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Economics and Climate Economics and Climate Applications: Exploring the Applications: Exploring the
FrontierFrontier
Debra J. RubasDebra J. Rubas
Harvey S.J. HillHarvey S.J. Hill
James W. MjeldeJames W. Mjelde
Modeling Decision MakingModeling Decision Making
Decision TheoryDecision Theory
General Equilibrium ModelingGeneral Equilibrium Modeling
Game TheoryGame Theory
Mechanism DesignMechanism Design
Decision TheoryDecision Theory
One decision makerOne decision maker
At least one decisionAt least one decision
Fixed rulesFixed rules
Decisions of others are fixedDecisions of others are fixed
Decision Theory in Climate Decision Theory in Climate Applications IApplications I
Decision maker makes choices to Decision maker makes choices to maximizes an objective (generally profit)maximizes an objective (generally profit)
Without a forecast, decision maker uses Without a forecast, decision maker uses prior knowledge of climate conditions to prior knowledge of climate conditions to make decisionsmake decisions
Climate occurs and payoff is receivedClimate occurs and payoff is received
Decision Theory in Climate Decision Theory in Climate Applications IIApplications II
With a forecast, decision maker uses the With a forecast, decision maker uses the forecast to make decisions forecast to make decisions
Climate occurs and payoff is receivedClimate occurs and payoff is received
The value of the forecast is the difference The value of the forecast is the difference between the payoff with a forecast and the between the payoff with a forecast and the payoff without a forecastpayoff without a forecast
Decision Theory Examples IDecision Theory Examples I
Decision theory used most of four Decision theory used most of four approachesapproaches
Most studies assume away price effects Most studies assume away price effects (o.k. if one decision maker but (o.k. if one decision maker but inappropriate if many decision makers)inappropriate if many decision makers)
Most give a dollar value for climate Most give a dollar value for climate forecastsforecasts
Decision Theory Examples IIDecision Theory Examples II
Meza and Wilks - $5 Meza and Wilks - $5 - 22 / ha for potato - 22 / ha for potato farmers in U.S.farmers in U.S.
Jones Jones et al.et al. – $13 / ha for maize producers – $13 / ha for maize producers in Tifton, Georgia and $15 /ha for maize in Tifton, Georgia and $15 /ha for maize producers in producers in Pergamino, Pergamino, ArgentinaArgentina
Hamlet Hamlet et al.et al. - $153 million revenue - $153 million revenue increase for hydroelectric dam increase for hydroelectric dam managementmanagement
Game TheoryGame Theory
At least two decision makersAt least two decision makers
At least one decisionAt least one decision
Fixed rulesFixed rules
Decisions of others are not fixedDecisions of others are not fixed
Game Theory in Climate Game Theory in Climate ApplicationsApplications
Decision maker makes choice to maximize Decision maker makes choice to maximize objective given what he knows about other objective given what he knows about other players’ objectivesplayers’ objectives
Forecast value is the difference between Forecast value is the difference between the payoff when using the forecast and not the payoff when using the forecast and not using the forecast (as in decision theory)using the forecast (as in decision theory)
Game Theory ExampleGame Theory Example
Australia Adopts Canada Adopts U.S. Adopts
Aus Can U.S. Aus Can U.S. Aus Can U.S.
Mean % 6.29 -0.15 0.06 0.06 0.59 -0.28 1.01 1.32 2.83
Std. Dev. 8.39 1.64 1.47 10.00 10.02 10.24 5.14 5.53 2.00
Canada & Australia Adopt U.S. & Australia Adopt U.S. & Canada Adopt
Aus Can U.S. Aus Can U.S. Aus Can U.S.
Mean % 6.56 0.52 -0.34 7.19 1.20 2.76 1.13 1.37 2.29
Std. Dev. 13.65 10.28 10.27 9.85 5.93 2.53 11.52 11.36 10.61
U.S., Canada, & Australia Adopt
Aus Can U.S.
Mean % 7.53 1.33 2.22
Std. Dev. 14.80 11.66 10.66
Players:Players: Australia, U.S., and Canada Australia, U.S., and Canada
Decision:Decision: Use climate forecast or not in planting wheat Use climate forecast or not in planting wheat
Result:Result: All countries use climate forecasts All countries use climate forecasts
Mean Percentage Changes in Producer Surplus Over 20 Years for 1000 Simulations
General Equilibrium ModelingGeneral Equilibrium Modeling
All decision makersAll decision makers
All decisionsAll decisions
Fixed rulesFixed rules
Decisions of others are not fixedDecisions of others are not fixed
General Equilibrium Modeling in General Equilibrium Modeling in Climate ApplicationsClimate Applications
True general equilibrium modeling has not True general equilibrium modeling has not been used due to huge informational been used due to huge informational requirementsrequirementsWould have every decision maker Would have every decision maker maximize an objective containing all maximize an objective containing all possible decisions given the objectives of possible decisions given the objectives of all other decision makersall other decision makersValue of climate forecast would be Value of climate forecast would be determined as beforedetermined as before
Partial Equilibrium Examples IPartial Equilibrium Examples I
Though general equilibrium modeling has Though general equilibrium modeling has not been attempted, there have been not been attempted, there have been attempts at partial equilibrium modeling attempts at partial equilibrium modeling (limited players and or limited decisions)(limited players and or limited decisions)All studies we found show use of climate All studies we found show use of climate forecasts to improve overall welfare, forecasts to improve overall welfare, though some show consumers to benefit though some show consumers to benefit at the expense of producers, and some at the expense of producers, and some show both to benefit.show both to benefit.
