Assessing the Economy-Wide Effects of Climate Change Adaptation Options of Land Transport

Online supplementary material to Assessing the economy-wide effects of climate change adaptation options of land transport systems in AustriaRegional Environmental ChangeGabriel Bachner** University of Graz, Wegener Center for Climate and Global Change Email: [email protected] Tel.: +43 / 316 / 380 / 8454 Fax.: +43 / 316 / 380 /9830November, 20161. Current damage costsTable OSM-1: Current average annual weather induced damage costs in the road transport sector in Austria. (Source: Doll and Sieber 2010; European Union 2012 and own calculations) in M € in % of total Infrastructure Assets Operation Assets Operation Flood and Rain 23.90 0.19 51% 0% Ice and Snow 8.46 0.01 18% 0% Storm 3.73 0.02 8% 0% Heat 2.11 0.62 5% 1% Sum 38.20 0.84 82% 2%Vehicles Assets Operation Assets Operation Flood and Rain 4.76 0.97 10% 2% 1 Ice and Snow 0.00 0.01 0% 0% Storm 0.00 0.06 0% 0% Heat 0.02 0.00 0% 0% Sum 4.78 1.04 10% 2%Users Safety Time Safety Time Flood and Rain 0.18 1.18 0% 3% Ice and Snow 0.39 0.00 1% 0% Storm 0.00 0.11 0% 0% Heat 0.00 0.01 0% 0% Sum 0.56 1.30 1% 3%Table OSM-2: Current average annual weather induced damage costs in the rail transport sector in Austria. (Source: Doll and Sieber 2010)Cost category M € % Infrastructure damages 16.11 88% Service - Passenger detouring 0.56 3% Service - Freight detouring 0.26 1% Damages to vehicles 0.67 4% User time losses 0.77 4% sum 18.38 100%2. CGE model description2.1. Non-technical model descriptionAustria’s economy is modeled as a static, small open economy CGE model with 2008 as base year (based on Bachner et al. 2015). In total there are 46 domestic production sectors (see Table 6). Figure 4 gives the conceptual overview of the applied CGE model and shows flows of goods and services as well as production factors (monetary flows run in the respective opposite directions). The representative private household (privHH) is endowed with the production factors labour (L) and capital (K) and obtains transfers from the government (GOV). The production factors are used in domestic production (X) together with intermediate inputs to produce goods and services which are either used domestically or2 exported (EX). According to Armington (1969) goods and services produced in different world regions are not perfectly substitutable, thus every region treats its imports (IM) and goods from domestic production(D) differently. Therefore the so called “Armington aggregate” (G) bundles goods and services coming from domestic production and other world regions, which can be substituted with sector specific elasticities. Goods and services from G are then either used as intermediate input for production or are consumed by private households (privHH) and the government (GOV). The government collects taxes which are levied on L and K (input taxes) as well as taxes on production and consumption (output taxes). By definition all flows within a correctly calibrated model lead to the benchmark equilibrium, depicting the current status of the economy in terms of annual flows. When this benchmark equilibrium is shocked the model adjusts relative prices and demand and supply quantities such that a new equilibrium emerges, where all flows are balanced again. By comparing system variables prior and after a shock it is possible to capture macroeconomic and societal effects.L,K Private households Domestic production privHH intermed. X demand final Armington aggregate Domestic supply demand G DIM EX Government GOV Rest of world ROWFigure OSM-1: Diagrammatic overview of the CGE model (source: Bachner et al. 2015)Table 6 shows the economic sectors of the CGE model. The original NACE sectors V49 (Land Transport) and V52_53 (Warehousing and support activities for transportation) had been disaggregated to five transport service sectors and three transport supporting sectors (including infrastructure).3 Table OSM-3: Economic sector aggregates with respective NACE and model code (Land transport sectors printed in bold)NACE model Sector description code code V01 Crop and animal production, hunting and related service activities AGRI V02 Forestry and logging FORE V86 Human health activities HEAL V87_88 Residential care activities; Social work activities without accommodation RECA V36 Water collection, treatment and supply WATE Sewerage; Waste collection, treatment and disposal activities; materials V37_39 WAST recovery; Remediation activities and other waste management services V35 Electricity, gas, steam and air conditioning supply ELEC V19 Manufacture of coke and refined petroleum products COKE Manufacture of machinery and equipment n.e.c.; Manufacture of electrical V28_29 MACH equipment Construction of buildings; Civil engineering; Specialised