Executive Summary
Integrated Economics of Climate Change project
This project led by Motu collaborating with other EcoClimate members builds an integrated modelling framework that draws on the results from both natural science and economic analysis. It aims to provide evidence on the direct and trade effects of expected climate change on the economy and how policies and institutions will affect adaptation and mitigation.
The project has three objectives. The first is to enhance and link component models and the second is to run and interpret policy relevant simulations. The third objective is to analyse policies for adaptation and mitigation. The project contributes to predictive capacity with emphasis on the role of uncertainty and economic outcomes, as well as the implications of changing land use and management on the greenhouse gas budget. We will explore the economics of mitigation options in key sectors as well as policies that will enhance adaptation to changes in water and hence electricity availability.
On mitigation we will explore two broad issues: the effects of different international scenarios on New Zealand; and the effectiveness, cost, and distribution of cost, of mitigation policies in the land use (agriculture and forestry) and energy sectors (all fossil fuel use including transport). On adaptation, we will model the impact of climate change on New Zealand, breaking it into: the direct impact of climate change within New Zealand; and the effect of international impacts and adaptation that is transmitted through global trade and migration. We will explore the implications of these changes for infrastructure decisions (irrigation and flood protection) and electricity management.
We have three objectives: Enhance and link component models; Run and interpret policy relevant simulations; and Analyse policies for adaptation and mitigation. The empirical modelling component (objectives 1 and 2) enhances four existing economic models: LURNZ - a model of New Zealand rural land use which draws heavily on geophysical inputs from Landcare Research and GNS-Science; ESSAM - a computable general equilibrium model of the New Zealand economy; a model of land values being created in the Motu ‘Infrastructure’ project and the Institute for the Study of Competition and Regulation’s (ISCR) option pricing model. It combines these with a suite of energy related models that MED coordinates, natural science inputs from our CRI collaborators and boundary conditions from international integrated assessment models. The outputs of the modelling will include economic variables (such as land use; intensity of land use; agricultural output; profitability; GDP; regional economic impacts; employment shocks; cost of mitigation; and energy prices) and environmental variables (such as emissions and removals of greenhouse gases and water flows).
The qualitative policy analysis in objective 3 will draw on the economics of information, transaction cost economics, natural resource economics, analysis of property rights, decision making under uncertainty, game theory and analysis of market structures and institutions as well as comparative analysis of existing policies in New Zealand and elsewhere. It will use the scenario results from objectives 1 and 2 to guide judgements where policy architecture needs to respond to empirical evidence on the relative importance of different effects. It will also use the detailed knowledge of sectors and institutions that the modelling work will generate to identify practical issues in policy design.
The potential benefits of this research will come first from the advantages of having more effective and efficient mitigation. Currently, the fiscal cost of mitigation between 2008 and 2012 for NZ will be around $500m. NZ faces an even larger opportunity cost because there are opportunities to reduce emissions and enhance removals that are not yet being effectively mobilised. The Prime Minister is keen to implement an effective credible mitigation policy in part to strengthen our position against protectionism related to our distance from markets which could severely impact trade. The second set of benefits come from understanding the likely impacts and adapting appropriately. Preliminary work by our team for MAF suggests that the direct impacts of climate change on agricultural productivity in New Zealand are likely to be small overall but high in some regions. This does not account for damage from extreme events. It also misses the potential effects through trade. The Stern review suggests that we will lose at least 5% of global GDP and up to 20%. Even if most of the impacts are not borne directly in New Zealand, they are likely to affect our trading partners and so flow on to us.