global mean temperature and the stock of atmospheric carbon is 40 years.

We thus get the following back-of-the-envelope rule for the optimal SCC and price of carbon:

Capture

where r = ρ+ (IIA-1)x g. Here the term in the first set of round brackets is the present discounted value of all future within-period damages resulting from emitting one ton of carbon and the term in the second set of round brackets is the attenuation in the SCC due to the lag between the change in temperature and the change in the stock of atmospheric carbon.

Policy insights from the new rule
This rule gives the following policy insights:

  • The global price of carbon is high if welfare of future generations is not discounted much.
  • Higher growth in living standards g boosts the interest rate and thus depresses the optimal global carbon price if IIA > 1. As future generations are better off, current generations are less prepared to make sacrifices to combat global warming. However, with IIA < 1, growth in living standards boosts the price of carbon.
  • Higher IIA implies that current generations are less prepared to temper future climate damages if there is growth in living standards and thus the optimal global price of carbon is lower.
  • The lag between temperature and atmospheric carbon and decay of atmospheric carbon depresses the price of carbon (the term in the second pair of brackets).
  • The optimal price of carbon rises in proportion with world GDP which in 2014 totalled 76 trillion USD.

The rule is easy to extend to allow for marginal damages reacting less than proportionally to world GDP (Rezai and van der Ploeg, 2014). For example, additive instead of multiplicative damages resulting from global warming gives a lower initial price of carbon, especially if economic growth is high, and a completely flat time path for the price of carbon. In general, the lower elasticity of climate damages with respect to GDP, the flatter the time path of the carbon price.

Calculating the optimal price of carbon following the new rule
Our benchmark set of parameters for our rule is to suppose trend growth in living standards of 2 percent per annum and a degree of intergenerational aversion of 2, and to not discount the welfare of future generations at all (g = 2%, IIA = 2, r = 0). This gives an optimal price of carbon of $55 per ton of emitted carbon, $15 per ton of emitted CO2, or 13 cents per gallon gasoline, which subsequently rises in line with world GDP at a rate of 2 percent per annum.

Leaving ethical issues aside, our rule shows that discounting the welfare of future generations at 2 percent per annum (keeping g = 2% and IIA = 2) implies that the optimal global carbon price falls to $20 per ton of emitted carbon, $5.5 per ton of emitted CO2, or 5 cents per gallon gasoline.

If society were to be more concerned with intergenerational inequality aversion and uses a higher IIA of 4 (keeping g = 2%, r = 0), current generations should sacrifice less current consumption to improve climate decades and centuries ahead. This is why our rule then indicates that the initial optimal carbon price falls to $10 per ton of carbon. Taking a lower IIA of one and a discount rate of 1.5% per annum as in Golosov et al. (2014) pushes up the initial price of carbon to $81 per ton emitted carbon.

A more pessimistic forecast of growth in living standards of 1 instead of 2 percent per annum (keeping IIA = 2, r = 0) boosts the initial price of carbon to $132 per ton of carbon, which subsequently grows at the rate of 1 percent per annum. To illustrate how accurate our back-of-the-envelope rule is, we road-test it in a sophisticated integrated assessment model of growth, savings, investment and climate change with endogenous transitions between fossil fuel and renewable energy and forward-looking dynamics associated with scarce fossil fuel (for details see Rezai and van der Ploeg, 2014). The figure below shows that our rule approximates optimal policy very well.

Capture-graph

The table below also confirms that our rule also predicts the optimal timing of energy transitions and the optimal amount of fossil fuel to be left unexploited in the earth very accurately. Business as usual leads to unacceptable degrees of global warming (4 degrees Celsius), since much more carbon is burnt (1640 Giga tons of carbon) than in the first best (955 GtC) or under our simple rule (960 GtC). Our rule also accurately predicts by how much the transition to the carbon-free era is brought forward (by about 18 years). No wonder our rule yields almost the same welfare gain as the first best while business as usual leads to significant welfare losses (3% of world GDP).

Transition times and carbon budget

Fossil fuel Only Renewable Only Carbon used maximum temperature Welfare loss
IIA=2 First best 2010-2060 2061 – 955 GtC 3.1 °C 0%
Business as usual 2010-2078 2079 – 1640 GtC 4.0 °C – 3%
Simple rule 2010-2061 2062 – 960 GtC 3.1 °C – 0.001%

 Recent findings in the IPCC’s fifth assessment report support our findings. While it is not possible to translate their estimates of the social cost of carbon into our model in a straight-forward manner, scenarios with similar levels of global warming yield similar time profiles for the price of carbon.

