Four main strands of socio-economic modeling:

1. Agent-based, system dynamic models (ECF, MADIAMS)

2. Participatory agent-based models (FEEM, Carlo Giupponi)

3. General equilibrium models, including induced technological change (FEEM )

4. Regional, sector-based models focusing on Arctic (Russian, Norwegian and other partners)

CLIMARES – possible contributions from ECF and other partners to socio-economic modeling of the Arctic regions

Klaus Hasselmann, Max Planck Insitute of Meteorology and ECF

CLIMARES – possible contributions from ECF and other partners to socio-economic modeling of the Arctic regions

Klaus Hasselmann, Max Planck Insitute of Meteorology and ECF

Four main strands of socio-economic modeling:

1. Agent-based, system dynamic models (ECF, MADIAMS) New modeling trend, but exists so far only in global version

2. Participatory agent-based models (FEEM, Carlo Giupponi) Experience in regional applications (river basin areas), but not yet in

larger areas such as Arctic

3. General equilibrium models, including induced technological change (FEEM)

Reduced credibility through global financial crisis and recession, but important as reference to main stream

4. Regional, sector-based models focusing on Arctic (Russian, Norwegian and other partners)

Essential for bringing all strands together

CLIMARES – possible contributions from ECF and other partners to socio-economic modeling of the Arctic regions

Four main strands of socio-economic modeling:

1. Agent-based, system dynamic models (ECF, MADIAMS) New modeling trend, but exists so far only in global version

2. Participatory agent-based models (FEEM, Carlo Giupponi) Experience in regional applications (river basin areas), but not yet in

larger areas such as Arctic

3. General equilibrium models, including induced technological change (FEEM ?)

Reduced credibility through global financial crisis and recession, but important as reference to main stream

4. Regional, sector-based models focusing on Arctic (Russian, Norwegian and other partners)

Essential for bringing all strands together

Traditional coupled climate-economic (integrated assessment-IA) model

climate system

economic system

climate policy

ghg emissions

impacts on production,welfare,…

regulatory instruments

scenario predictions

climate system

economic system

climate policy

ghg emissions

impacts on production,welfare,…

regulatory instruments

scenario predictions

“invisible hand“ establishes market equilibrium

Traditional coupled climate-economic (integrated assessment-IA) model

climate system

economic system

climate policy

ghg emissions

impacts on production,welfare,…

regulatory instruments

scenario predictions

MADIAM (Multi-Actor Dynamic Integrated Assessment Model)

Dynamic evolution, governed by agent strategies

Actors: governments, public, media, consumers, firms, workers, …

k

kdummy

hhat

g

yk

ykdummy

yh

yg

kdeprec

hdeprec

gdecrease

hlnbydo

lambdaL

totconsum

kinit

hinit

ginit

y

lambdak

lamdah

Main routine: production outputs in physical goods units

<rhok>

<rhoh>

<rhog>

<yA>

<shconsum><weconsum>

(Vensim diagram)

The “real economy”: Production output in physical units

k

kdummy

hhat

g

yk

ykdummy

yh

yg

kdeprec

hdeprec

gdecrease

hlnbydo

lambdaL

totconsum

kinit

hinit

ginit

y

lambdak

lamdah

Main routine: production outputs in physical goods units

<rhok>

<rhoh>

<rhog>

<yA>

<shconsum><weconsum>

(Vensim diagram)

The “real economy”: Production output in physical units

y: total production

, invested in:

k: physical capitalh: human capitalg: consumer goods and

services

Monetary subroutines 3: money circulation

fmliquidity hsliquidity

reserves

fminterest

fmcreditupt

w

consum$

moncreatrate<fmcredituptA>

<wA>

hsinterest

hssavrate

<moncreatrateA>

<hssavrateA><hsinterestA>

<consum$A>

<fminterestA>

The “virtual economy” (financial system): money circulation between firms, banks and households

Extensions to analyze impact of climate policies

1. Governments, with policies for carbon taxes, subsidies and recycling of tax income

2. Investment strategies: capital investments subdivided into fossil and renewable energies and energy efficiency

3. Consumer preferences for climate friendly and climate hostile goods

4. Assessment of climate change damages

Model M3a. BAU / MM (Moderate Mitigation)

Model M3a. ITC (Induced Technological Change)

Model M3a. Relative demand Good1(climate-friendly)/Good2(climate-hostile)

Emissions

0

5

10

15

20

25

30

0 20 40 60 80 100

time [y]

Emis

sion

s [G

t C] BAUw

m

s

Production

0

5

10

15

20

0 20 40 60 80 100

time [y]

norm

aliz

ed p

rodu

ctio

n

BAU

w

ms

(a) (b)

Model M3a. mitigation measures: w: weak, m: moderate, s:

strong

Is climate change mitigation affordable?

