Feb 11, 2015 | Risk and resilience
By Junko Mochizuki, IIASA Risk, Policy and Vulnerability Program
As economic losses due to natural disasters rise globally, there is an increasing consensus that the impacts of public and private investments on disaster risk must properly be monitored and evaluated. Such “risk-sensitive investment” is increasingly recognized as good practice in both public and private sector decision making. As we look beyond the Post-2015 development agenda, the incorporation of risk is increasingly becoming a crucial element to sustainable and resilience development throughout the world.
Risk reduction measures such as bamboo shelters and protected water sources can mitigate risks during and following a disaster ©EU/ECHO Malini Morzaria via Flickr
While risk sensitive investment will likely receive great fanfare at the World Conference on Disaster Risk Reduction to be held in Sendai next month, the prospects for achieving such investments are still distant for many developing countries. Despite much recent progress to collect and analyze natural disaster damage, loss, and risk information globally, data quality remains largely poor for these countries. Many developing countries also lack the expertise to interpret and use such data effectively. Even when capacity exists at the technical staff level, political will and financial capacity may not be sufficient to use risk information tangibly and invest in risk reduction activities.
My participation at a recent workshop in Madagascar, the Training Program on Disaster Risk Assessment and Optimization of Public Investments in Reducing Economic Losses in January confirmed my sense of this inadequate on-the-ground reality. With a per capita GDP of approximately $460 per year, Madagascar is one of the poorest countries and, located in the western corner of the Indian Ocean, one of the most highly exposed to natural disaster risk. In 2008 for example, three consecutive cyclones caused more than $330 million in damage and losses. The annual average loss (AAL) from cyclone wind alone is estimated to be $74 million or nearly 1% of the country’s GDP. After two days of capacity-building training on risk assessment and investment decision-making tools such as IIASA’s Catastrophe Simulation (CATSIM) model and Probabilistic Cost-Benefit Analysis (CBA), discussions by technical staff centered around how to fill the large gap between the reality of where they stand now and where they should be in the future.
At the workshop, the participants asked questions such as “How can we strengthen contingency funding and the mainstreaming of disaster risk reduction at the same time?” and “What can a cash stripped government do when donors themselves do not seem to allocate funding based on the tangible needs of a country’s natural disaster risks?”
Workshop in Madagascar. Credit: Junko Mochizuki
Given the unique constraints facing developing countries, solutions must be tailored to their specific needs, however much of the know-how and technological options that have worked in the developed world cannot be easily replicated in a country like Madagascar. There are no easy answers, but the participants’ earnest opinions certainly gave me a positive impression that they are serious about taking disaster risk into account in their development.
As we deliberate the post-2015 goals on climate change, disaster risk reduction, and sustainable development, it is vital that the international community consider these important questions: Given the unique constraints of developing countries, what can our state-of-the-art science produce as usable and useful information for the realities of their decision making? There are more dialogues to be had and research to be conducted incorporating their viewpoints. This workshop provided an important opportunity to exchange ideas and a glimpse into the real challenges of risk sensitive investment in the developing world.
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.
Feb 2, 2015 | Air Pollution, Alumni, Young Scientists
Jun Liu, a PhD student at the College of Environmental Sciences and Engineering in Peking University, Beijing, China, has won the annual Mikhalevich Award for her outstanding research as part of the 2014 Young Scientists Summer Program (YSSP) in IIASA’s Mitigation of Air Pollution and Greenhouse Gases research program.
Jun Liu, second from right, at the YSSP award ceremony in August 2014.
Could you tell me a bit about yourself? Where are you from and what do you study?
I’m a fifth-year PHD student from College of Environmental Sciences and Engineering in Peking University, Beijing, China. My major is Environmental Sciences. My main fields of scientific interest include source of air pollution, regional air quality modeling, mitigation policy and health effects of atmospheric air pollutants.
Why did you apply to the Young Scientists Summer Program?
For a long time before the YSSP, I had read many excellent research papers on the RAINS and GAINS model. It was developed at IIASA. I hoped to have chance to utilize the model in my research. At the same time, I was so lucky to learn about YSSP application from my supervisors when I was visiting in Princeton University in winter 2013. So I applied for the program.
Please tell me about your research project: What was the question you were trying to answer?
In the background of Russian-China gas deal signed in May 2014, we wanted to discuss and compare the potential air quality benefits for coal substitution strategies between power plants, industrial boilers, and residential cooking and heating activities.
What did you find?
We found that whereas more efforts were directed at the power sector, replacing coal in power sector is actually the least effective strategy to reduce pollutants emissions. Instead, coal substitution in the residential sector achieves the highest potential for emission reduction and air quality benefits.
