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Assessing climate change impacts and policies with

CGE models: methodology and application. The ICES
model

Francesco Bosello
CMCC, FEEM and University of Milan

Regional Consultation Meeting of RDTA 7645: “Strengthening

Planning Capacity for Low Carbon Growth in Developing Asia”

Kuala Lumpur, 27 Jan, 2011

1
 Classifying models for policy assessment

Climate-environmental-economic
Hard Linked Soft Linked
systems’ integration

Time treatment Static Dynamic

Modelling of the production and
Top-Down Bottom-Up
demand technology
Modeling of market relations Partial Equilibrium General Equilibrium

Policy assessment performed Policy Evaluation Policy Optimization

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 Top Down vs Bottom Up

Top-Down Models Bottom-Up Models

General approach “Economic”- focus on market “Engineering” – focus on

exchanges production technologies
Market view Olistic Partial
Main variables Elasticity of substitution inside the Initial cost, installed capacity,
production or the utility function residual life, penetration of different
Technical progress: often technologies  technological
exogenous adoption/diffusion is thus
endogenous
Detail Geographically/sectorally high, Geographically high, sectorally low,
technologically low technologically (energy sectors)
high
Energy demand Typically endogenous Typically exhogenous
About energy “Pessimistic” (high costs) “Optimistic” (low costs)
substitution and Rebounds & lower cost options No rebounds & lower cost options
emissions reduction not usually accessible accessible
costs

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 Growth and General Equilibrium Models

The top-down stream originated many different applied modelling

approaches. For what matters here:

 One stemming from modern and new growth theory (Solow 1956,
Ramsey, 1926, Aghion-Howitt 1996)  Dynamic optimization models
 One stemming from the neoclassical theory of general economic
equilibrium (Walras, 1874; Arrow-Debreu, 1954; Negishi, 1960,
Showen-Whalley, 1992) + international macroeconomic (Armington
1969) Computable General Equilibrium Models

Since the 90s both have been increasingly applied to study the economic
implications of climate change and of climate change policies
(effectiveness, efficiency, equity) with different perspectives though:

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 Growth and General Equilibrium Models
The growth modeling approach focuses more on transitions to long-term
equilibrium  with this perspective it investigates: cost/benefit of
climate change policies (e.g. Nordhaus and Yang, 1995; Nordhaus and
Boyer 1999, Manne and Richels 2004); strategic incentives to
participate to international mitigation efforts (e.g. Carraro et al.
2001), the relation between climate policy, R&D policies energy
policies (e.g. Bosetti et al. 2008), relation between mitigation and
adaptation policies (e.g. Agrawala et al. 2010, Bosello et al. 2010)

The general equilibrium modeling approach focuses more on mid-term

sectoral and competitiveness effects of mitigation policies answering
e.g. the questions: what is the overall burden of the policy? Is it
efficiently distributed among countries and sectors? What are the
policy effect on international competitiveness? Which are the sectors
at higher leakage risk? Which policy can better limit this risk? (SEC
2008, SEC 2010) or on impacts assessments (Ciscar 2009, Aaheim
and Wey 2010, Eboli et al. 2008)

Recently increasing focus on REDD policies by both research approaches

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 Computable General Equilibrium Models

There are many countries and many sectors

 Representative agents are rational (optimizing behavior by firms and

households is assumed)

 Markets are perfectly competitive and in equilibrium (demand matches

supply).

 All markets are also interdependent as when excess demand or supply

materialize (“because of economic shocks”) inputs and outputs (resources
and demand flows) re-locate inter-nationally/sectorally responding to
price signals => international trade is explicitly modelled

 These models are usually “calibrated”: demand and supply functions

are parameterized in order to replicate observed market exchanges in a
given reference year

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Sketching a CGE model

Consumers Maximise welfare

(households, government) from consumption
supply demand

Constrained
Income by income
Output markets
Goods and They meet in
services
Input markets
K, L, Land, NR Constrained
by technology
Income

demand supply
Producers Minimise cost
(firms, government) of production
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The I/O (SAM) structure

