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14 IntegratedAssessment for IdentifyingClimateFinanceNeeds… 345 14.2 EstimationofResidualDamages inEconomic IntegratedAssessmentModelling 14.2.1 IAM-MethodsandModels EconomicIAMsareawidelyusedclassofmodels thatexplore theeconomicconse- quencesofdifferentgrowthpathsinthepresenceofclimatechangewiththeobjective ofmaximisingsocialwelfare(measuredbyGDP)overaspecifictimehorizon(Ortiz andMarkandya2009). Several IAMshavebeenused in this field,with differences thatareinpartamatterofsubjectivityinthemodellingdesign.2TheIAMstendtobe quiteaggregated,withasinglemeasureofoutput (GDP),which increasesover time through capital investment, population growth and technical change. In themodel set-up,GDP is reduced as a result of losses or damages causedby climate change. Thesedamagesare included throughfunctions that linkdamages inmonetary terms to climate variables such as temperature or precipitation (typically temperature is thevariablemostcommonlyused).Thesefunctionsandmonetarydamageestimates then feed into themodel set-up tocalculate the impactof thedamagesoneconomic output and growth, globally and for givenworld regions.Overall, the IAMs select levelsof thecontrolvariablessoas tomaximisethediscountedpresentvalueofwel- fare (usually represented byGDPor an adjusted version ofGDP) over the chosen timehorizon (usually2100orbeyond).Thekeycontrol variable hasbeen the level ofmitigation, butmore recently adaptationhas been added (the level of adaptation expenditures,whichreduceclimate-relateddamages).Levelsofthecontrolvariables are selectedaspartof adynamicwelfaremaximisingexercise (generally in10year timestepsandoftenuntil theyear2100)basedona trade-offbetween thecosts cli- matechangeimposesandthereductionitmakestoclimate-relateddamages:as long as adaptation costs are smaller thandamages avoided, climate changedamages are reduced.Thedamages remainingafter theadaptationhas takenplaceare referred to as residualdamages. 14.2.2 IAMMechanics:RelationBetweenAdaptation Expenditures,LossandDamageandResidualCosts Figure 14.1 is a guide to understanding the links between total climate damages, expenditures on adaptation and residual damages. The vertical axis represents the valueofdamages inmonetary terms.Theycanbe thoughtofasdamages inasingle periodor thepresent valueofdamagesover theplanninghorizon. In the latter case additional issues arise about interpretation,whichwediscuss later.ODis thevalue of thesedamages in theabsenceofanyadaptation. 2Further seeOrtiz andMarkandya (2009) for a detailed literature reviewof previous versions of IAMsforclimatechangeanalysiswithdamage functionsmentionedhere.