Apr. 2 2004

1
Government roles and Co-effects of Climate
Change Mitigation policies

• Apr. 2 2004
• En Zhu
• Department of Agricultural Economics
• Texas AM University
• Spring 2004

2
Outline

• Role of Agriculture
• Role and Policy Design of Co-effects
• Market failure
• Government Intervention
• Control GHG Emissions
• Subsidize Agriculture
• Tax Energy Sector
• Case Study
• Water Quality
• Environmental benefits
• Biodiversity

3
KEY FINDINGS for Global climate change

• 1. Increased warming
• rise 5-9ºF (3-5ºC) on average in the next 100
  years.
• 2. Vulnerable ecosystems
• 4. Widespread water concerns
• 5. Secure food supply
• 6. Near-term increase in forest growth
• 7. Increased damage in coastal and permafrost
  areas
• 8. Adaptation determines health outcomes
• 9. Other stresses magnified by climate change
• 10. Uncertainties remain and surprises are
  expected
• Precaution Principal Stop Global Warming!

4
Role of Agriculture

• Provides a set of potential Carbon Sinks
• Sequestration from land use change and forestry
  in 1999 15 of total U.S. emissions.
• Conservation tillage, crop residues, cover crops,
  water management, forestry, bio-fuels, manure
  management.
• Alternative Fuel
• Face different input and output prices due to
  mitigation (Mccarl and Schneider 2000)

5
Examples about potential ancillary benefits or
costs

• Particle pollution ? fossil fuel use
• Recreational sites ? reforestation programs
• Technological efficiency ? new technologies and
  unit costs fall
• Welfare ? carbon taxation
• Road-use related mortality ? public transport
• Congestion ? public transport
• Employment ? GHG projects with excess supply of
  labor
• Higher electricity prices ?reductions in
  electricity ? reduce educational opportunities
  for children
• Reduced electrification rates ? increases in
  household air pollution
• Costs associated with ghg projects ? decreased
  economic activity ? decline in employment

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Negative the net Co-benefits (CB)

• Some co-effects are beneficial and can help
  offset the costs of producing practices from a
  social perspective
• eg Improving water quality from low tillage
• eg. Enhancing producer incomes from conversion
  of cropland to grasslands
• The co-benefits likely to be partially offset by
  co-costs
• Expanded emissions in the energy sector vs. the
  offsets gained from CS
• Co-effect are relevant in all sectors of the
  economy ? accounting needs to be evenhanded

Reference McCarl.B.A , Tanveer A. B , Man,K. Kim
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Co-effects from Agriculture and Forestry
Sequestration

• Watson 2000 co-benefits
• soil productivity could be improved through
  increased capacity to retain water and nutrients
• long-lived valuable products (wood) are produced
• marginal lands could be improved and riparian
  ecosystems restored
• Erosion reduction
• Antle 2000
• Reduced erosion, improved land quality, water
  quality, recreation sites, bio-diversity, farmer
  income support .

8
Detail Report

• Southern Carolina, Southern Wisconsin, and Maine
  will lose in bird populations from afforestation
  (Matthews et. al., 2002)
• Soil erosion reduction -- 42 million per year
  under 25 conversion scenario, 32-42 of
  sequestration costs. Erosion reduction and
  wildlife habitat --- 103 million annually
  (Plantenga, 2003)
• Water quality, erosion, nitrogen, phosphorus. The
  damage values range from 0.57 per ton of
  erosion in Northern Plains to 7.06 in Northeast.
  
• Defensive expenditures, production costs,
  consumer surplus

9
Co-effects of Emission Reductions by Energy Sector

• Nuclear waste, risks of nuclear disasters,
  recreation sites, health effects.
• 10 per ton carbon tax could result in 3 health
  benefit from associated NOx reductions (Burtraw,
  1999)
• Approximate by using marginal costs as social
  willingness to pay, 15 per ton of CO2 (EIA,
  1995).

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How important is the Co-effect?

• Speed up and spread the commitment to action and
  implementation
• By knowing that the possibly high cost of climate
  change mitigation might be largely offset by
  ancillary benefits
• Policy benefits of incorporating co-effects
• Design policy on complete and inclusive set of
  effects
• Support GHG initiatives with broader
  environmental co-effects (no regrets)
• Justify policy interventions in favor of
  terrestrial activities
• Safely ignored
• On the other hand, if these effects are small
  relative to the other costs or the benefits of
  reducing GHGs
• Debate over climate change mitigation policy at
  least from the perspective of efficiency
  simplifying an already too complex debate.