Country A Country B

S1 S2 … Sn S1 S2 … Sn

S1 S1

S2 S2

… …

Sn Sn

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 Strengths and weaknesses of CGE models

Pros:
 Market interdependence allows the description of policy transmission
mechanisms across sectors and countries i.e. policy effects on the
macroeconomic context and rebounds of this. Trade effects,
competitiveness effects, sectoral effects, leakages
 Highly flexible, they can assess the implication of “everything” once it
has been translated into changes into demand or supply

Cons:
 Difficult to be developed into fully dynamic  computational difficulty
due number of countries and markets => stylized dynamics with
“myopic” agents  problems to study transitions, endogenize
technological progress, better for policy evaluation (cost effectiveness)
than for policy optimization (cost benefit)
 being calibrated good for short, mid-term analyses
 they are equilibrium model, market imperfections only with ad hoc
modelization
 data intensive

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The ICES (Intertemporal Computable Equilibrium
System) model

 Top-down, recursive-dynamic, computable general equilbrium

model for policy evaluation

 Calibrated in 2004 (GTAP-7 database) 113 regions 57 sectors

among which: Indonesia, Malaysia, Philippines, Singapore,
Thailand, Vietnam

 Depicts international trade with capital mobility

 Growth driven by endogenous investment decisions building

capital stock interperiodally

 Production-side detail improved including nuclear, hydro, wind,

solar, (biofuel under development)

 Emissions from CO2, N2O, CH4

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 ICES: the supply side

Representative cost Output

minimizing
Representative Firm firm
- cost minimizing
Output
Leontief

TOP Level V.A. + Energy CES

Other Inputs
VAE D

Natural Capital Domestic Foreign

1° Level M
Land Labour +
Resources Energy
CES Region 1 Region n
KE

2° Level Capital Energy Region ...

CES
=1

3° Level CES Non Electric Electric

=0.5
CES
=2
Non Nuclear Nuclear Non Intermittent Intermittent
4° Level CES
=0.5 CES CES
=0.5 =2

5° Level Other fuel Coal Hydro Other Ely Solar Wind

CES
=1

6° Level

Oilgas Non Oilgas

CES CES
=1 =0.5

7° Level
Crude Oil Gas Petroleum Prod Biofuel

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ICES: the demand side

Representative utility
maximizing household Utility
Cobb-Douglas

Private Public
Savings
Consumption Consumption

Item 1 Item m Item 1 Item m

Item … Item …

Domestic Foreign Domestic Foreign

Region 1 Region n Region 1 Region n

Region ... Region ...

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ICES: the standard treatment of land and the AEZ
approach
Currently: Land is homogenous and imperfectly “mobile” across
crops responding to crops prices. Only economic factors
considered, not climatic and soil characteristics
• No competition between forestry and agricultural land

GTAP AEZ

• Introduces climate and soil characteristics making use of the

FAO/IIASA agro-ecological zoning methodology.
• Land is imperfectly “mobile” across crops responding to crops’
prices within AEZ, but not between AEZ. Many land types
accounting for geographical and biochemical land characteristic.
• The original model may now be modified to account for land
competition between forestry and agriculture

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The 18 AEZ

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 Application (1): the economic implication of the EU post
Kyoto mitigation policy: the “20-20-20” and “30-20-20”

The context:

In June 2009 the EU Council established as mandatory the 20-20-20

“Climate and Energy package” for the EU.

