CCE

What is the target GHG emission ?

550 PPM

3 mechanisms in Kyoto protocol

international emissions trading (IET), joint implementation (JI), and Clean Development Mechanism (CDM)

Externalities

"An externality is present whenever some individual's utility or production relationships include real variables, whose values are chosen by others. . . without particular attention to the effects on that person's welfare."

Intra-generational equity

- Deciding about the optimal abatement across world regions - Balancing the burden of abatement between nations - Accounting for regional differences in wealth when evaluating damage costs (How to value damages in rich vs. poor countries?) social equity among all people of the world

Intergenerational equity

- Deciding about the optimal abatement path over time - Distributing the burden of abatement between the present and future generations Choice of discount rate

Which criteria is accounted for when choosing which instrument is best to correct externalities?

- Ecological accuracy - Static cost-effectiveness - Dynamic cost-effectiveness - Political acceptability (polluters)

A good (or service) can be:

- Rival: when an agent's consumption of the good is at the expense of another's consumption e.g. eating apple - Excludable: when agents can be prevented from consuming the good e.g. magazine.

Characteristics of the Indifference curves

- The further the indifference curve is from the origin, the higher the Utility • The slope of the indifference curve is normally negative • The indifference curve is normally convex • The indifference curves do not intercept

Problems with Coasian Theorem

1) The assignment problem: In cases where externalities affect many agents (e.g. global warming), assigning property rights is difficult. 2) The holdout problem: Shared ownership of property rights gives each owner power over all the others (because joint owners have to all agree to the Coasian solution) 3) Transaction Costs and Negotiating Problems: The Coasian approach ignores the fundamental problem that it is hard to negotiate when there are large numbers of individuals on one or both sides of the negotiation.

Clean Development Mechanisms Goals

1) to assist countries without emissions targets (ie developing countries) in achieving sustainable development. 2) help those countries with emission reduction targets under Kyoto (ie developed countries) in achieving compliance by allowing them to purchase offsets created by CDM projects

Efficiency in allocation requires efficiency in:

1. Consumption 2. Production

2 types of Damage from pollution

1. Flow-damage pollution 2. Stock-damage pollution

Main drivers of uncertainties in IAM results

1. Model structure 2. Abatement costs and the endogeneity of technological change 3. Equity across time and space 4. Uncertainty in climate outcomes

Classifying integrated assessment models

1. Optimal growth (or welfare optimisation) models 2. General equilibrium models 3. Partial equilibrium models 4. Simulation models 5. Cost minimization models

Ecological economists believe: Stabilization of GHG emissions is achieved by introducing an emissions-trading system:

1. the sale of transferable emissions permits 2. the tightening of emissions caps to stabilize the concentration of GHG 3. A heavy reliance on permit prices

How much would it cost to achieve measures of Paris Agreement?

1.5% of World's Income - Best possible scenario 4% in less favorable scenarios

If slope of MB curve is greater than slope of MD curve, which is prferred?

A Price mechanism

Accounting for macroeconomic feedback

A common approach is to treat abatement costs as a pure loss of income • This mean that modeling abatement costs as a dead-weight loss implies that there are no "good costs" But many costs do not fit this pattern, because: • Money spent wisely can provide jobs or otherwise raise income. • Abatement costs more closely resemble additions to capital, rather than subtractions from income.

Feedback effects

A feedback effect occurs when an initial change, such as higher temperatures, which in turn produces changes in physical processes that amplify or decrease the initial effect

Pareto Efficiency

A gain by one or more persons without anyone else suffering • Summation of all the gains Pareto optimal, or Pareto efficient

Budget line

A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.

If slope of MD curve is greater than MB curve, which is preferred?

A quantity instrument

What is utility?

A simple way of describing consumer preferences

Global greenhouse gas emissions by sector

Agriculture, Forestry, and Other Land Use (24% of 2010 global greenhouse gas emissions): Greenhouse gas emissions from this sector come mostly from agriculture (cultivation of crops and livestock) and deforestation. Agricultural production represented 13% Deforestation accounts for 11% of human caused global greenhouse gas emissions

Scientific/Ecological accuracy

Aim is to achieve some emission target, or stock of GHGs in the atmosphere • Instrument must make sure that we achieve this target!!

Greenhouse gas emissions

An Ecological externality and • Typical case of overexploitation. of a resource that is a common/public good

What would happen if this condition (consumption efficiency) did not hold?

An allocation (e.g. of X and Y) is efficient if it is not possible to make one or more persons better off by changing the allocation.

"Normal" goods

Are rival and excludable (plane ticket, groceries)

How does the budget line shift outward?

An increase in income

Quantifying the costs of climate change in terms of monetary values pose ethical issues

Because it capture the effects of climate change which have an impact in terms of economic production or when the impacts can be expressed in monetary terms • Climate change has a differential impact on the economic sectors • Omitting some of the most devastating ecological effects of climate change.

