Aftermath of Climate Change: A CGE Approach

Abstract

This research work is based on three different types of CGE models: the static GTAP-Energy model (1), the static GTAP-Poverty model (2), and a dynamic CGE-Water model (3). The dynamic CGE-Water model is the theoretical contribution of the present research work to the CGE modeling literature developed by linking a static GTAP-Water model and a dynamic GTAP-Energy model. All the CGE models in this research work use different types of data aggregation schemes based on the objectives of this research work.

Our simulation results show that climate change reduces welfare level in all the East Asian and South Asian countries. These simulation results are based on model 1 and dataset 1. After a 1 degree increase in temperature, welfare level declines the most in China, India and Japan. Major reason for the welfare decrease is adverse technical change as the current technology become obsolete after temperature increases. The same pattern persists after further rise in temperature. We believe that free trade can help to reduce such welfare losses. A comparison of 16 developing countries reveals that full liberalization scenario is more poverty friendly than the Doha Reforms scenario. These simulation results are based on model 2 and dataset 2.

Mitigation strategies are important to control GHG emission. However, it is important to figure out the optimal marginal abatement cost to reduce CO2 emissions in a country. Through the flexibility mechanisms, countries can decrease their marginal abatement costs, based on model 1 and dataset 3. Without global emission trading, marginal abatement costs are very high for the European countries (EU27), China and Korea. Many of these countries take benefit from the global emission trade as it decreases their marginal abatement costs. Emission trading reduces such costs in Korea, China, Japan, EU27 and rest of the Annex 1 countries. Through the flexible emission trade mechanisms, the world saves around US$ 400 billion a year globally.

The simulation results of our dynamic CGE-Water model reveals that our adaptation strategy to climate change effectively overcomes the negative effects of climate change, based on model 3 and dataset 4. It increases the crop yield that had reduced previously due to rising temperature level. We find that Nepal receives most of the advantages from this adaptation strategy as its output of rice, cereal crops, wheat, oilseeds, vegetables, fruits and sugarcane grows the most as compared to other South Asian countries under analysis. Crop production of rice as well as sugarcane escalates more than any other crop in Bangladesh and India after implementing this adaptation policy to climate change. Production of wheat and rice cops increases in Pakistan while the output of rice and sugarcane nurtures in Sri Lanka more than any other crop.

In case of East Asian countries, our simulation results show that irrigation efficiency increases the investment level in Korea and China while it falls down in Japan and the Rest of the World. One major reasons behind this fact is that expected rate of return in Korea and China increases more than Japan and the Rest of the World. These changes in investment are ultimately translated into change in real GDP. Our simulation results indicate that GDP of Korea and China increases more than the GDP of Japan and the Rest of the World overtime.