It requires:

20% GHG emission reduction compared to 1990 levels in 2020

20% share of renewable energy in total final energy consumption in
2020
20% increase in energy efficiency compared to 2020 baseline

After the exit of 2009 COP 15 Bali (and 2010 COP 16 Cancun) discussion
to move forward to 30% GHG emission reduction

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 The Copenhagen Pledges

Low pledges High pledges

-20% GHG emissions wrt 1990 in -30% GHG emissions wrt 1990 in
EU27 2020 2020
-17% GHG emissions wrt 2005 in -17% GHG emissions wrt 2005 in
USA 2020 2020
-15% GHG emissions wrt 1990 in -25% GHG emissions wrt 1990 in
Russia 2020 2020
-29% GHG emissions wrt 2005 in -32% GHG emissions wrt 2005 in
RoA1 2020 2020
China -40% CO2/GDP wrt BAU 2020 -45% CO2/GDP wrt BAU 2020
India -20% C/GDP wrt BAU 2020 -25% C/GDP wrt BAU 2020
-9.4% GHG emissions wrt BAU
Brazil -5.3% GHG emissions wrt BAU 2020 2020
-10,5% GHG emissions wrt 2005
NonA1_T -2% GHG emissions wrt 2005 in 2020 in 2020

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Regional and sectoral detail of the exercise

Regions Sectors
EU27: Agriculture,
Austria, Belgium, Czeck Republic, Coal,
Denmark, Finlan, France,Gemany, Oil,
Greece, Hungary, Ireland, Italy, Gas,
Netherlands, Poland, Portugal, Oil Products,
Spain, Sweden, UK, Rest of EU27, Nuclear,
+ Solar,
Usa, Wind,
Russia, Hydro,
Rest of Annex1, Other Electricity,
China, Paper,
India, Minerals,
Brazil, Chemicals,
Rest of NonAnnex1, Iron and Steel,
Rest of the World Transportation,
Other Industries,
Services
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 Benchmark assumptions: GDP

GDP Growth rates 2004-2020

200
180
160
140
% change 2005-2020

120
100
80
60
40
20
0
Austria
Belgium
CzechRep
Denmark
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Netherlands
Poland
Portugal
Spain
Sweden
UnitKingdom
RoEU
USA
Russia
RoA1
China
India
Brazil
NonA1_T
RoW
ICES Benchmark

Sources for benchmark:

EC (2010): Economic Forecasts
EC (2010): Ageing Report 2009
WEO (2010)
IMF (2010)
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 Benchmark assumptions: fossil fuel prices
Coal Price
30

25
SEC (2008)

US$ (2008) / boe

20
DB (2008) SC
15
DB (2008) CC
10

5
DB (2010) CC
0

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Oil Price ICES Benchmark
Natural Gas Price
120 90
80
100
70
US$ (2008) / boe

US$ (2008) / boe

80 60
50
60
40
40 30
20
20
10
0 0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
ICES Benchmark ICES Benchmark

Source: Eurelectric (2010)

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 Policy scenarios

EU27 NON EU27

20-20 20% emission reduction compared Business as Usual
to 1990 in 2020
20% renewable energy over total
final energy consumption
30-20 30% emission reduction compared Business as Usual
to 1990 in 2020
20% renewable energy over total
final energy consumption
20-20 Low 20% emission reduction compared Low Copenhagen pledges
to 1990 in 2020
20% renewable energy over total
final energy consumption
30-20 Low 30% emission reduction compared Low Copenhagen pledges
to 1990 in 2020
20% renewable energy over total
final energy consumption
30-20 High 30% emission reduction compared High Copenhagen pledges
to 1990 in 2020
20% renewable energy over total
final energy consumption

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 GDP impacts of the EU mitigation policy
0.5

0.20
0.10
0.0

-0.5 -0.56
-0.66
-0.55 EU GDP ( % change
-1.0 wrt baseline in 2020)
-1.26
-1.5

-1.89
-2.0
ICES 20-20 ICES 30-20 ICES 20-20 ICES 30-20 ICES 30-20 ICES 30-20 high ICES 30-20 full
Low Low Low Gdf ETS trade

0.4

0.2 0.17
0.09
0

-0.2

-0.4
Non EU GDP ( %
-0.6 change wrt baseline in
-0.8
-0.89
-0.75
2020)
-0.91
-1 -0.97

-1.2
-1.3
-1.4
ICES 20-20 ICES 30-20 ICES 20-20 ICES 30-20 ICES 30-20 ICES 30-20 high ICES 30-20 full
Low Low Low Gdf ETS trade