Air pollution is a serious and growing problem in many areas of China. Credit: V.T. Polywoda via Flickr.
Why is this research important for policy or society?
As we know, China is facing serious air pollution problems. Replacing coal with natural gas is one of the important strategies to reduce this air pollution. Historically, the power sector is the largest coal consumer and receives highest priority for reducing coal use, but the residential sector is scarcely discussed. It is an urgent time for China to propose a rational and effective distribution plan across different sectors for our limited natural gas resources.
My study shows that informed decision making should direct strategies to maximize the air quality and human health benefits, rather than focusing on the control of coal consumption. From this perspective, the residential sector is more promising than power sector and industrial boilers.
How are you planning to continue this research when you return to IIASA?
I plan to finish writing papers for the natural gas scenarios and continue with other policy relevant work, such as potential role of agricultural ammonia emission in air pollution in China.
What was your favorite aspect of the YSSP and IIASA?
First, The YSSP encourages an interdisciplinary perspective and integrated method. Second, we have lots of opportunities to improve our research through discussions with our research teams, our supervisors at IIASA, and experts in other fields who are also at IIASA. Also we can communicate and learn from other YSSPers to improve our work. The three-month length of the program is highly productive and effective.
What was your favorite moment of the summer?
There were many moments: I particularly enjoyed the many discussions with my supervisors and my colleagues in my research program, the unforgettable trip with YSSPers to Hallstatt, Asia Day, and the awards ceremony.
Jun Liu, seated at left, and her colleagues in the Mitigation of Air Pollution and Greenhouse Gases research program
Jan 19, 2015 | Energy & Climate
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
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:
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.
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.
Dec 18, 2014 | Systems Analysis
By Leena Ilmola-Sheppard, IIASA Advanced Systems Analysis Program
When government officials speak about risks, they are usually referring to natural disasters. And it seems in these discussions that the increasing frequency of flooding, droughts, snow storms, and hurricanes have no link to climate change nor mitigation of it.
Last week, I had an opportunity to sit and listen to discussions at the fourth annual Organisation for Economic Co-operation and Development (OECD) High Level Risk Forum. The objective of the forum is to initiate joint development of the national level risk management tools and procedures. National risk directors form their Prime Minister’s Offices and OECD ambassadors spent three rainy days from December 10-12 discussing risk.
The most of the time, the discussion centered around disaster risks. Whatever the theme of the session, the discussion ended up on disaster management, disaster costs, or best practices. This is a theme that was recognized to be of importance in every government. The other risks that were presented were terrorism, the Ebola epidemic, and illicit trade. The missing themes–that I had expected to be on the agenda–were technology related, financial risks and political risks.
Governments usually take risk to mean natural disasters – but missing from most discussions are climate change, technology, financial, and political risks. Here: storm clouds over England in September 2014. Photo Credit: Ched Cheddles via Flickr
Margaret Wahlstrom, Special Representative of the UN Secretary General for Disaster Risk Reduction, gave the best presentation. Her key message war that climate change related issues were not integrated well enough with risk management. Kate White from the US Army Corps of Engineers supported Wahlstrom by stating that the climate change will radically change disaster management goals, procedures, and volume of investment. There should be a strong motivation for that, she said, as disasters are coming more expensive. According to her data, the total cost of hurricane Sandy was 65 billion US$.
The Australian government calculations presented in the meeting are very revealing as well; from Australian government is spending around 400 million AU$ for disaster prevention and response, and 2.6 billion AU$ for recovery. As the Australian example shows, governments have a long way to go from words to action. Governments have not yet realized the role of mitigation, at least not in the budgeting level.
The main theme of this year’s forum was “risk and resilience.” So the word was used a lot in all of the presentations. However, the concept of resilience seems to have many meanings and concrete substance behind the word is ambiguous. Margaret Wahlstrom pointed out that there is a need for a cross-discipline understanding of resilience, as well as for a generic resilience measurement system. Concrete quantitative indicators would help policymakers to assess the development actions needed, improvement achieved, and provide justification for development actions.
The most vivid discussion concerned the relationship of the national risk management and public involvement. Countries such as the United Kingdom promote full transparency and active risk communications, while some of the governments such as Singapore focus on communicating the vision and improvement ideas instead of risks. My interpretation of the discussion is that many of the represented government experts perceive risks to be too complicated to communicate to a general audience. The Nordic countries even go beyond communication, to encourage and support self-organized actions. For example the government supported people when they started to offer shelter and places to sleep for those that got stuck on the road during the October storms of this year, the worst to hit the region in decades.
Read the forum’s summary document draft (PDF)
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.
