BC3. Basque centre for climate change – Klima aldaketa ikergai

The paper provides an introduction to energy, respective resource, use within the framework of endogenous growth models. We provide an overview of different modeling approaches as well as intuition with respect to the results obtained. We consider the source problem, i.e. the supply of energy, as well as the sink problem, i.e. pollution generated by the consumption of energy resources. The introduction to the theoretical framework shortly discusses the use of neoclassical versus endogenous growth models and also points to the implications of the different types of endogenous growth approaches. We additionally give an introduction to CGE-models that include energy use and present an example of a numerical solvable model in detail. The paper closes with an outlook on future research.

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Understandably, focus on a transition to a low carbon economy has overshadowed what happens when the transition has been completed. This paper tries to offer lessons about the very long run aspects of a future economy reliant predominantly on renewable energy sources. The evidence is based on past economies and civilizations and their experiences of economic expansion driven by renewable energy resources. The paper proposes that economies around the world, since antiquity, have managed to survive, and even develop and grow driven by renewable energy sources. Successful long run economic growth depended on sound management of demand, supply and trade of woodfuel. Where governments failed to develop appropriate policies, growth and development was severely constrained. Despite the uncertainty about the future, this paper proposes that researchers start to consider the nature of long run economic growth and appropriate policies within renewable energy systems.

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Anthropogenic emissions of greenhouse gases cause climate change and this change in turn induces various direct impacts, e.g., changes in regional weather patterns. The frequency of heat waves and droughts in Europe is likely to rise. Yet, beyond these immediate effects of climate change, there are more indirect effects: Droughts may cause water scarcity and a lack in water supply which in turn would affect further sectors and critical infrastructures. An arising lack in water supply for cooling purposes, for example, will negatively affect the electricity generation in power plants.
In this paper we analyse such interplays between climate-change affected sectors. We investigate whether and to which extent power generation and supply in Europe is threatened by climate change because of the higher risk of water supply shortages due to more frequent drought and heat-wave incidences. Our proposed approach cannot only be applied to analyse the climate change effects on individual power plant sites or the overall economy but also on electricity exchanges between countries.

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Carbon-fired power plants could face some difficulties in a carbon-constrained world. The traditional
advantage of coal as a cheaper fuel may decrease in the future if CO2 allowance prices start to increase.
This paper seeks to answer empirically the most drastic question that an operating coal-fired power plant
may ask itself: under what conditions would it be optimal to abandon the plant and obtain its salvage
value? We try to assess this question from a financial viewpoint following a real option approach at firm
level so as to attract the interest of utilities and the broader investment community. We consider the
specific case of a coal-fired power plant that operates under restrictions on carbon dioxide emissions in
an electricity market where gas-fired plants are considered as marginal units. We also consider three
sources of uncertainty or stochastic variables: the coal price, the gas price and the emission allowance
price. These parameters are derived from future markets and are used in a three-dimensional binomial
lattice to assess the value of the option to abandon. Our results (and sensitivity analysis) show the
conditions that have to be met for the abandonment option to be exercised. This option to abandon coalfired
plants is, however, hardly likely to be exercised if plants can operate as peaking plants. However,
the decision may go differently in different circumstances, such as high CO2 allowance prices, very low
volatility of allowance price or a decrease in the price of gas. The decision is also influenced by the
remaining lifetime of the plant and its thermal efficiency. In any case the price of CO2 will work to bring
forward the decision to abandon in older and less efficient coal-fired plants, which are less likely to be
retrofitted in the future.

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This article uses the hedonic approach to estimate how much is paid for the energy efficiency label on the dishwasher market in Spain. The estimated figure is 15.6% of the final price. This accounts for about 80€ of the average price. We use this estimate combined with a demand systems to obtain own and cross price elasticities of demand, vital for policy designing and analysis. This is done by combining the use of the estimate with the Quantity Based Demand System (QBDS) model to completely determine the demand function for different dishwashers. Finally, the elasticity results are compared with the ones calculated using the Linear Almost Ideal Demand System (LA/AIDS). The comparison of the results confirm that the QBDS model is easier to handle and less data demanding than the LA/AIDS model while providing reliable estimates of demand elasticities.

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This paper reviews past energy transitions by sector and service to identify features that may be useful for anticipating future transitions. As the United Kingdom was the first to make the transition from traditional energy sources to fossil fuel, its experiences may offer a unique perspective of relevance for a possible transition to a low carbon economy. Although often considered a single event, the transition from traditional energy sources to fossil fuels was complex and involved numerous services and sectors at different times between 1500 and 1920.The main drivers for the energy transitions were the opportunity to produce cheaper or better energy services. In a majority of cases, the successful new energy source or technology provided the same service (i.e. heating, power, transport or light) with superior or additional characteristics (e.g. easier, cleaner or more flexible to use). The existence of a niche market willing to pay more for these characteristics enabled the new energy source and technology to be refined gradually until they could compete with the incumbent energy source. Nevertheless, this implied that, on average, the whole innovation chain took more than one hundred years and the diffusion phase nearly fifty years. In the same way, since low-carbon energy sources and technologies are valued for their low climate impact, they will be able to develop gradually until they can compete with fossil fuels. However, for a transition to take place, low carbon energy sources and technologies will have to provide cheaper energy services – possibly helped by carbon taxes or tradable permit schemes. And, based on past experiences, a complete transition to a low carbon economy is likely to be very slow.