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 GDP impacts of the EU mitigation policy

CO2 price (€/t in 2020)

250

200 205.0

150

110.0
100 102.0

69.9
57.0
50
40.8
30.2

0
ICES 20-20 ICES 30-20 ICES 20-20 ICES 30-20 ICES 30-20 ICES 30-20 high ICES 30-20 full
Low Low Low Gdf ETS trade

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 Var. % r. baseline
Ag

-4
-3
-2
-1
0
1
2
3
ric
ul
tu
re -0.3
-1.2
-1.6
-2.0
Pa
pe
r -0.4
-0.3
-0.8
M -0.9
in
er
al
s -1.1
-0.1 A
Ch -1.4 gr Var. % r. baseline
ic
-1.0

-50
-40
-30
-20
-10
10
20
30
40

0
em ul
ic tu
al
s -2.1 re
2.3
0.3
4.3
Iro -0.1 C 4.7
n 0.8 oa 5.4
_S l
te -21.7
el -2.0 -44.2
-0.4 -46.0
Tr -2.5 O -46.0
an -1.5 il -3.3
sp -14.6
o rt -1.9 -18.0
G -20.3
-0.3 as
-2.9 1.8
O 5.1
O -2.7 il_ 9.9
th Pc 10.7
_i t
nd -0.3 s 1.3
-1.7 -8.5
-1.9 So -5.7
Se -2.3 la -7.7
rv r
ic -17.5
es -0.2 -12.9
0.4 W -1.8
0.1 in -0.4
d -17.6
0.2
-12.8
H -1.8
yd -0.5
ro

PER I CAMBIAMENTI CLIMATICI

Var. % r. baseline -0.3
4.4

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O

20-20
th 3.9

-60
-40
-20
0
20-2020
40
60
80

El 4.9
y

30-20 Low
Low

30-20 High
Co 7.7
al -6.7 16.2
-35.1 Pa 27.1
29.4
-47.3
pe
M r 0.2
-49.9 4.9
in
er 5.2
O -0.5 6.2
il C
al
s
-3.5 he 1.2
-4.7 m 5.9
-5.7 ic 7.6
al 8.7
G -10.6 Iro s 1.4
as
-20.0 n_ 6.0
-28.6 St 8.1
ee 9.1
O -30.3 l
il_ Tr 1.7
Pc
-6.1
an 6.6
ts sp 8.9
-0.2 or 10.1
-8.7 t 2.3
-7.4 O 5.7
So th 9.2
lar 60.3 _i
nd 10.1
67.4 0.1
Sectoral impacts of the EU mitigation policy

Se 4.6
45.1 rv 4.8
46.1 ic 5.7
W es
in 57.5 -0.3
20-20

d 4.2
59.1 3.7
45.4 4.7
30-20 Low
20-20 Low

30-20 High

45.9
Sectoral Prices in the EU: % change wrt baseline in 2020

Hy
dr
o 1.2
0.4
3.2
Sectoral Production in the EU: % change wrt baseline in 2020

3.1
O
th
El
y -3.4
-3.5
-6.2
-6.1
23
20-20

30-20 Low
20-20 Low

30-20 High
Domestic regional action vs full trade: GDP 30-20 low
Domestic action Full Trade

UE27 -0.66 0.2

Italy -0.69 0.1
Germany -0.46 0.3
UK -0.17 0.4
Spain -0.75 0.16
Non UE27 -0.91 -0.75
Countries with
-1.25 -0.6
Pledges
USA -0.60 -0.37
Russia -2.37 -4.1
RoA1 -1.18 -0.06
China -1.62 -3.8
India 1.64 -2.2
Brazil 0.00 -0.18
NonA1_T -6.79 -1.12
RoW 2.24 1.65

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 Application 2: CGE implication of climate change (the
cost of inaction)
Impact Cathegory Status
+ 1.2 C
temperature
Supply- side impacts
increase in
Impact on labour quantity (change in mortality – health effect
of climate change)
 2050 wrt 2000
(+1.4 C wrt 1980-
Impacts on labour productivity (change in morbidity – health
effect of climate change)  1999 average)