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AM Assessed in monetary terms AP Assessed in
physical terms, possibly partly in monetary
terms. NA Not assessed, they may be important.
NE No effect of significance is anticipated. 1.
SO2 and NOx include acid deposition impacts. 2.
Effects of PM10, NOx and SO2 on amenity arise
with respect to visibility. In previous studies
these have not been found to be significance in
Europe, although they are important in the US. 3.
Routine operations generate externalities through
mining accidents, transport accidents, power
generation accidents, construction and
dismantling accidents and occupation health
impacts. All these involve mortality and
morbidity effects. 4. Water pollution effects
include impacts of mining (including solid
wastes) on ground and surface water, power plant
emissions to water bodies, acid deposition and
its impacts on lakes and rivers (partly
quantified).
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Externalities

• Simple definition---Externalities may arise when
  economic activity has effects on third parties.
• We are interested in cases when a policy yields a
  change in the productive use of resources, or in
  the welfare of individuals, and when these
  effects are not fully taken into account by the
  agents involved.
• The magnitude of an externality can be measured
  by comparing the difference between the social
  opportunity cost of resources that are used in
  production, and the private market cost of those
  resources.
• In economic vocabulary, this is referred to as
  market failure.

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Market Failure

• Market Failure
• Inefficient allocation of scarce resources by
  market mechanism
• Efficiency PPO or PO
• Co-effect are usually not reflected in private
  decision making.
• Co-effects affect social welfare.
• Co-effects affect social abatement costs.
• Need to adjust private abatement activities to
  reflect co-effects.

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Social vs. Private
CN
CGA
CA
CSA
CN
B
D
G
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Solution for market failure

• To solve the market failure problem, there are
  some remedies to this market failure of
  externality such as
• Pigovian taxes
• Voluntary negotiation (Coase Approach)
• Compensatory tax/subsidy
• Creating a missing markets with property rights
• Direct intervention
• Merges
• Incentives mechanism design

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Control GHG Emissions

• Regulation, Command and Control
• No incentive for innovation
• Heterogeneity (Agriculture)
• Taxes
• Need MC to arrive optimal tax (Weitzman, 1974)
• Concentrates on management decisions (Antle and
  Mooney, 2002)
• Used to generate revenue (Stavins, 1998)
• Tradable Pollution Permits
• Clean Development Mechanism
• Innovation (Burtraw, 2000)
• Lower costs

17
Permit Trading
CN
CA
qA
qN
B
SA
SN
18
Tax of conventional pollutants
If the government has taken measures to
internalize observable external effects such as
damage from conventional air pollutants, then the
ancillary effects of GHG reduction may not yield
corresponding economic benefit equal to the
change in the external cost. The reason is that
pre-existing regulation has already incorporated
into product prices some portion of external
costs.
19
literature Regarding the costs and benefits of
climate change mitigation

1. Literature that primarily looks at climate change
   mitigation, but that recognizes there may be
   benefits in other areas
2. Literature that primarily focuses on other areas,
   such as air pollution control, and recognizes
   there may be benefits in the area of climate
   mitigation
3. Literature that looks at the combination of
   policy objectives (climate change and other
   areas) and looks at the costs and benefits from
   an integrated perspective.

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literature on Co-effect

• The literature uses a number of terms to depict
  the associated benefits and costs that arise in
  conjunction with GHG mitigation policies.
• These include
• co-benefits
• ancillary benefits
• side benefits
• secondary benefits
• collateral benefits
• associated benefits.

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Co-benefits Vs. Ancillary benefits

• Co-benefits
• The non-climate benefits of GHG mitigation
  policies that are explicitly incorporated into
  the initial creation of mitigation policies.
• Reflects that most policies designed to address
  GHG mitigation also have other rationales
  involved at the inception of these policies
  (e.g., related to objectives of development,
  sustainability, and equity).
• Ancillary benefits
• Those secondary or side effects of climate change
  mitigation policies on problems that arise
  subsequent to any proposed GHG mitigation
  policies
• (eg reductions in local and regional air
  pollution associated with the reduction of fossil
  fuels, and indirect effects on issues such as
  transportation, agriculture, land use practices,
  employment, and fuel security. )
• The benefits may be negative---cost.
• From the perspective of policies to abate local
  air pollution, GHG mitigation may be an ancillary
  benefit.

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Co-effects
GHGE Mitigation
Co-effects
Agricultural Involvement
Mitigation in Energy Sector
Transportation
Co-effects
Co-effects
Co-effects
23
Ancillary Benefits and Costs and Co-benefits and
Costs

• Mechanism for the Generation of Ancillary
  Impacts.

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Case Studies of Co-Effects Water Quality
Ag Census NRI State Annual
Crop Acreage
Reference Pattanayak et al. 2002
Carbon Prices
Regional Crop Mix input use Env loads
Water Quality Index
NWPCAM
County Crop Mix and percent loads
ASMGHG
Regionalizing Model
EPIC Runoff Sim.