Partial Equilibrium Examples IIPartial Equilibrium Examples II
Chen and McCarl and Chen, McCarl, and Chen and McCarl and Chen, McCarl, and Adams – societal welfare increases due to Adams – societal welfare increases due to increases in consumer surplus; producer increases in consumer surplus; producer surplus decreasessurplus decreases
Adams Adams et alet al. (2001) – US $10 million . (2001) – US $10 million annually for Mexican agricultureannually for Mexican agriculture
Hill Hill et al.et al. (2004) producer surplus and (2004) producer surplus and consumer surplus increase worldwideconsumer surplus increase worldwide
Mechanism DesignMechanism Design
All decision makers plus a “principle”All decision makers plus a “principle”
At least one decisionAt least one decision
Rules not fixed—chosen by principleRules not fixed—chosen by principle
Decisions of others are not fixedDecisions of others are not fixed
Mechanism Design in Climate Mechanism Design in Climate ApplicationsApplications
Mechanism design theory has not been Mechanism design theory has not been used to our knowledgeused to our knowledge““Principle” could choose best set of rules Principle” could choose best set of rules to maximize value of forecast useto maximize value of forecast useDecision makers make choices as before Decision makers make choices as before but now they also include rules set by the but now they also include rules set by the “principle” in the objective they are “principle” in the objective they are maximizing maximizing Value of forecast determined as beforeValue of forecast determined as before
Publishing Trends IPublishing Trends I
ISI Web of Knowledge SearchISI Web of Knowledge Search
““Climate” and “Forecast”Climate” and “Forecast”
““Climate,” and “Forecast” and “Value”Climate,” and “Forecast” and “Value” Shows applicationsShows applications
Disciplines where publishedDisciplines where published
Publishing Trends IIPublishing Trends II
0 0 0 0 0 0 2 25
2 3 52 3 5
1013 12
1518
2 1 2 1 16
28
21 2327
5249 50
62
52
8084
108
123
97
0
20
40
60
80
100
120
140
1985 1988 1991 1994 1997 2000 2003Year
Nu
mb
er
Climate and Forecast and Value
Climate and Forecast
Number of Published Articles Using ISI Web of Knowledge Search Engine for Searches of “Climate and Forecasts” and “Climate and Forecasts and Value”
Publishing Trends IIIPublishing Trends III
0
10
20
30
40
50
60
70
80
90
Subject Matter Category
Pe
rce
nta
ge 1985-1990
1990-1994
1995-1999
2000-2004
Percentage of Published Articles by Journal Subject Matter Type Using ISI Web of Knowledge Search Engine for Search of “Climate and Forecasts”
Reasons Climate Forecasts Seen Reasons Climate Forecasts Seen as Applied Issue in Social Sciencesas Applied Issue in Social Sciences
Lag between advance in one discipline Lag between advance in one discipline and use in other disciplinesand use in other disciplines
Funding originates from sources that do Funding originates from sources that do not typically fund social science researchnot typically fund social science research
Lack of communication between the Lack of communication between the disciplinesdisciplines
Resource/Environmental Resource/Environmental EconomicsEconomics
Pollution TradingPollution Trading
Natural Disaster MitigationNatural Disaster Mitigation
Climate ChangeClimate Change
Seasonal Forecast UseSeasonal Forecast Use
Technology AdoptionTechnology Adoption
Educational ApplicationsEducational Applications
Integrated ResearchIntegrated Research
ConclusionsConclusions
Traditionally, climate forecast applications have Traditionally, climate forecast applications have involved decision theory and have been involved decision theory and have been published in non-social science journalspublished in non-social science journals
There are many exciting opportunities for studies There are many exciting opportunities for studies using climate applications to contribute to the using climate applications to contribute to the economics of information, especially using game economics of information, especially using game theory and mechanism designtheory and mechanism design
This would increase our ability to accurately This would increase our ability to accurately value climate forecasts in different settings and value climate forecasts in different settings and would contribute to economic theorywould contribute to economic theory