construction V41_43 CONT activities V68 Real estate activities REAL V71 Architectural and engineering activities; technical testing and analysis ARCH Wholesale and retail trade and repair services of motor vehicles and V45 MOTO motorcycles Freight transport rail FRRAIL Long range passenger transport rail PSRAIL V49 Short range public transport SHTR Freight transport road FRROAD Rest of Land transport and transport via pipelines REST V50 Water transport WTRA V51 Air transport ATRA Supporting activities for road transport; Road Infrastructure STROAD V52_53 Supporting activities for rail transport; Road Infrastructure STRAIL Warehousing and other support activities for transportation; Postal and STREST courier activities V10, Manufacture of food products; Manufacture of tobacco products FOOD V12 V11 Manufacture of beverages BEVE Manufacture of wood and of products of wood and cork, except furniture; V16 WOOD manufacture of articles of straw and plaiting materials V17 Manufacture of paper and paper products PAPE V20 Manufacture of chemicals and chemical products CHEM Manufacture of basic pharmaceutical products and pharmaceutical V21 PHAR preparations Manufacture of rubber and plastic products; Manufacture of other non-metallic V22_23 PLAS mineral products Manufacture of basic metals; Manufacture of fabricated metal products, except V24_25 META machinery and equipment4 NACE model Sector description code code Rest of manufacturing (Manufacture of textiles; Manufacture of wearing V13_15, apparel; Manufacture of leather and related products; Printing and V18, reproduction of recorded media; Manufacture of computer, electronic and RMAN V26_27, optical products; Manufacture of electrical equipment; Manufacture of other V30_33 transport equipment; Manufacture of furniture; Other manufacturing; Repair and installation of machinery and equipment) Wholesale trade, except of motor vehicles and motorcycles; Retail trade, V46_47 TRAD except of motor vehicles and motorcycles V64 Financial service activities, except insurance and pension funding FINA V65 Insurance, reinsurance and pension funding, except compulsory social security INSU V66 Activities auxiliary to financial services and insurance activities AFIN V84 Public administration and defence; compulsory social security PUBL V55_56 Accommodation; Food and beverage service activities ACCO V79 Travel agency, tour operator and other reservation service and related activities TRAV V90 Creative, arts and entertainment activities ENTE V91 Libraries, archives, museums and other cultural activities CULT V93 Sports activities and amusement and recreation activities SPOR Fishing and aquaculture; Mining of coal and lignite, Extraction of crude V03, petroleum and natural gas, Mining of metal ores, Other mining and quarrying, REXT V05_09 Mining support service activities V58 Publishing activities Motion picture, video and television programme production, sound recording V59_60 RECR and music publishing activities; Programming and broadcasting activities V92 Gambling and betting activities Legal and accounting activities; Activities of head offices, management V69_70 consultancy activities V72 Scientific research and development SCIE V73 Advertising and market research V74_75 Other professional, scientific and technical activities; Veterinary activities V61 Telecommunications Computer programming, consultancy and related activities; Information V62_63 TELE service activities V95 Repair of computers and personal and household goods V77 Rental and leasing activities V78 Employment activities Security and investigation activities; Services to buildings and landscape V80_82 activities; Office administrative, office support and other business support activities V85 Education RSER V94 Activities of membership organisations V96 Other personal service activities Activities of households as employers of domestic personnel; Undifferentiated V97_98 goods- and services-producing activities of private households for own use V99 Activities of extraterritorial organisations and bodies 5 Domestic production X of sector i is characterized by a nested constant elasticity of substitution (CES) function (see Figure 5, top; lowercases represent elasticities of substitution). On the first level of production of commodity i, a capital-labour-energy composite ((KL)E) can be substituted for an intermediate material-transport composite (MATR) with the sector specific elasticity of substitution top.On the second level of the nesting structure there are two branches: First, (KL)E is produced by a capital- labour composite (KL) and an energy composite E (consisting of sector inputs from COKE, ELEC andREXT) which can be substituted for each other with a sector specific elasticity kle. On the second branch,MATR is produced using a