Impacts on land quantity (land loss due to sea level rise)  NEW
Impacts on land productivity (Yield changes due to
temperature and CO2 concentration changes)
 + 3.1º C
temperature
Impacts on capital quantity (infrastructure vulnerability to
increase in frequency and intensity of extreme weather Under development increase in
events) 2050 wrt 2000
(+3.5 C wrt 1980-
Impacts on water quantity (climate change driven water Under development
scarcity) 1999 average)

Demand-side impacts
Impacts on energy demand (change in households energy  Likely
consumption patterns for heating and cooling purposes) range
Impacts on recreational services demand (change in tourism  according
flows induced by changes in climatic conditions) to IPCC
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Impacts on health care expenditure
PER I CAMBIAMENTI CLIMATICI  FAR 2007
25
 Quantifying impacts
HEALTH LAND PRODUCTIVITY
Labour Product. Public Exp. Private Exp. Wheat Rice Cereal Crops
1.2°C 3.2°C 1.2°C 3.2°C 1.2°C 3.2°C 1.2°C 3.2°C 1.2°C 3.2°C 1.2°C 3.2°C
USA -0.06 -0.18 -0.15 -0.28 -0.02 -0.03 -5.66 -18.89 -6.19 -20.37 -8.18 -25.15
Med_Europe 0.01 0.01 -0.10 -0.18 0.00 -0.01 -1.14 -8.33 -4.62 -18.94 -2.00 -11.84
North_Europe 0.06 0.16 -0.35 -0.88 -0.01 -0.03 1.50 -7.74 -5.90 -26.01 50.00 107.82
East_Europe 0.09 0.23 -0.47 -1.17 -0.01 -0.02 -1.13 -10.50 -2.64 -13.57 -4.60 -18.35
FSU 0.11 0.28 -0.41 -1.03 -0.01 -0.03 -6.12 -21.92 -7.47 -24.64 -9.73 -30.10
KOSAU -0.43 -1.14 0.57 1.62 0.04 0.11 -7.78 -17.00 -2.90 -7.41 -3.11 -7.38
CAJANZ 0.09 0.22 0.03 0.24 0.00 0.00 -0.74 -12.33 -1.87 -14.31 -2.24 -15.17
NAF -0.28 -0.69 2.02 4.41 0.10 0.23 -12.81 -42.14 -10.78 -41.00 -12.62 -45.97
MDE -0.22 -0.34 1.34 1.81 0.10 0.14 -8.40 -32.40 -11.73 -38.52 -13.60 -43.12
SSA -0.31 -0.84 0.47 1.34 0.07 0.19 -9.89 -15.02 -7.17 -7.42 -8.81 -10.59
SASIA -0.11 -0.30 0.28 0.76 0.06 0.17 -2.96 -13.37 -4.89 -17.39 -6.61 -21.43
CHINA 0.14 0.37 0.65 1.80 0.06 0.17 0.93 2.69 0.50 1.79 -1.42 -2.37
EASIA -0.11 -0.32 1.05 2.96 0.06 0.17 2.45 9.82 0.34 5.04 -1.15 1.93
LACA -0.14 -0.39 0.68 1.98 0.07 0.19 -6.69 -68.10 -6.61 -55.65 -8.25 -76.37
SEA LEV. RISE TOURISM HOUSEHOLDS' ENERGY DEMAND
Market Serv.
Land Losses Income Flows Natural Gas Oil Products Electricity
Demand
1.2°C 3.2°C 1.2°C 3.2°C 1.2°C 3.2°C 1.2°C 3.2°C 1.2°C 3.2°C 1.2°C 3.2°C
USA -0.026 -0.055 -0.68 -1.76 -0.17 -0.43 -13.67 -35.31 -18.52 -47.84 0.76 1.96
Med_Europe -0.007 -0.015 -1.86 -4.81 -0.40 -1.02 -12.68 -32.76 -15.84 -40.91 0.76 1.96
North_Europe -0.020 -0.041 7.54 19.47 1.78 4.61 -13.75 -35.51 -15.52 -40.09 -2.20 -5.68
East_Europe -0.022 -0.046 -2.46 -6.36 -0.33 -0.86 -12.93 -33.41 -17.39 -44.92 0.76 1.97
FSU -0.007 -0.015 0.00 -0.01 0.00 0.00 -13.02 -33.65 -17.39 -44.92 0.75 1.94
KOSAU -0.005 -0.011 -1.31 -3.39 -0.32 -0.82 nss nss -13.03 -33.66 12.31 31.81
CAJANZ -0.004 -0.009 5.54 14.30 1.40 3.61 -5.05 -13.04 -12.63 -32.63 -4.80 -12.40
NAF -0.017 -0.036 -2.52 -6.52 -0.24 -0.63 -8.60 -22.22 -13.25 -34.22 5.95 15.37
MDE -0.004 -0.007 -4.67 -12.06 -0.91 -2.34 -13.12 -33.89 -17.39 -44.92 0.74 1.92
SSA -0.066 -0.139 -4.43 -11.45 -0.37 -0.96 nss nss -6.51 -16.83 16.35 42.23
SASIA -0.204 -0.427 -1.21 -3.12 -0.10 -0.25 nss nss nss nss 20.38 52.65
CHINA -0.045 -0.094 -4.99 -12.89 -0.33 -0.85 nss nss nss nss 20.38 52.65
EASIA CENTRO
-0.316 -0.662EURO-MEDITERRANEO
-4.69 -12.10 -0.53 -1.38 nss nss nss nss 20.38 52.66
LACA PER I -0.052
-0.025 CAMBIAMENTI
-2.68 CLIMATICI
-6.91 -0.56 -1.45 nss nss nss nss 21.37
26
55.20
Climate cange impacts: the global picture (1)