Our rule for the global price of carbon is easy to extend for growth damages of global warming (Dell et al., 2012). This pushes up the carbon tax and brings forward the carbon-free era to 2044, curbs the total carbon budget (to 452 GtC) and the maximum temperature (to 2.3 degrees Celsius). Allowing for prudence in face of growth uncertainty also induces a marginally more ambitious climate policy, but rather less so. On the other hand, additive damages leads to a laxer climate policy with a much bigger carbon budget (1600 GtC) and abandoning fossil fuel much later (2077).

In sum, our back-of-the-envelope rule for the optimal global price of carbon and gives an accurate prediction of the optimal carbon tax. It highlights the importance of economic primitives, such as the trend growth rate of GDP, for climate policy. We hope that as the rule is easy to understand and communicate, it might also be easier to implement.

References
Dell, Melissa, Jones, B. and B. Olken (2012). Temperature shocks and economic growth: Evidence from the last half century, American Economic Journal: Macroeconomics 4, 66-95.
Foley, Duncan, Rezai, A. and L. Taylor (2013). The social cost of carbon emissions. Economics Letters 121, 90-97.
Golosov, M., J. Hassler, P. Krusell and (2014). Optimal taxes on fossil fuel in general equilibrium, Econometrica, 82, 1, 41-88.
Nordhaus, William (2008). A Question of Balance: Economic Models of Climate Change, Yale University Press, New Haven, Connecticut.
Nordhaus, William (2014). Estimates of the social cost of carbon: concepts and results from the DICE-2013R model and alternative approaches, Journal of the Association of Environmental and Resource Economists, 1, 273-312.
Rezai, Armon and Frederick van der Ploeg (2014). Intergenerational Inequality Aversion, Growth and the Role of Damages: Occam’s Rule for the Global Carbon Tax, Discussion Paper 10292, CEPR, London.
Stern, Nicholas (2007). The Economics of Climate Change: The Stern Review, Cambridge University Press, Cambridge.

Note: This article gives the views of the authors, and not the position of the Nexus blog, nor of the International Institute for Applied Systems Analysis.

William Nordhaus: A new model for climate treaties

“We have to recognize that international approaches to climate change have basically failed. They are not going anywhere, maybe even backwards,” said economist William Nordhaus at a lecture for IIASA staff and young scientists on 23 June. The reason for this failure, he argued, is that international agreements have so far failed to deal with the problem of free riders.

The Kyoto Protocol, for instance, failed as countries dropped out one by one, as soon as mitigation started to become costly. Many countries never even ratified the agreement. Nordhaus explained, “There were no penalties for dropping out.”

Norhaus first introduced the concept at the IIASA 40th Anniversary Conference in 2012.

Norhaus first introduced the concept of climate clubs at the IIASA 40th Anniversary Conference in 2012.

As the next round of climate talks approach this winter and next in Paris, many researchers say it is time for a new model for international climate change treaties. One new idea, which Nordhaus first proposed at the IIASA 40th Anniversary Conference in 2012, is the concept of “climate clubs.”

Nordhaus said, “Think of the treaty as a club. It’s a voluntary agreement, where members get certain benefits, for a certain cost.” A climate club would work like a free-trade union, such as the EU. It would encourage participation by penalizing non-participants, allowing members of the “climate club” to charge tariffs on all imports of non-participating nations. In his lecture on Monday, Nordhaus expanded on the concept he introduced in 2012, presenting the results of modeling work to determine the tariff rates and carbon prices that would be needed in such an agreement, and how participation would look.

Nordhaus found that more countries were likely to participate when carbon prices were lower. At a carbon price of 25 or 50 dollars, a majority of world regions would participate in the club, while at higher carbon prices of 75 to 100 dollars per ton of carbon dioxide, the highest participation rate would be only about half of that.

From left: William Nordhaus, Nebojsa Nakicenovic, and Joanne Bayer

At IIASA on Monday. From left: William Nordhaus, IIASA Deputy Director General Nebojsa Nakicenovic, and IIASA Risk Policy and Vulnerability Program Director Joanne Bayer

The high carbon price, Nordhaus explained, would make the cost of participating much higher than the costs of tariffs for non-participants. However, with a lower carbon price, even low penalty tariffs of 3 to 4% could be enough to encourage participation. The idea of tariffs is simpler than previous suggestions of trade penalties based on the carbon emissions impact of specific goods—which in practice are difficult to define, and, as Nordhaus said, “not a big enough stick to induce participation.”

Like any trade agreement, though, Nordhaus’ climate club also means some win and some lose. When he examines the benefits on a regional level, the US, EU, and India appear to gain the most benefits, while Russia and China gain the least. What would it take to get such an agreement off the ground? Nordhaus said that a few key regions would be enough—for example, the EU, the USA, and China.

Watch Nordhaus’ 2012 Lecture at the IIASA Conference

William Nordhaus is Sterling Professor of Economics at Yale University, New Haven, Connecticut, USA. He has a B.A. from Yale University (1963) and a Ph.D. in Economics from MIT (1967). More>>