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[2009-11] Optimal Investment in Energy Efficiency under Uncertainty
Luis M. Abadie, José M. Chamorro, Mikel González-Eguino

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This paper deals with the optimal time to invest in an energy efficiency improvement. There is a broad
consensus that such investments quickly pay for themselves in lower energy bills and spared emission
allowances. However, investments that at first glance seem worthwhile are frequently not undertaken. Our
aim is to shed some light on this issue. In particular, we try to assess these projects from a financial point
of view so as to attract sufficient interest from the investment community. We consider the specific case of
a firm or utility already in place that consumes huge amounts of coal and operates under restrictions on
carbon dioxide emissions. In order to reduce both coal and carbon costs the firm may undertake an
investment to enhance energy efficiency. We consider three sources of uncertainty: the fuel commodity
price, the emission allowance price, and the overall investment cost. The parameters of the coal price
process and the carbon price process are estimated from observed futures prices. The numerical
parameter values are then used in a three-dimensional binomial lattice to assess the value of the option to
invest. As usual, maximising this value involves determining the optimal exercise time. Thus we compute
the trigger investment cost, i.e. the threshold level below which immediate investment would be optimal.
A sensitivity analysis is also undertaken. Our results go some way towards explaining the so-called energy
efficiency paradox.

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[2009-10] The Costs of Ecosystem Adaptation: Methodology and Estimates for Indian Forests
Elena Ojea, Ranjan Ghosh, Bharat B. Agrawal and P. K. Joshi

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This paper presents a detailed methodology for estimating the cost of adaptation to climate change impacts on ecosystems. Up to date estimates are built-up following national investments in measures such as protected areas, with inaccurate estimates of the adaptation level needed. Here we propose a new methodology which identifies vulnerable areas due to climate impacts and the specific adaptation options feasible for these regions. An illustration of the methodology for shifts in forest ecosystems in India is presented. Advantages and future requirements for this methodology are finally discussed.

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[2009-09] The Costs of Drought: the Exceptional 2007-2008 Case of Barcelona
Julia Martin-Ortega and Anil Markandya

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The drought affecting Catalonia between 2007 and 2008 was the most severe of the last century and serves as a case study for the assessment of the economic costs of such an event. The main focus is the drought affecting the so-called Ter-Llobregat system which serves the Metropolitan area of Barcelona, where most of the population is concentrated (approximately 5.5 million people). The 2007-2008 drought is a good illustrative case study due to its extreme severity and the availability of economic information both on the impacts (damages) and the measures taken. Moreover, important communication campaigns were put into place and led to significant reduction of the demand and the set up of mechanisms for public participation for future water management. Direct costs of the affected sectors, indirect costs of the Catalan economy and non-market welfare losses due to the worsening of the environmental quality and restrictions on water supply to households due to scarcity conditions are reported here. The total losses are estimated at 1,661,000,000 Euros (for a one year period), almost 1% of Catalonian´s GDP. The results of this study point out the need for further research on the estimation of the costs of drought (especially at European level) that needs to be embedded into the assessment of the costs of adaptation to climate change.

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[2009-08] Climate Change and Its Socioeconomic Importance
Ibon Galarraga and Anil Markandya

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Climate change has played an increasingly key role in recent years and is now one of the leading political priorities worldwide. This article illustrates the scope of the problem, its causes and its impacts, along with the possible solutions that are being considered on the international stage. The existing information regarding these topics is summarised, together with the associated costs and the scale of the effort required to tackle climate change. The article explains why climate change can be seen as a market failure, the importance of public policies to correct this problem and its impact on international trade. The last section considers the international debate taking place in the United Nations Conferences and the Kyoto Protocol as well as what is expected with respect to the future post-Kyoto negotiations.

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[2009-07] Modelling the Effect of Climate Change on Environmental Pollution Losses from Dairy Systems in the UK
Agustin del Prado, Anita Shepherd, Lianhai Wu, Cairistiona Topp, Dominic Moran, Bert Tolkamp and David Chadwick

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So far, there has been strong emphasis on studying the impacts of climate change on agriculture in terms of changes in food production; however, there is increasing evidence that agricultural ecosystems (e.g. livestock) will also be severely affected in terms of other goods and services. For example, patterns and loads of environmental pollution derived from nutrient losses are expected to change dramatically (e.g. increased run-off: Betts et al., 2007). There have been few studies that use a system-based approach to explore the complex interactions between farm inputs, response of system components and inherent site factors that give rise to changes in productivity, environmental pollution losses and agricultural services in future scenarios. This article describes the methodology and the results of a study to evaluate the effect of climate change only on losses of nitrogen (N) and carbon (C) from grassland-based livestock systems in 10 UK Regional Development Programme (RDP) areas. In order to do so, a modelling framework integrating different models at the crop and farm level was developed and implemented. Simulated projections suggest that farming systems will undergo different changes in food production and associated nutrient losses depending on different areas and time-slices. Potential trade-offs on other pillars of farm sustainability (e.g. net farm income, biodiversity and soil quality) were simulated and illustrated as an example.

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[2009-06] Literature Review of Integrated Impact Assessment Models of Climate Change with Emphasis on Damage Functions
Ramon Ortiz and Anil Markandya

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We review the literature on the impact assessment models currently used in the climate change debate. From among these we select some relevant models, highlight their important features and identify how climate change damages are treated. A common feature of the treatment of climate change damages within the existing models seems to be the significant degree of subjectivity involved in the choice of parameters, functional forms and the potential damages in case of temperature changes above the current predicted (low) levels. This is in part due to the small number of studies available from which we can estimate climate change damages, which forces researchers to extrapolate, from a small set of figures, damage for higher temperature changes and for regions of the world other than those where the original studies were undertaken. Thus, uncertainty surrounding damage functions is inevitably high.