• Run ASMGHG at GHG prices of 25, and 50/tonne
  CE
• Link NWPCAM to ASMGHG outputs
• Run NWPCAM at elevated loadings corresponding to
  2 GHG prices (25 and 50)
• Estimate WQI at two levels
• Compute

25
Co Benefits Analytical Framework
1.
2.
3.
Convert changes in N, P, and TSS concentrations
into a WQ Index
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Co-benefits elasticity 25/ton CE for
representative year
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Case Studies of Co-Effects Water Quality

• Overall Results
• Economic
• Agricultural production declines (2-4) and
  prices increase (3-8)
• CS decreases, PS increases, Export earnings fall
  (3 5).
• GHG (not co-effects)
• National GHG emissions decline (89 and 156
  MMTCE/yr under 25 and 50 /ton CE,
  respectively).
• Agriculture becomes a net sink at high GHG price.
• Low C price gt Low/no till cropland management
• High C price gt Biofuel offsets and
  afforestation
• Land use
• Traditionally cropped lands decline(0.1 6)
• Irrigated lands decline(3 7 )
• Afforestation increases(5 12 million acres)

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Case Studies of Co-Effects Water Quality

• Overall Results
• Loadings
• N and P decline at low price
• All loadings decline at high price
• Erosion reductions most dramatic
• National WQ increased nearly 2
• Future Extensions
• Co-effects
• Monetized
• Multiple co-effects biodiversity
• Omitted loadings in forestry and livestock

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Case Studies of Co-Effects Environmental benefits
Reference Plantinga and Wu 2003
Empirical Procedure
Landik fik (net return, population density,
land quality ) fik logistic function using SUR
procedure Net return to forestgt effect on the
forest but on the agriculture Net return to Ag
gt effect on the forest but on the
agriculture
Estimate Land Use
Five values of subsidies are used to achieve
conversion of 5, 10, 15, 20, and 25 of the
baseline ag land. Average costs for
afforestation rise from 200 (5 conversion) to
600 per acre (25 conversion).
Get Acres of Afforested Land
Using Birdsey forest carbon function to estimate
additional C seq. through afforestation. Using
the Natural Resource Inventory (NRI) and the Soil
Interpretation Record System (SOILS5) to predict
locations, agricultural land conversion, and
environmental characteristics (e.g. soil type,
permeability).
Determine C Seq. Environ. Characteristics
Using estimation from previous studies to
quantify environmental benefits. Under 25
conversion scenario gt soil erosion benefits
32-42 of cost of Cseq. program gt
wildlife habitat benefits 25 of cost of
Cseq. program gt non-consumptive use benefits
25 of cost of Cseq. program
Estimate Environ. Benefits
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Case Studies of Co-Effects Environmental benefits
Remarks
(1). Co-Benefits appear to be substantial. Soil
erosion Wildlife habitat (Use Value) Non-Use
Value ? Cseq Cost 42 M
30 M 31 M
101-132M (under 25 conversion
scenario) (2). The number of potential
co-benefits and co-costs are not included (e.g.
water quality improvement, negative effects on
wildlife habitat). (3). Unrealistic fixed prices
assumption on timber and agricultural products
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Case Studies of Co-Effects Biodiversity
Reference Matthews, OConnor, and Plantinga 2002

• Study of land use changes impacts on biodiversity
  in South Carolina, Maine, and Southern Wisconsin
• Two types of land use gt agricultural and
  Forestry lands
• Two types of birds gt farmland and forest
  birds (651 species)
• Using an econometric model to estimate land use
  changes due to afforestation subsidies
• Achieving a 10 reduction in agricultural land by
  giving afforestation subsidies as an incentive
• Using an estimated land use change to estimate
  bird abundance

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Discussion questions

• Should we design policy to mitigate based on
  co-effect? How? What kind of policy?
• Consider
• Co-effect legitimately vary under alternative
  climate change mitigation policies
• Potential Welfare gain
• Cost and scale of an effort
• Information needed
• Inherent Uncertainty
• Safe Minimum Standard

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Assignments

• Read these papers if interested
• Antle, J.M. and S. Mooney. 2002. Designing
  Efficient Policies for Agricultural Soil Carbon
  Sequestration. Chapter in Agriculture Practices
  and Policies for Carbon Sequestration in Soil,
  edited by J. Kimble, CRC Press LLC, Boca Raton,
  FL, pp. 323-336
• McCarl, B.A. and U.Schneider, (2000).
  Agriculture's Role in a Greenhouse Gas Emission
  Mitigation World An Economic Perspective.
  Review of Agricultural Economics 22134-159
• Plantinga A. J., and J. Wu, Co-Benefits from
  Carbon Sequestration in Forests Evaluating
  Reductions in Agricultural Externalities from and
  Afforestation Policy in Wisconsin. Land
  Economics, 79(1), 74-85, 2003