material and services composite (MA) which subsumes inputs from all sectors except the energy sectors and the transport sectors (Gi-Gk; including imports). These intermediate inputs can be substituted against each other with the sector specific elasticity int. Next to material inputs also transport serves as input in the production process of every sector; represented by composite TRAN. It is divided into land transport (LT, which trades off between FRRAIL and FRROAD), water transport (WT), air transport (AT) as well as other transport (REST). Elasticities of substitution are based on Okagawa andBan (2008). Regarding the elasticities between MA and TRAN we assume matr = 0.1, between different transport modes we assume tr = 0 (fixed proportions of transport modes used) and trl 0.9 (reflecting the possibility of substitution between rail and road but to a limited extent).This general production structure applies for all economic sectors i except for the five transport service sectors FRRAIL, PSRAIL, SHTR, FRROAD and REST, which additionally demand inputs from transport infrastructure providers (Figure 5, middle). Passenger transport services (PSRAIL, SHTR and MIT) are not included in the production process of Xi, as those services are demanded solely by privHH.Regarding final demand of privHH, the aggregate demand function (composite W) is depicted in Figure 5(bottom). On the top level the composite NEE combines non-energy goods (NE) with energy consumption(E, consisting of COKE, ELEC and REXT). Similar to the production structure of domestic production theNE composite is produced using commodities Gi to Gk but with a different elasticity of substitution (nene).The composite NEE can be traded off with an elasticity of substitution of s with a transport composite6 (TRA). TRA consists of MIT as well as public transport (PBTR) which in turn subsumes inputs from the transport sectors AT, WT as well as LT. The latter trades off services across SHTR, PSRAIL and REST.1 1 The elasticities of substitution regarding different transport modes are based on Abrell et al. (2010) as well as Paltsev et al. (2005, 2004) with s = 0.5 and u = 0.2. Elasticities tr and ltr are assumed to be 0.1, reflecting rather rigid preferences regarding the choice of transport modes of households.7 Xi top (KL)E MATR kle matr KL E MA TRAN kl ene int tr … K L COKE ELEC REXT Gj Gk LT WT AT REST trl FRRAIL FRROADXTRANS top (KL)E MTIN kle 0 KL E MATR INFR kl ene matr 0 K L COKE ELEC REXT MA TRAN STROAD STRAIL STREST int tr … Gi Gk LT WT AT REST trl FRRAIL FRROADW s NEE TRA v u NE E MIT PBTR nene ene tr AT WT LTH Gi … Gk COKE ELEC REXT ltr SHTR PSRAIL RESTFigure OSM-2: Nested constant elasticity of substitution function for: domestic production (top), the transport service sectors (middle), demand function of private households (bottom).8 2.2. Mathematical model formulationThe CGE model is formulated as a system of non-linear inequalities. More precisely the Arrow-Debreu economic equilibrium can be stated as a mixed complementarity problem (MCP) where three inequalities must be satisfied (Mathiesen 1985): (i) zero profit condition, (ii) market clearance condition and (iii) income balance condition. The first condition is determining activity levels, the second price levels and the third defines income levels. In the algebraic model formulation the unit profit function is used for notation. Z is the regarded activity of sector (or commodity) i. The unit profit function is based on the constant elasticity of substitution (CES) production function in calibrated share form (see for exampleBöhringer and Wiegard (2002)). Initial benchmark data refers to the year of 2008.2.2.1. Zero profit conditionsThe zero profit condition requires that any production activity which produces positive quantities must earn zero profits. Thus, the value of inputs must be greater or equal than the value of outputs. Therefore either a positive amount is produced and profits are zero or profits are negative and the output is zero.Production of XiUnit profits of domestic production X of sector i () are determined by two parts: Revenue per unit and unit costs. The former part is the domestic price p of good i () net of the sector specific domestic benchmark output tax . The latter part is determined by (benchmark costs of item i in domestic production X) which is divided by (benchmark production of sector i). The resulting benchmark unit costs are then multiplied by sector specific relative prices of inputs or input aggregates (equilibrium price divided by the benchmark price ) which are weighted with sector specific value shares of inputs or input aggregates a.Note that in the benchmark case the whole term in curly brackets is equal to 1. Substitution elasticities between inputs or input aggregates