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[2009-05] Climate Change and Knowledge Communities
M.C. Gallastegui and Ibon Galarraga

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Climate change is a global problem whose particular characteristics mean that public-sector policy is fundamental in tackling it: a public-sector policy implemented world-wide that requires the co-operation of a large number of very different stakeholders. Innovative instruments are needed that can overcome the difficulties inherent in a global challenge of this magnitude. This paper looks at climate change as an excellent case in point of how knowledge communities can effectively help to spread learning processes and paradigm shifts. A central role in the globalisation of knowledge of this problem over the past few decades has been played by the Intergovernmental Panel on Climate Change (IPCC), which has acted as a knowledge community and a catalyst for the globalisation of learning. It is not the only community that has contributed to providing both the general public and public-sector policy-makers all over the world with a better understanding of the problem of climate change and the options available for tackling it, but it is without doubt one of the most significant.

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[2009-04] The Role of Regions in Climate Change Policy
Ibon Galarraga, Mikel González-Eguino and Anil Markandya

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Climate change is one of the greatest challenges facing human kind. Urgent policy action is needed. Climate change policies are mainly being discussed at international level by means of the United Nations Conventions and the Kyoto Protocol. However, the bulk of the impact will be felt at regional and local level. And these levels of governance hold many of the competences for implementing policy actions. Regional governments are important agents and should, therefore, be incorporated into the negotiation rounds so that their voices can be heard. This paper illustrates the important role of regions in climate policies and considers many of the policy instruments being designed and implemented. More than 20 major regions are showcased here. Finally, the case of Basque climate policy is described to shed some light as to what regions could do.

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[2009-03] Analysis and Use of Information and Communication Tools in Economics of Climate Change
Aline Chiabai

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The use of Information and Communication Technologies (ICT) in the context of climate change is of great importance in the scientific community, but can also play an important role in the policy context. On the one hand, the results achievable for mitigation and adaptation are influencing the policy arena, and on the other hand these instruments represent an opportunity for decision-makers to apply innovative forms of public administration based on stakeholder involvement, which can reduce the existing gap between policy-makers and citizens (Oates, 2003). The paper provides an analysis of the main ICT tools and methods used in climate change economics by means of a questionnaire-based survey and focus group discussion with specific experts in this context. The issues addressed are related with the use and relevance of ICT in the different research area of climate change, the perceived usefulness of these tools, and their importance in the scientific, economic and policy contexts. The main problems and limitations of ICT are investigated, together with their potential role in future research.

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[2009-02] Market Instruments and CO2 Mitigation: A General Equilibrium Analysis for Spain
Mikel González-Eguino

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Market instruments are a core element of policies to mitigate climate change. Choosing and designing the right instruments can help to minimise mitigation costs. This paper seeks to analyse various market instruments for CO2 mitigation from the viewpoint of cost-effectiveness, using an AGE (applied general equilibrium) model for the case of Spain. A distinction is drawn between (1) quantity instruments, which represent different extents of a market for emission permits; and (2) price instruments, which represent different types of tax. The analysis quantifies the importance of making the right choice as to which sectors are excluded from the permit market, and of targeting taxes correctly.

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[2009-01] Linking Reduced Deforestation and a Global Carbon Market: Impacts on Costs, Financial Flows, and Technological Innovation
Valentina Bosetti, Ruben Lubowski, Alexander Golub and Anil Markandya

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Discussions of tropical deforestation are currently at the forefront of climate change policy negotiations at national, regional, and international levels. This paper analyzes the effects of linking Reduced Emissions from Deforestation and Forest Degradation (REDD) to a global market for greenhouse gas emission reductions. We supplement a global climate-energy-economy model with alternative cost estimates for reducing deforestation emissions in order to examine a global program for stabilizing greenhouse gas concentrations at 550 ppmv of CO2 equivalent. Introducing REDD reduces global forestry emissions through 2050 by 20-22% in the Brazil-only case and by 64-88% in the global REDD scenario. At the same time, REDD lowers the total costs of the climate policy by an estimated 10-25% depending on which tropical countries participate and whether the “banking” of excess credits for use in future periods is allowed. As a result, REDD could enable additional reductions of at least 20 ppmv of CO2-equivalent concentrations with no added costs compared to an energy-sector only policy. The cost savings from REDD are magnified if banking is allowed and there is a need to increase the stringency of global climate policy in the future in response, for example, to new scientific information. Results also indicate that REDD will decrease carbon prices in 2050 by 8-23% with banking and 11-26% without banking. While developing regions, particularly Latin America, gain the value of REDD opportunities, the decrease in the carbon price keeps the value of international carbon market flows relatively stable despite an increase in volumes transacted. We also estimate that REDD generally reduces the total portfolio of investments and research and development of new energy technologies by 1-10%. However, due to impacts on the relative prices of different fossil fuels, REDD has a slight positive estimated effect on investments in coal-related technologies (IGCC and CCS) as well as, in some cases, non-electric energy R&D. This research confirms that integrating REDD into global carbon markets can provide powerful incentives for the preservation of tropical forests while lowering the costs of global climate change protection and providing valuable policy flexibility.

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