Math of emission reduction Kaya Identity:

CO Emissions = Population × GDP/Population × Energy Consumption/GDP × Emissions Energy/Consumption 𝑪 = 𝑵 × 𝒀/𝑵 × 𝑬/𝒀 × 𝑪/𝑬

Climate change as an externality

Climate change or the accumulation of GHG is a negative externality on all citizens of the world • Agents choose actions such as driving cars, producing goods which produce pollution as a by-product • Pollution being emitted compared to the allocative efficient outcome. (Graphed in next lecture) • The effect of GHG is a public "bad" (good).

Greenhouse gases

Clouds, water vapor, and the greenhouse gases carbon dioxide (CO2), methane, nitrogen oxide, and ozone. These create a greenhouse effect.

Global carbon dioxide emissions

Coal combustion is responsible for about 42% Liquid fuels are the source of 33%

Marginal abatement costs

Costs of reducing an additional unit of carbon depending on the measure taken

Why do externalities create inefficiencies in markets

Costs/Benefits of externalities are not borne by decision makers so therefore not taken into account when decisions are made.

Results of Stern Review

Damage cost of climate change: equivalent to losing at least 5% of global GDP each year, now and forever (up to 20% of GDP, if a wider range of risks and impacts is taken into account) • Cost of climate change mitigation: equivalent to losing around 1% of global GDP each year (with the goal of a stabilization between 500 and 550ppm CO2e).

Ex: Demand decreases, but supply doesn't change

Demand curve shifts to the left, equilibrium price and quantity decrease

Ex: When demand increases, but supply doesn't change.

Demand curve shifts to the right, equilibrium price and quantity go up

Relationship between CO2 concentrations and temp ranges

Depending on the PPM of CO2, predicted temperature increases range

Structure of IAM

Economic dynamics -> Carbon Cycle -> Climate Dynamics -> Damage function

Consumption Efficiency

Efficiency occurs when the marginal rates of utility substitution are equal among the individuals: MRSA = MRSB

Efficiency in Production

Efficiency will hold when the marginal rate of technical substitution (MRTS) (between the goods X and Y) are identical for both goods: MRTSX = MRTSY

The stock pollution problem:

Emissions (M) accumulate and create a stock (A) of a harmful substance. 𝑫 = 𝑫(𝑨)

Free-riding Behavior

Everyone profits from public goods even if he or she does not contribute to the production costs

Strengths of IAMs

Explore interactions and feedbacks between the different domains • Serve as flexible and rapid simulation tools • Provide consistent frameworks to structure scientific knowledge • Serve as tools for communication to decision-makers, scientists, stakeholders and the general public

Negative externality

External cost, e.g. pollution

Pigouvian taxation

Externalities cause inefficiency because of the divergence between social and private benefits or costs

Is 550 ppm efficient?

From economist's point of view: • Focus on optimality: Aim is to maximize welfare: efficient allocation of resources in economy • Problem: policymakers do not know all relevant information. • Solution: focus on efficient outcome by trying to maximize discounted net benefits over time

Future Projections and Scenarios - Temperature

Future projections of climate change depend on trends in future emissions. There is considerable uncertainty about global warming.

optimization problem

GHG emissions should be set at the level where the present value of net marginal benefits equals the present value of damage from the marginal unit of pollution • Note the decay rate alters the level of optimal emissions

Positive Feedback effect - An example

Global warming increases Melting arctic tundra Releasing carbon dioxide and methane

Benefit function graph

INSERT PHOTO slide 13 Lec 3 pt 2

Dynamic effectiveness

Important way to reduce emissions: new technologies • How do policy instruments affect incentives to develop new technologies? • Minimize costs to achieve a target over some time‐horizon: dynamic efficiency

What shifts the demand curve to the right?

Income rises, price of a substitute good rises, price of a complementary good falls, number of buyers in the market increases

Global warming - Rising sea levels

Increase in ocean levels of about 2 millimeters per year In 2012, the sea level had already reached 23 cm more than it was in 1880

Subsidies

Is subsidizing 'good behavior' efficient? (emission reductions, or particular technologies like solar panels, windmills) • Political feasibility: yes!! Firms love subsidies! • But less desirable in terms of efficiency: • Monitoring is difficult and expensive • Hard to stop once started • In case of subsidy on particular technology: dynamically inefficient: • Does government know which technology is best? • Hampers technology competition

Why is Weitzman 's argument for GHGs wrong?

Karp and Traeger (2018) suggest that the abatement technology is a stochastic process • The technological innovation affects the abatement costs in future periods • The technology shock affects also the marginal damage curve.