are reflected by .9 (1) Sector specific capital-labor-energy aggregate ((KL)E)(2) Sector specific capital-labor aggregate (KL)(3) Sector specific energy aggregate (E)(4) With nrg being all energy sectors (COKE, ELEC, REXT)Sector specific material-transport aggregate (MATR)(5) Sector specific material aggregate (MA)(6) 10 Sector specific transport aggregate (TRAN)(7) Sector specific land transport aggregate (LT)(8) Production of transport sectors (XTRANS)(9) Transport sector specific material-transport-infrastructure aggregate (MTIN)(10) 11 Transport sector specific land transport infrastructure aggregate (INFR)(11) Armington aggregate (G):(12) Welfare of private household (W):(13) Household non-energy consumption (NE):(14) Household energy consumption (E):(15) With nrg = COKE, ELEC, REXT12 Household non-energy-energy consumption aggregate (NEE):(16) Household transport consumption aggregate (TRA):(17) Household public transport consumption (PBTR):(18) With j = AT, WT, LTHHousehold public land transport consumption aggregate (LTH):(19) With j = SHTR, PSRAIL, RESTWelfare of government (WGOV):(20) 13 Aggregate imports and exports:Exports are used to create foreign exchange (FX) which is used to purchase imports (IM). In the benchmark social accounting matrix of Austria there are positive net exports. The resulting excess FX is assumed to be spent for investment.(21) (22) Domestic supply:Domestic supply D is modeled as a constant elasticity of transformation (CET) function. Domestic production X is either allocated to domestic supply D (which is then used as input in the Armington aggregate G) or to exports EX).(23) Investment:(24) 14 2.2.2. Market clearance conditionsThe market clearance conditions require that all goods with a positive price must have a balance between demand and supply. Any goods in excess supply must have zero prices. Derivation of unit profit functions with respect to prices gives the respective compensated demand quantities which must be smaller or equal to supply (Shephard’s Lemma).Labor market:Aggregate labor endowment has to be larger or equal labor demand, which is the sum of all labor demand by all sectors. Labor demand of sector i is calculated by derivation of the unit profit function of domestic production of this sector with respect to the wage rate (price for labor) and multiplying it by the activity level of domestic production . We allow for unemployment in equilibrium by applying a minimum wageω which has to be equal or greater than the price of the welfare good pW. is rationed or expanded by an endogenous parameter such that this constraint is met. The change in this parameter then gives the change of unemployment.(25) (26) Capital market:(27) Sector specific energy aggregate:(28) 15 Sector specific capital-labor aggregate:(29) Sector specific capital-labor-energy aggregate:(30) Sector specific material aggregate:(31) Sector specific material-transport aggregate:(32) Sector specific material consumption:(33) Sector specific transport aggregate:(34) Sector specific land transport aggregate:(35) Transport sector specific material-transport-infrastructure aggregate:(36) 16 Transport sector specific land transport infrastructure aggregate:(37) Sectoral domestic supply; including XTRANS (for Armington aggregate and export markets):(38) Import aggregate:(39) Armington aggregate:(40) Household energy consumption:(41) Household non-energy consumption:(42) Household non-energy-energy aggregate consumption:(43) Household transport aggregate:(44) 17 Household public transport aggregate:(45) Household public land transport aggregate:(46) Welfare of household:(47) Welfare of government:(48) 2.2.3. Income balance conditionsIncome balance condition requires that every agent’s income must equal the value of endowments.Household income:Household income equals the total value of labor and capital income of private households (wage rate times benchmark labor endowment plus rental rate (price of capital) times benchmark capital endowment) plus unemployment benefits (UBEN) and other transfers (TRANS) from the government. (49) In addition the private household is endowed with annual savings and depreciation , which drive the extent of annual investment. The composition of investments however is flexible. Hence the household does not decide whether to consume or invest, since investment is given exogenously. 