CC (3.1°
(1.2° C) vs baseline: Real GDP (% change)
USA
Med_Europe
4
North_Europe
3 East_Europe
2 FSU
1 KOSAU
CAJANZ
0
NAF
-1 MDE
-2 SSA

-3 SASIA
CHINA
-4
EASIA
-5 LACA
02

05

08

11

14

17

20

23

26

29

32

35

38

41

44

47

50
World
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
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Climate cange impacts: the global picture (2)

Climate Change Impacts: Summary

4.0

3.0
USA
2.0 Med_Europe
North_Europe
1.0 East_Europe
FSU
% of GDP

0.0
KOSAU
-1.0 CAJANZ
NAF
-2.0
MDE
-3.0 SSA
SASIA
-4.0 CHINA
EASIA
-5.0
1.2 °C 3.1 °C 1.2 °C 3.1 °C 1.2 °C 3.1 °C 1.2 °C 3.1 °C 1.2 °C 3.1 °C 1.2 °C 3.1 °C LACA
Agriculture Energy Health Sea Level Tourism All Impacts World
Demand Rise
Tem perature increase

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Effects in international markets (1)

CC (3.1°C)
(1.2°C) vs baseline:
Baseline: w
world
orldprices
prices (%
(%Changes)
changes)
Rice
Wheat
Rice
15
15
Wheat
CerCrops
CerCrops
VegFruits
10
10
VegFruits
Animals
Animals
Wood Prod
5
Wood Prod
Fishing
Fishing
0 Coal
Coal
Oil
Oil
-5 Gas
Gas
Oil_Pcts
-10 Oil_Pcts
-10
Electricity
Electricity
Water
Water
-15
-15
En_Int_ind
En_Int_ind
-20 Oth_ind
-20
2002
2005

2008
2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044
2047

2050
2002
2005
2008
2011

2014
2017
2020
2023

2026
2029
2032
2035
2038

2041
2044
2047
2050
MServ
CENTRO EURO-MEDITERRANEO NMServ
PER I CAMBIAMENTI CLIMATICI 29
 Effects in international markets (2)