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Reference

• Krupnick A., Dallas B. and Anil M. The Ancillary
  Benefits And Costs Of Climate Change Mitigation
  A Conceptual Framework http//www.airimpacts.org/
  documents/local/M00007466.pdf
• Antle J.M., Economic Feasibility of Using Carbon
  Sequestration Policies and Markets to Alleviate
  Poverty and Enhance Sustainability of the Worlds
  Poorest Farmers, Presened at the Expert Workshop
  on Carbon Sequestration, Sustainable Agriculture
  and Poverty Alleviation, World Meteorological
  Organization, Geneva Switzerland, August 31, 2000
  
• Antle, J.M. and S. Mooney. 2002. Designing
  Efficient Policies for Agricultural Soil Carbon
  Sequestration. Chapter in Agriculture Practices
  and Policies for Carbon Sequestration in Soil,
  edited by J. Kimble, CRC Press LLC, Boca Raton,
  FL, pp. 323-336
• Burtraw, D., Innovation Under the Tradable
  Sulfur Dioxide Emission Permits Program in the
  U.S Electricity Sector. Resources for the Future
  Discussion Paper No. 00-38, 2000.
• Burtraw, D. Krupnick, A., Palmer K.,Pul, A.,
  Toman M., Bloyd, C., Ancillary Benefits of
  Reduced Air Pollution in the U.S. from Moderate
  Greenhouse Gas Mitigation Policies in the
  Electricity Sector. Resources for the Future.
  Discussion paper No. 99-51. 1999.
• Energy Information Administration, Electricity
  Generation and Environmental Externalities Case
  Studies, Office of coal nuclear and Alternative
  Fuels, Coal and Electric Analysis Branch, U.S.
  Department of Energy, Washington D.C. 20585,
  1995.
• International Panel on Climate Change, Climate
  Change 2001 The Scientific Basis. IPCC Third
  Assessment Report. 2001. http//www.ipcc.ch/
• Matthews, S., OConnor, R., and A., J.,
  Plantinga. Quantifying the Impacts on
  Biodiversity of Policies for Carbon
  Sequestration in Forests. Ecological Economics.
  40(1) 71-87. 2002.

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Reference

• McCarl, B.A. and U.Schneider, (2000).
  Agriculture's Role in a Greenhouse Gas Emission
  Mitigation World An Economic Perspective.
  Review of Agricultural Economics 22134-159.
• McCarl.B.A , Tanveer A. B , Man,K. Kim How much
  would Carbon Cost a Buyer? Working Paper 2004
• Meyer, J. L.,M. J. Sale, P. J. Mulholland,and N.
  L. Poff, Impacts of climate change on aquatic
  ecosystem functioning and health Journal of the
  American Water Resources Association, 35(6),
  pp.1373-1386,1999.
• National Assessment Synthesis Team Climate
  Change Impacts on the United StatesThe Potential
  Consequences of Climate Variability and Change
  US Global Change Research Program,400 Virginia
  Avenue,SW Suite 750 Washington DC,20024
  www.usgcrp.gov
• Pattanayak, Subhrendu, Allan Sommer, Brian
  Murray, Tim Bondelid (RTI) Bruce McCarl, Dhazn
  Gillig (TAMU) Ben DeAngelo (USEPA), Water
  Quality Co-Benefits of Greenhouse Gas Mitigation
  Incentives in U.S. Agriculture. Presented at
  Forestry Agriculture Greenhouse Gas Modeling
  Forum, Shepherdstown, WV, October 2002 Water
  Quality Co-effects of Greenhouse Gas Mitigation
  in US Agriculture.
• Plantinga, A. J., Modeling the Impacts of Forest
  Carbon Sequestration on Biodiversity.
  Department of Agricultural and Resource
  Economics, Oregon State University.
• Plantinga A. J., and J. Wu, Co-Benefits from
  Carbon Sequestration in Forests Evaluating
  Reductions in Agricultural Externalities from and
  Afforestation Policy in Wisconsin. Land
  Economics, 79(1), 74-85, 2003
• Stavins, R.N., "Transaction Costs and Tradable
  Permits", Journal of Environmental Economics and
  Management, 29133-148,1995.
• Watson, R.T., report to the Sixth Conference of
  the Parties of the United Nations Framework
  Convention on Climate Change, IPCC,
  http//www.ipcc.ch/press/speech.htm Nov.13, 2000
• Watson, R.T. and the Core Writing Team (Eds.),
  IPCC Third Assessment Report Climate Change
  2001 Synthesis Report, IPCC, Geneva,
  Switzerland, September 2001. http//www.ipcc.ch/pu
  b/un/syreng/spm.pdf
• Wietzman, M., L., Prices vs. Quantities Review
  of Economic Studies. 41 (4) 447-91, 1974

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AF Strategies for GHG Mitigation