Dec 5, 2014 | Energy & Climate, Risk and resilience
By Reinhard Mechler & Thomas Schinko (IIASA) with Swenja Surminski (LSE)
(updated 17 December 2014)
As participants in the 20th Conference of the Parties to the Climate Convention (COP 20) in Lima strived to prepare the grounds for a comprehensive climate agreement expected for COP 21 in Paris, negotiators faced key questions that revolve around responsibility and burden sharing.
These questions are not new and have played a key role in the policy and academic discourse on climate change since the beginning of the UNFCCC process.
On the mitigation of emissions, the debate has circled around burden sharing: How should emission reductions be distributed among countries and what are the distributional consequences? On climate impacts and adaptation, the debate has centered on the question of who should pay for adaption and impacts in the global South, given that the global North has been responsible for the bulk of historic anthropogenic greenhouse gas emissions and that the global South will be facing the most severe risks from climate change.
The 20th Conference of the Parties to the Climate Convention (COP 20) opened in Lima on December 1st with big fanfare. It is considered the key milestone event on the road to a comprehensive global deal on climate change that many hope will be struck in Paris in a year’s time. Photo Credit: UN Climate Change
As a partial response, the Green Climate Fund (CGF) was established at COP 16 in Copenhagen to assist developing economies in addressing climate change adaptation and mitigation. The GCF is currently being capitalized by industrialized and emerging economies with the aim of raising 100 billion USD by 2020. At the UN climate talks in Lima the CGF has achieved – thanks to last-minute pledges by several countries – its short term target of mobilizing at least 10 billion USD for the next four years.
Negotiations covering impacts and adaptation have further proceeded, among others, under the umbrella of the Warsaw Loss and Damage Mechanism (WIM), accepted at COP 19 in Warsaw after strong debate as to its meaning and nature- some suggest this mechanism should be part of adaptation, others want it to focus on residual risks that remain after adaptation efforts have been taken.
As a contribution to the WIM discourse, we recently suggested an approach organized around climate risk management, involving the principle of risk layering. We propose that the WIM can build on this principle to distinguish between risk layers to be managed and residual risk layers ‘beyond adaptation,’ thus involving both equity and efficiency aspects: (i) Equity in terms of financially supporting countries particularly vulnerable to climate change in their efforts to manage risks and deal with the burdens ‘beyond adaptation’; (ii) Efficiency in terms of helping to identify best practice for managing risk through well-designed risk prevention, preparedness and financing measures that address high and low frequency climate-related events.
We argue that the risk layering perspective may contribute to taking the WIM discourse over the apparent red negotiation lines if financial support is coupled with well-targeted risk management efforts – such as coordinated nationally through national platforms for disaster risk reduction,
Notions of risk management have been fundamental for the WIM. In Lima the parties discuss whether to accept a two-year work plan, which was put together with input from policy, science and practice. The work plan would give a strong role to risk management and, among others, would seek advice on “enhanced understanding of how comprehensive risk management can contribute to transformational approaches.”
Inauguration ceremony of COP20 in Lima. Credit: Ministerio de Relaciones Exteriores, Peru
Transformational risk management approaches have been promoted by the disaster risk management community over the last few years in seeking a better balance between pre-event risk management and post-event relief and reconstruction (currently 15% of overseas development assistance goes into pre-event efforts vs. 85% into post-event). As a case in point, regional risk pools (mostly covering climate-related risks) have been springing up in the Caribbean, Pacific, and Africa. These efforts are first and foremost focussed on mutually financing risk, but can also be seen as a first step to a comprehensive approach for reducing and financing risks.
For example, the African Risk Capacity (ARC) pool provides quick finance to provide relief after drought events, and has aimed at linking these efforts to improvements in response planning and early warning. Innovatively, the ARC, initially capitalized by donor support and country contributions, currently explores to set up an Extreme Climate Facility for raising funding for any losses that can be related to climate change and may endanger the solvency of the ARC.
The idea is to monitor variability in a composite index of weather indicators over time and understand whether this variability can be attributed to climate change, which would then lead to a pay-out to the fund from this facility. While promising, the link to attribution is a key scientific challenge, and a number of principled and implementation-related questions for this particular facility as well as for the WIM in general remain open. These open questions will need further attention by science, policy, practice and civil society in the coming months in order to help achieve progress on the Loss and Damage Mechanism.
Reference
Reinhard Mechler, Laurens M. Bouwer, Joanne Linnerooth-Bayer, Stefan Hochrainer-Stigler, Jeroen C. J. H. Aerts, Swenja Surminski & Keith Williges. 2014. Managing unnatural disaster risk from climate extremes. Nature Climate Change. March 26, 2014. http://www.nature.com/nclimate/journal/v4/n4/full/nclimate2137.html
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.
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