CCCC (3.1°C)
(1.2°C) vsvsBaseline:
Baseline: term
term ss of
oftrade
trade(%(%
changes)
changes)
USA
15 Med_Europe
USA
15
North_Europe
Med_Europe
10
10 North_Europe
East_Europe
East_Europe
FSU
55
FSU
KOSAU
00 KOSAU
CAJANZ
CAJANZ
-5
-5 NAF
NAF
MDE
MDE
-10
-10
SSA
SSA
-15 SASIA
SASIA
-15
CHINA
CHINA
-20
-20 EASIA
2002
2005
2008
2011
2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044
2047
2050
EASIA
2002

2005

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

2050
LACA
LACA

CENTRO EURO-MEDITERRANEO
PER I CAMBIAMENTI CLIMATICI 30
 The sectoral picture
Climate change impacts on production, 3.1°C, ref. Year 2050 (% change wrt base)

Med_Eu North_Eu East_Eu

Rice 3.18 1.14 0.21
Wheat -1.12 6.28 0.85
USA Med_Eu North_Eu East_Eu FSU KOSAU CAJANZ NAF MDE SSA SASIA CHINA EASIA LACA
Rice -3.46 3.18 1.14 0.21
CerCrops
-0.99 -0.55 -10.09 -9.07 6.18
-1.05
-3.77 -5.39
48.39-1.11 -1.75
-2.14
2.10
Wheat -10.27 -1.12 6.28 0.85 VegFruits
-3.11 -0.10 3.03 -5.69 5.10 0.79-3.57 -1.3821.76-0.99 0.04 -0.11
-1.84
CerCrops -9.85 -1.05 48.39 -2.14 -4.53 1.61 -3.01 -7.35 -1.77 -1.60 -3.73 0.58 -1.45 -3.20
VegFruits -10.08 0.79 21.76 -0.11 Animals
-4.28 0.16 -3.14 -4.89 3.79 2.56-0.99 -4.17-2.33 1.65 0.62 -0.01
-2.76
Animals -3.96 2.56 -2.33 -0.01 Wood Products-5.54
-3.18 -1.19 -7.89 3.33 2.16-4.56 -14.50
-6.14 -1.61 -1.47 0.87
1.07
Wood Products 0.71 2.16 -14.50 0.87 1.29 -0.94 -20.36 -0.05 8.29 -0.83 -4.07 -1.01 -2.86 2.72
Fishing 2.11 8.77 -8.09 1.53 Fishing
1.89 2.12 -18.75 -0.99 7.54 8.77-3.08 -4.45-8.09-0.55 0.52 1.533.31
Coal -0.15 0.06 -2.13 -0.69 -0.19
Coal-0.08 -1.24 0.38 0.62 0.06 0.65 0.56-2.13 0.64 0.58 -0.69
0.58
Oil -0.54 -0.61 -0.72 -0.75 -0.31 -0.55 -0.83 -0.25 -0.22 -0.25 -0.29 -0.20 -0.27 -0.30
Gas -4.93 -14.51 -13.84 -16.62 Oil -1.71 -3.99 -1.49
-5.84 -2.43-0.61-0.26 -0.43-0.72 2.46 0.55 -0.75
2.28
Oil_Pcts -2.28 0.72 -0.77 -1.10 -7.58
Electricity -0.18 1.68 -16.16 -2.58
Gas -0.63
-1.47 3.39
0.97
-13.45
-7.13
4.01
-9.19
-14.51
3.78
-6.16
10.95
1.28
-13.84
7.39
3.55
4.73
6.42
13.83
4.64
-16.62
16.44
Water 0.84 5.92 -11.66 0.71 Oil_Pcts
-0.64 1.51 -14.18 -0.77 2.75 0.72-1.96 -0.79-0.77 0.30 1.21 -1.10
2.84
En_Int_ind 0.10 3.54 -10.46 0.26 0.01 -1.27 -13.05 2.47 13.00 2.44 -3.52 -0.75 -2.46 4.05
Oth_ind 1.80 5.11 -12.22 2.03
Electricity
-1.79 -0.14 -14.87 -4.45 9.68
1.68
-3.91
-16.16
-6.22 -0.98 -1.71
-2.58
2.55
MServ -0.74 -0.21 10.70 -1.83 Water
0.33 -1.95 7.25 -2.85 -7.17 5.92-4.56 -11.66
-4.13 -4.64 -5.43 0.71
-5.82
NMServ 0.36 -1.20 -2.21 -0.24 -2.20 1.31 -1.26 0.29 -2.67 -0.83 2.60 2.59 1.90 0.85
Int. Inv. Flows -0.67 0.72 6.30 -2.37 En_Int_ind
-4.87 -1.47 2.41 -4.66 -5.84 3.54-4.93 -10.46
-5.79 -4.30 -5.22 0.26
-5.28
Oth_ind 5.11 -12.22 2.03
MServ -0.21 10.70 -1.83
NMServ -1.20 -2.21 -0.24
Int. Inv. Flows 0.72 6.30 -2.37
CENTRO EURO-MEDITERRANEO
GDP
PER I CAMBIAMENTI CLIMATICI 0.31 2.96 -1.20
31
Application 3: impact of opening EU mitigation policy to
REDD
Addressing the role REDD may play in the European carbon market,
in the context of a mitigation policy aiming to reduce EU emissions
by 20% respect to 1990 in 2020.