18 (50) Government income:(51) (52) 3. Damage reduction Parameter ri,a is the direct reduction factor to reduce damages d to cost category i (e.g. infrastructure assets), using adaptation measure a (e.g. enlargement of drainage systems), aiming at impact category j(e.g. Flood and Rain):Calculating the product of all reduction factors across adaptation measures for a certain cost category, and subtracting it from 1 yields the damage reduction DR in %:To add co-benefits across transport sectors, parameter c is introduced, capturing the co-benefits for cost category i from adaptation measures b (≠ a) in other transport sectors:Table OSM-4: Climate change impacts and damage reduction by adaptation in the road and rail transport sectors.Cost category Damage Damage reduction Direct reduction by all impact by all measure measures s [M € [%] [M € p.a.]19 p.a.] Road Infrastructure Assets 38.2 64.70% -24.73 Operation 0.84 16.70% -0.14 Vehicles Assets 4.78 44.00% -2.11 Operation 1.04 16.70% -0.17 Users Safety 0.56 41.60% -0.23 Time loss 1.3 25.30% -0.33 Sum 46.73 -27.71Rail Infrastructure Assets 16.11 73.00% -11.76 Detouring passenger Service 0.56 16.70% -0.09 transport Detouring freight transport 0.26 16.70% -0.04 Vehicles Assets 0.67 19.60% -0.13 User Passengers 0.17 16.70% -0.03 Freight 0.61 16.70% -0.1 Sum 18.38 -12.1620 4. Further results D D L L L A A I I I T O A A A R O N T R R R R R T I O T S T H R R F S F P S S M C 0.5% l e v e l 0.0% t u p t -0.5% u o n i -1.0% e g n a h -1.5% c-2.0% impact w/o adaptation with adaptation (residual) D D L L L A A I I I T O A A O A R N T R R R R R T I O T S T H R R F S F P S S M C 60 l e v 40 e l t u 20 p t € u M o0 n n i i e g -20 n a h -40 c-60 impact w/o adaptation with adaptation (residual)Figure OSM-3: Sectoral effects of climate change impacts and adaptation in the transport sectors as well as the construction sector in % and in M € p.a. of output relative to the benchmark equilibrium. (FRROAD: freight road, STROAD: road infrastructure provision, FRRAIL: freight rail, PSRAIL: passenger rail, STRAIL: rail infrastructure provision, SHTR: short range public transport, MIT: motorized individual transport, CONT: construction)21 -0.10% -0.05% 0.00% 0.05% AGRI FORE REXT FOOD RMAN PLAS META MACH TRAD RECR TELE SCIE RSER BEVE WOOD PAPE COKE CHEM PHAR ELEC WATE WAST MOTO WTRA ATRA ACCO FINA INSU AFIN REAL ARCH TRAV PUBL HEAL ENTE CULT SPOR INV impacts net effect of adaptation residual impactsFigure OSM-4: Sectoral effects of climate change impacts and adaptation in % of output relative to the benchmark equilibrium (see Table 6 for abbreviations).22 Table OSM-5: Net effects of adaptation and macroeconomic benefit-cost ratios. Adaptation Macroeconomic benefit- Net effect of adaptation costs [M € cost ratio [M € p.a.] p.a.] GDP Welfare GDP Welfare Road Enlargement of drainage systems +5 +9 4.31 1.16 2.09 Additional vegetation management +25 +31 20.88 1.20 1.48 Additional hydrological stations for early +19 +26 0.28 67.86 92.86 warning systems Increase in visual inspection of roads +7 +14 1.38 5.07 10.14Rail Enlargement of drainage systems +15 +17 0.22 68.18 77.27 Additional vegetation management +14 +16 1.06 13.21 15.0923 ReferencesAbrell J (2010) Regulating CO2 emissions of transportation in Europe: A CGE-analysis using market-based instruments. Transportation Research Part D: Transport and Environment 15:235-239. Bachner G, Bednar-Friedl B, Nabernegg S, Steininger KW (2015) Economic Evaluation Framework and Macroeconomic Modelling. In: Steininger KW, König M, Bednar-Friedl B, Kranzl L, Loibl W, Prettenthaler, F. (ed) Economic Evaluation of Climate Change Impacts: Development of a Cross- Sectoral Framework and Results for Austria. Springer, Berlin, pp 101-120 Böhringer C and Wiegard W (2002) Methoden der angewandten Wirtschaftsforschung: Eine Einführung in die numerische Gleichgewichtsanalyse (No. 3-2), ZEW Discussion Paper. Zentrum für Europäische Wirtschaftsforschung, Mannheim. Doll C and Sieber N (2010) Vulnerability Assessment for Road Transport. Contribution to Deliverable 2: Transport Sector Vulnerabilities within the research project. http://www.weather- project.eu/weather/downloads/Deliverables/WEATHER_D2_Appendix--B_Annexes-by- Mode_20110610.pdf. Accessed 14 March 2014 European Union (2012) EU Transport in Figures. Statistical Pocketbook 2012. Publications Office of the European Union, Luxembourg. http://ec.europa.eu/transport/sites/transport/files/facts- fundings/statistics/doc/2012/pocketbook2012.pdf. Accessed 23 May 2013. Mathiesen L (1985) Computational experience in solving equilibrium models by a sequence of linear complementarity problems. Operations research 33:1225-1250. Paltsev S, Jacoby HD, Reilly JM, Viguier L, Babiker M (2005) Transport and climate policy modeling the transport sector: The role of existing fuel taxes in climate policy. Springer. Paltsev S, Viguier L, Babiker M, Reilly J, Tay KH (2004) Disaggregating household transport in the MIT- EPPA model. MIT Joint Program on the Science and Policy of Global Change, Technical Note, Cambridge.24

Assessing the Economy-Wide Effects of Climate Change Adaptation Options of Land Transport

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