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Water management is subject to conflicting economic and environmental objectives, and policymakers require a clear overview of the different outcomes derived from different water management options. The aim of this paper is to assess the efficiency of several irrigation water pricing policies with a special focus on their environmental implications. Irrigation is chosen here as a crucial sector of water use in large parts of southern Europe, where pressure over the resource is expected to increase due to climate change. A novel methodological approach to perform an ex ante analysis of alternative water pricing policies is proposed here, where environmental and technical performance are simultaneously considered. This approach takes place in two steps: the first is a simulation of alternative water policies through a mathematical programming model, and the second is the analysis of results by using the Data Envelopment Analysis (DEA) technique. A case study is applied in Puglia (southern Italy), where irrigation is the primary factor of strategic relevance for policymakers regarding water management. Our results show, on the one hand, that alternative pricing policies perform similarly in terms of technical efficiency and environmental efficiency. On the other hand, inefficiency appears to depend mainly on technical rather than environmental concerns. According to the assigned weights, through the DEA technique, the highest improvement for inefficient options may be obtained by better labour use. We conclude that the proposed approach may be a comprehensive and versatile framework for water policy analysis, offering a tool for supporting the decision-making process.

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This paper presents new evidence on the very long run trends in the price of energy and energy services, such as heat, power, transport and light. The paper has two purposes. First, it shows that, in general, there was an upward trend in average energy prices leading up to the Industrial Revolution and a decline afterwards, associated with the shift from traditional energy sources to fossil fuels. At the end of the nineteenth and early twentieth centuries, however, average energy prices did rise, reflecting (not rising resource scarcity but) greater value to consumers, as they shifted to energy sources that provided the desired services more efficiently. Second, the paper highlights the dangers of focussing on the price of energy, rather than the price of energy services, when considering the long run. The price of energy ignores the major technological improvements that have occurred and that benefit the consumer. This failure to focus on the services is likely to lead to incorrect estimates of consumer responsiveness to changes in price and income. This paper suggests that the inclusion of service prices and consumption variables would lead to more reliable models of long run energy demand and forecasts of carbon dioxide emissions.

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CO2 prices will continue to differ from one country to another for a long time, even if a global post-Kyoto agreement is achieved in the near future. The non-homogeneous nature of climate policies may decrease the competitiveness of some industries with the risk of relocation of activities due to carbon leakage. One of most exposed industries in Europe is iron and steel, as it is highly CO2-intensive and relatively open to international trade. Most studies estimate a leakage of up to 20% as a consequence of all the industrial production activities that are expected to be relocated, and a level of relocation ranging from 1.5% to 35% specifically for the iron and steel sector. This might seem a relatively small macroeconomic impact if measured at country or EU level. However, the picture may be quite different if the analysis is conducted at sub-national level. Therefore, one could argue that there is an important gap in the literature as the relevant studies are applied to a large geographical scale when the fact is that in Europe this industry is highly concentrated in certain specific regions, i.e. the so-called Old Industrial Regions (OIR). This paper seeks to analyze the impact that different levels of relocation of the iron and steel industry in the OIRs will have as a consequence of climate policy. This is done using an AGE (Applied General Equilibrium) model. The results show that although these effects may be diluted from a national perspective, the impact for incumbent regions may be very large, and may in fact significantly reduce their GDPs. Another important outcome emerges when the costs of CO2 reduction derived from industry relocation and from cost-effective policies are compared. Although relocation of industrial activity (i.e. forced output change) can reduce CO2, the cost is very high compared with other options (e.g. induced input substitution). These results can help national and regional policy makers understand the necessary linkages between their environmental and industrial policies.

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Increased temperatures and changes in patterns of rainfall as a result of climate change are widely recognized to entail serious consequences for human health, including the risk of diarrheal diseases. Indeed, there is strong evidence that temperature and rainfall patterns affect the disease pattern. This paper presents the first study that links the incidence of cholera to environmental and socioeconomic factors and uses that relationship to predict how climate change will affect the incidence of cholera. Specifically, the paper integrates historical data on temperature and rainfall with the burden of disease from cholera in Tanzania, and uses socioeconomic data to control for impacts of general development on the risk of cholera. Based on these results we estimate the number and costs of additional cholera cases and deaths that can be attributed to climate change by year 2030 in Tanzania. The analyses are based on primary data collected from the Ministry of Health, Tanzania, and the Tanzania Meteorological Agency. The result shows a significant relationship between cholera cases and temperature and predicts an increase in the initial risk ratio for cholera in Tanzania in the range of 23 to 51 percent for a 1 degree Celsius increase in annual mean temperature. The cost of reactive adaptation to cholera attributed to climate change impacts by year 2030 in Tanzania is projected to be in the range of 0.02 to 0.09 percent of GDP for the lower and upper bounds respectively. Total costs, including loss of lives are estimated in the range of 1.4 to 7.8 percent of GDP by year 2030. Lastly, costs of additional cholera cases and deaths attributed to climate change impacts in Tanzania by the year 2030 largely exceed the costs of preventive measures such as household chlorination.

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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 usually are 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 into explaining the so-called energy
efficiency paradox.

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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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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 and 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. Besides, 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 in 1,661 million Euros (for a one year period), almost 1% of the Catalonian GDP. The results of this study point out the need for further research on the estimation of the costs of drought (specially at the European level) that needs to be embedded into the assessment of the costs of adaptation to climate change.

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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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So far, there has been a strong emphasis to study 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 explore with a system-based approach 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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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. It forces researchers to extrapolate, from a small set of figures, damages 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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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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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 competencies to implement the policy actions. Regional Governments are important actors and should, therefore, be incorporated into the negotiation rounds and their voices heard. This paper illustrates the important role of the regions in climate policies and considers many of the policy instruments being designed and implemented. More than 20 leading regions are showcased here. Finally, the case of the Basque climate policy is described to shed some light as to what regions could do.

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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 of applying innovative forms of public administration based on stakeholder’s 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 groups 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 the potentiality they can play in future research.

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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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