Climate Change and Development PolicyBy Finn Tarp and Channing Arndt

Introduction

• 2009 was a year of turmoil in the global economy• UNU-WIDER developed its 3-crisis work programme

(2010-13) in response to three large scale global phenomena:– Finance– Food– Climate change

• Alongside our traditional (foundational) focus on: poverty and inequality

Policy Challenges for Climate Change• Adaptation: steps to reduce vulnerability to

climate shocks and sustain economic development

• Mitigation: steps to reduce emissions of GHGs and hence climate warming and uncertainty

UNU-WIDER’s Response

• The ReCom aid, environment and climate change initiative• Development Under Climate Change (DUCC)

– Looking at the Zambezi and MENA regions + Vietnam and others• Collaboration with AERC

– Building research capacity for climate research• A series of contributions to the IPCC process• Consultations and conferences

– At different levels (national governments, RIO+20 and much more)– September 2012 WIDER development conference: bringing

researchers, policy makers together to share knowledge and debate issues -> formulating effective policy

Conference Background: Where Did the World Find Itself in 2012?• Financial crisis lingering on AND future of

development finance unclear• The global food system (architecture) clearly

still under pressure• Climate scientists even more pessimistic about

future global warming (4 degrees rather than 2)

Conference Messages: Back to “Big” Development Economics• As a profession we must not shy away from thinking deeply about:

– Large scale (global) phenomena– Uncertainty/extreme (low probability) events are critical

challenges– Conflict and global governance

• True across finance, food, and climate change • Developing optimal policy designs will require:

– Continuing to move out of the “silos”– Integrating data/knowledge from natural and social science– Recognising global solutions require deep understanding of

national interests

Documentation of WIDER Work

• General overview: www.wider.unu.edu/climateresearch• Recom position paper:

www.wider.unu.edu/climateresearch/article/aid-environment-climate-change • DUCC website: see www.wider.unu.edu/ducc • UN Global Pulse: see

http://www1.wider.unu.edu/ducc/article/un-selects-ducc-project-watch-part-big-data-climate-challenge

• AERC on-line course: http://www.wider.unu.edu/publications/newsletter/articles-2011/en_GB/06-2011/

• A reference to the IPCC AR5: http://www.ipcc.ch/ • September 2012 WIDER Development Conference web-site: see

www.wider.unu.edu/Climate2012• Academic output: see

http://www.wider.unu.edu/publications/en_GB/index-revised-2010/

Five Specific Lessons: Climatic Change Special Issue• Zambeze River Valley (DUCC)

– Arndt, Channing and Finn Tarp. "Climate Change Impacts and Adaptations: Lessons Learned from the Greater Zambeze River Valley and Beyond." Climatic Change. 130(1) (2015): 1-8.

– Converting uncertainty into risk– Importance of extreme events– Timing of impact– Inseparability of development and climate agendas– Assimilating climate information

2014-18 UNU-WIDER Work Programme

• 15 Major Research Projects – ongoing within three themes: http://www.wider.unu.edu/research/en_GB/index/

• Transformation– remains at the core of economic development– requires that economic growth reallocate resources towards more productive sectors

• Inclusion– inequality is a key challenge for economic growth and redistribution, but also translates into power asymmetries

that can endanger democratization and human rights

• Sustainability– a multifaceted concern with environmental, social and economic dimensions– fundamental policy and investment decisions in energy, water resources, infrastructure, and agriculture interact

strongly with environmental issues at the global, regional, and national levels

Two Major Current Projects

• Southern Africa Regional– Climate impacts for South Africa– Bioenergy– Regional growth strategies

• African Energy Futures– Regional and continental collaboration– Hydropower exploitation/potential– System linkages

Questions for Today

• What are the implications of climate change for growth and development prospects to about 2050?– Focus on South Africa

• Is a regional energy strategy anchored in hydropower viable for Africa?– Focus on Southern Africa with explicit modeling

for South Africa, the major demand source.

Related Academic Publications• South Africa Impacts (Southern Africa Regional)

– Cullis, James, Theresa Alton, Channing Arndt, Anton Cartwright, Alice Chang, Sherwin Gabriel, Yohannes Gebretsadik, Faaiqa Hartley, Gerald de Jager, Konstantin Makrelov, Gordon Robertson, C. Adam Schlosser, Kenneth Strzepek, and James Thurlow. “An uncertainty approach to modelling climate change risk in South Africa.” UNU-WIDER working paper 2015/045. April 2015.

• Regional Energy - Grand Inga (African Energy Futures)– Arndt, Channing, Rob Davies, Sherwin Gabriel, Konstantin

Makrelov, Bruno Merven, Faaiqa Hartley, and James Thurlow. "A sequential approach to integrated energy modelling in South Africa." Applied Energy. Forthcoming.

Questions for Today

• What are the implications of climate change for growth and development prospects to about 2050?– Focus on South Africa

• Is a regional energy strategy anchored in hydropower viable for Africa?– Focus on regional hydropower with explicit

modeling for South Africa, the major demand source.

Multi-sector Modeling Framework

Agriculture (food, exports)

Economy (growth, jobs,

welfare, inequality)

Global change (temperature, rainfall, world product prices)

Rivers (runoff, streamflow)

Flooding (frequency, severity)

Sea level rise (land loss, salination)

Energy (hydropower)

Infrastructure (roads, ports, houses)

Cyclones (storm surges)

Integrated Modeling Framework

CLIRRUN/PITMAN

WRYM

IRRDEM/Smith IPSS

ADJUSTED FOR RSA MODELS

GCM HFDs LTAS Scenarios

Water supply to urban and industry

Development/Demand

Scenario(s)

Water supply (Local hydropower)

Baseline Climate

Scenario(s)

Sectors

Water Management Areas

Cape Town

Durban

Johannesburg

Spatial variation on potential climate change impacts on the average annual catchment runoff by 2050. Median impacts from resulting from the HFDs analysis for the UCE scenario.