2000 2100

1% BAU growth

2 -GDP (log Scale)

1 -

3 -

4 -

2000 2100

1% GDP loss corresponds to a delay of 1 year over a period of 100 years–an affordable insurance premium to avoid the risk of dangerous climate change! (see also Azar and Schneider,2002)

2 -

1 -

3 -

4 -

BSP (log Skala)

Is climate change mitigation affordable?

1% BAU growth

Extensions to analyze impact of climate change in Arctic:

1. Include instabilities related to actor behaviour (e.g. financial crisis, business cycles, investment booms and busts)

Textbook view of equilibrium in supply and demand in relation to price (Samuelson and Nordhaus)

System dynamics representation of supply-demand-price interdependence dS/dt = F (S,D,P) (S = supply)

dD/dt = G (S,D,P) (D = demand)

dP/dt = H (S,D,P) (P = price)

dS/dt = F (S,D,P) (S = supply)

dD/dt = G (S,D,P) (D = demand)

dP/dt = H (S,D,P) (P = price)

General result: A system of three first-order ordinary differential equations can have solutions representing:

• a damped periodic, monotonic or non-monotonic (e.g. boom-bust) transition to an equilibrium point

• a stable convergence to a periodic attractor

• an unstable trajectory diverging to infinity

• a bounded, non-periodic chaotic trajectory

Which type of solution is realized depends on the initial conditions and the behaviour of the economic actors

System dynamics representation of supply-demand-price interdependence

supply

2

1.5

1

0.5

0

0 1 2 3 4 5 6 7 8 9 10Time (Year)

supply : Talk 4 M1 good/Yearsupply : Talk 3 M1 good/Yearsupply : Talk 2 M1 good/Yearsupply : Talk 1 M1 good/Year

demand

2

1.5

1

0.5

0

0 1 2 3 4 5 6 7 8 9 10Time (Year)

demand : Talk 4 M1 good/Yeardemand : Talk 3 M1 good/Yeardemand : Talk 2 M1 good/Yeardemand : Talk 1 M1 good/Year

price

2

1.5

1

0.5

0

0 1 2 3 4 5 6 7 8 9 10Time (Year)

price : Talk 4 M1 $/goodprice : Talk 3 M1 $/goodprice : Talk 2 M1 $/goodprice : Talk 1 M1 $/good

General equilibrium model: evolution to joint equilibrium in supply, demand and price for four different initial conditions

supply

4

3

2

1

0

0 2 4 6 8 10 12 14 16 18 20Time (Year)

supply : Run 3a-M5 good/Yearsupply : Run 3c-M5 good/Year

demand

4

3

2

1

0

0 2 4 6 8 10 12 14 16 18 20Time (Year)

demand : Run 3a-M5 good/Yeardemand : Run 3c-M5 good/Yearprice

4

3

2

1

0

0 2 4 6 8 10 12 14 16 18 20Time (Year)

price : Run 3a-M5 $/goodprice : Run 3c-M5 $/good

Boom-bust model:

Equilibrium model:

Business cycle model: two-feedback loops, one postive (unstable), one negative (stabilizing)

consumption decrease delcons

production decrease delypositive loop

negative loopwage decrease delw employm. increase

increase

demand

supply

price

Extensions to analyze impact of climate change in Arctic:

1. Include instabilities related to actor behaviour (e.g. financial crisis, business cycles, investment booms and busts)

2. Regionalization: different countries, different geographic regions

3. Sector resolution: different economic sectors (fishing, transportation, resources, tourism)

4. Feedbacks of consumer behaviour

5. Assessment of climate change damages

6. Uncertainty and risk assessment

Strategy:

Develop hierarchy of models with gradually increasing complexity

Strategy:

Develop hierarchy of models with gradually increasing complexity

And apply Occam’s razor:

use the simplest model that explains the phenomenon!