Modelling Climate Policy – Trade-Off Metrics, Resource Markets, and Uncertainty

Doctoral thesis, 2007

This thesis consists of five papers related to climate change policy. In paper I and paper II we discuss the use of Global Warming Potentials (GWPs) that facilitate the tradeoff between abatement of the different greenhouse gases (GHGs). In paper I we estimate the cost of using GWPs instead of a cost-effective trade-off between the different GHGs, using a dynamic integrated climate economic model, MiMiC. The results show that this cost is rather small, ~5% increase in net present value abatement cost, if the surface temperature is to be stabilised at 2ºC above the pre-industrial level. In paper II, we take the analysis of cost-effective trade-off ratios between the different GHGs one step further and introduce uncertainty and learning in climate sensitivity. We find that the more uncertain we are about climate sensitivity today, the higher should a short-lived GHG, methane, be valued relative to a long-lived GHG, carbon dioxide. However, the costeffective trade-off ratio is still lower than methane’s GWP as used in the Kyoto Protocol. In paper III, we study uncertainties in the emissions inventories and the proposal that emissions targets should be met with a degree of certainty above 50%. We find that given that compliance cost should be minimized, emissions with quantification uncertainties should be taxed higher (lower) per expected ton if abatement of these emissions reduces (increases) the uncertainty of the emissions portfolio. In paper IV, we develop a dynamic non-cooperative game model to analyse how OPEC’s oil rent is affected by carbon prices. We find that in the majority of cases analysed OPEC may actually gain rent due to carbon prices. The reason for the increase in rent is that most of the cost-effective alternatives to conventional oil have higher life cycle CO2 emissions. In paper V, we study how carbon taxes would affect the demand for bioenergy and how this would affect the agricultural sector using an energy-agricultural-economy model, LUCEA. We find that food prices may increase substantially due to the land scarcity induced by the cultivation of energy crops. In addition, our analysis does not support the belief that energy crops will be cultivated on low quality lands so as to avoid land competition with food production.