All models show drying in the west, and most models show wetting in the east, but with some models showing some drying. Generally increases over Lesotho.

Climate Change Impact Channels• World commodity prices

– Consistent with unconstrained emissions scenario

• Road infrastructure– Costs to maintain the same road network

• Water supplies – Affects agriculture, industry and households

• Dryland agriculture– Crop yield deviations

• Simulations are cumulative

Change in GPD Relative to Baseline

Change in Agricultural Value Added

South Africa Impacts Summary

• Based on the impact channels considered, we expect:– Mild negative implications for overall GDP growth – Increased costs to maintain the same transport

infrastructure resulting in consistent losses– Potentially strong economic impacts for

• Dry land agriculture (broad confidence intervals) • Water availability in certain WMAs• Infrastructure on a localized basis• Particular zones vulnerable to sea level rise

Questions for Today

• What are the implications of climate change for growth and development prospects to about 2050?– Focus on South Africa

• Is a regional energy strategy anchored in hydropower viable for Africa?– Focus on Southern Africa with explicit modeling

for South Africa, the major demand source.

Hydro-power potential in Africa

Congo River: Inga I and II

Congo River: Inga Falls

Modeling Focus

• Grand Inga in the DRC as the major potential new source of supply.

• South Africa as the major source of demand.

• Building in regional/continental demands is in process.

Economic Model (SAGE)• Standard Recursive Dynamic Model

– Past investment and profitability determines capital accumulation rates– Upward sloping labor supply curves

• Additional features:– Electricity investments amortized via electricity tariffs (+O&M costs)– Energy coefficients are a function of energy prices and investment funds

• 2007 SAM merged with 2007 Energy Balance Table– 62 sectors; 49 products; 9 factors; 14 representative households– Detailed energy subsectors (fuel and power)– See Arndt et al. (2012) SAJE; Davies and Thurlow (2014) IFPRI SAM

Energy Model (SATIM)• Version of TIMES

– Inter-temporal bottom-up partial equilibrium model

– Only use power component

• Solves for least-cost power plant mix – Subject to constraints (i.e.,

electricity demand; reserve margins; and resource limits)

– Given system parameters (i.e., load curves; fuel prices; existing plants; new plant options)

Coal-fired

Nuclear

Hydropower

Solar (PV)

Solar (thermal)

Wind

Gas-fired

Diesel

Imports

Coal-to-liquid

Gas-to-liquid

Refined oil

Gas

Coal

Crude oil

Electricity

Petroleum

Convergence

2006 2010 2014 2018 2022 2026480

490

500

510

520

530

540

550

560

Coupled runs every yearCoupled runs two yearsCoupled runs every four years

Year of coupled run

Ele

ctri

city

dem

and

in 2

030

(GW

h)

Baseline

Carbon Tax

Policy Scenarios• Baseline

– Tracks “business-as-usual” scenario (Alton et al. 2014 Applied Energy)

1. Carbon tax – US$30 per ton of CO2 from domestic burning fossil fuels– Gradually introduced over 2015-2024– Recycle revenues by uniformly lowering indirect tax rates

2. Lift import restrictions3. Combined “tax with imports” scenario

Electricity Demand and Prices

2010

2013

2016

2019

2022

2025

2028

2031

2034

-10

-8

-6

-4

-2

0

2

Carbon TaxImport policyTax with imports

Cha

nge

from

bas

elin

e (%

)

2010

2013

2016

2019

2022

2025

2028

2031

2034

-10

0

10

20

30

40

50Total demand (GWh) Average price (R/GWh)

Electricity Supply Mix

Baseline Baseline Carbon Tax

Import policy

Tax with imports

Baseline Carbon Tax

Import policy

Tax with imports

2010 2025 2035

0

100

200

300

400

500

600 Coal Nuclear Renewables Imported Diesal, gas and waste

Elec

tric

ity su

pply

(GW

h)

Emissions Reductions

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

-25

-20

-15

-10

-5

0

5

Carbon Tax

Import policy

Tax with importsCha

nge

from

bas

elin

e (%

) 13.3

11.4

13.0

10.2

Final per capita tCO2

Economic Outcomes

Baseline Deviation from baseline, 2035Carbon

TaxImport Policy

Tax with Imports

Cumulative investment cost (US$ bil.) 94.90 19.10 -12.70 -53.80 GDP growth (%) 3.49 -0.98 0.20 0.49 Employment (%) 1.80 -1.56 0.05 -1.07 Wages (%) 1.15 -1.46 0.14 -0.82 Household welfare (%) 1.91 -0.96 0.24 0.61 Low-income (p0-50) 1.93 -1.17 0.24 0.33 Middle-income (p50-90) 1.85 -1.00 0.24 0.53 High-income (p90-100) 1.96 -0.84 0.25 0.79

Conclusions: Regional Energy Strategy• Carbon tax on its own:

– Small negative economic impact, incl. reduced household welfare

• Lifting import restrictions without a tax:– Lowers investment costs and emissions, but gains are small

• Combining a carbon tax with import liberalization:– Halves investment costs and meets emissions targets without reducing growth

or welfare (but employment falls)

• Regional energy strategy offers a less expensive approach to “decarbonizing” the South African economy– Also addresses political economy concerns over adjustment costs

www.wider.unu.eduHelsinki, Finland