Accounting for direct and indirect effects occurring both on land and
timber markets. Lower deforestation => lower land available to
agriculture and lower raw wood to timber industry

ICES Emission Trade Scheme (ETS) module (originally restricted to

emission reduction from fossil fuel use) updated to account for
trading of carbon credits originated by reduced deforestation
activities.

Regions selling REDD credits can participate to the EU carbon market

even without accepting binding reduction quota, but only on the
basis of proven reduction in deforestation activities

CENTRO EURO-MEDITERRANEO
PER I CAMBIAMENTI CLIMATICI 32
 REDD data
Mainly from IIASA Cluster model (Gusti et al. 2008) providing BAU
deforestation rates and regional avoided deforestation curves in
response to CO2 prices (Below example for Latin America)
LACA IIASA

1200

1000

800 2010
2015
2020
Carbon Price

2025
600 2030
2035
2040
2045
400 2050

200

0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
20
40
60
80
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
Million Tons

CENTRO EURO-MEDITERRANEO
PER I CAMBIAMENTI CLIMATICI 33
Results: EU GDP costs (2020)
Limits to REDD credits in the ETS market
No
No
RED 5% 10% 15% 20% 25% 30% 50%
Limits
D
CO2 EU Price 46 43 40 38 35 33 31 23 8
% reduction 0% -6% -12% -17% -22% -27% -32% -50% -83%

European Policy Cost (Million US$)

140.000

120.000 115.110
101.377
100.000
76.769
80.000

60.000

40.000
19.292
20.000

0
CENTRO EURO-MEDITERRANEO
ETS
PERwithout REDD ETS
I CAMBIAMENTI with 10% REDD
CLIMATICI ETS with 30% REDD ETS with REDD 34
Results: direct revenues to REDD regions (2020)

Reduction in deforestation activities 22% (on average in

2020)
CENTRO EURO-MEDITERRANEO
PER I CAMBIAMENTI CLIMATICI 35
 Results: GDP gains for REDD regions (2020)

GDP Variation with respect to BAU (Million US$)

3.000
2.637
2.500

2.000

1.500
1.073
953
1.000 836

500 361
115
0
10 SSA 13 EASIA 14 LACA

ETS w/o REDD ETS withl REDD

CENTRO EURO-MEDITERRANEO
PER I CAMBIAMENTI CLIMATICI 36
Results: Price effects on land (upper) and timber (lower)
(2020) in REDD regions

CENTRO EURO-MEDITERRANEO
PER I CAMBIAMENTI CLIMATICI 37