Effects of the accumulated levels of CO2 in the Earth's atmosphere:

Loss of land due to rising sea levels • Loss of biodiversity and forest areas • Contamination of fresh water sources and problems of water scarcity • Increased public health problems and mortality • Increased costs related to air conditioning • Loss of agricultural crops

Optimal level emissions equation

M = 𝜕𝐷/𝜕𝑀 = 𝜕𝐵/𝜕𝑀 (1 + 𝑟/𝛼 )

Instruments to correct externalities

Market based instruments: • Bargaining • Tax/subsidy • Tradable permits • Other instruments: • Technology control (e.g. BATNEEC) • Damage control, prohibition • Liability

• Free market system can be shown to meet all the "efficiency" conditions, i.e. a market system that is efficient (and socially optimal) when we assume:

Markets exist for all goods and services in economy (environmental services?) - All markets are perfectly competitive - There exist perfect information (everybody knows everything) - Property rights are assigned to all resources and commodities - No externalities or public goods - All "well behaved" (firms profit maximize and consumer utility maximize)

"Optimal" pollution

Max Benefits - Costs Marginal Damages = Marginal Abatement Costs

Social welfare function

Measure describing the well-being of society as a whole in terms of the utilities of individual members

SDR equation

Net Present Value = 𝑋 / (1 + 𝑟) ^n

Is it realistic to assume that countries decide about their level of abatement on the basis of a global welfare function?

No it's not realistic

The optimization principle

People try to choose the best patterns of consumption that they can afford.

The equilibrium principle:

Prices adjust until the amount that people demand of something is equal to the amount that is supplied.

Reasons for market failure:

Public goods • Externalities • Information asymmetry (moral hazard and adverse selection)

Climate Change Trends and Projections

Rate of warming, currently around 0.13 ° C per decade 0.25 ° C per decade from 2020

How to handle equity across space?

Regionally disaggregated IAMs include separate utility and damage functions for each world region One option to account for interregional differences in income is equity weighting: Weights are put on the regional utility functions to account for interregional differences in per capita income

Meta-analysis on impact of GDP due to CC

Shows that the impact on GDP depends on the assumptions made, regarding on the possibility of substitution towards new energy sources, on technological adaptation and on the economic flexibility

Simulation models

Simulation models are based on off-line predictions about future emissions and climate conditions • Climate outcomes are not affected by the economic model (No feedback loop) • A predetermined set of emissions values by period dictates the amount of carbon that can be used in production • The simulation models estimate the costs of various likely future emission paths

What is stock in stock-damage pollution?

Stock is the flow of the pollutant minus the decay of the pollutant in the atmosphere

Ex: Supply decreases, but demand doesn't change

Supply curve shifts to the left, equilibrium price increases while quantity decreases

Ex: Supply increases, but demand doesn't change

Supply curve shifts to the right, equilibrium price and quantity goes down

Global warming - Ice caps

The Arctic and Antarctic have warmed at twice the global average rate. • The melting of the Arctic ice is both a consequence of climate change and a cause of its acceleration • Albedo phenomenon

Greenhouse gases and temperature changes relationship

The actual level of the warming will depend on the level of atmospheric concentration of CO2. • Pre-industrial concentration levels were 280 parts per million (ppm) • In 2008, scientists argue that "If humanity wants to preserve the planet, the concentration of CO2 in the atmosphere should not exceed 350ppm (Hansen et al, 2008) • In 2015, the atmospheric concentration of CO2 exceeded the critical level of 400ppm

What happens to the budget line if one good becomes more expensive?

The budget line becomes steeper

consumption discount rate

The consumption discount rate show the preferences for consumption in future periods.

What shifts the supply curve to the left?

The cost of an input rises, business taxes increase or subsidies decrease, the number of sellers decrease, the price of a product is anticipated to rise in the future, capital or resource destruction

What shifts the supply curve to the right?

The cost of an output falls, business taxes decrease or subsidies increase, the number of sellers increases, the price of the product is expected to fall in the future, the business deploys more efficient technology

Lower social discount rate

The greater the regard for the future

Higher social discount rate

The lower the regard for the future

Benefit function

The more expensive per unit emissions abatement costs , the greater the reduction in pollution

Social Discount Rate

The rate at which the economic significance of future costs/benefits declines over time.

The static flow pollution model:

These problems have no time dimension, the pollution stops when the emissions stops 𝑫 = 𝑫(𝑴)

Differences in IAM results

Uncertainty is due to: The discount rate and the aggregation of monetized impacts over countries

Global welfare function

W = W (Utility of rich, Utility of poor)

Cost-Benefit Analysis of Global Climate Change

Without political intervention, carbon emissions continue increasing Cost-benefit analysis, is to compare the consequences of the projected increase in carbon emissions with the costs of policies that aim to reduce CO2 emissions.

positive feedback

a feedback that increases the original effect

negative feedback

a feedback that reduces the original effect

Prisoner's Dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Pigovian tax

a tax enacted to correct the effects of a negative externality

The efficient level of pollution is 𝑀∗

add in graph slide 21 lec 3 pt 2

Kyoto Protocol

controlling global warming by setting greenhouse gas emissions targets for developed countries

Stock-damage pollution:

damages depend only on the stock of pollution in the relevant environmental system at any point in time. GHG is a stock pollutant, damages to the economy depend on the stock of the pollutant

Edgeworth box

diagram showing all possible allocations of either two goods between two people or of two inputs between two production processes

rival and non-excludable goods

e.g. Open access fisheries, e.g. "Tragedy of the Commons"

Positive externality

e.g. Vaccinations protect against disease for individual but also help prevent the spread of the disease too - benefit to wider society

Non-rival and excludable goods

e.g. national parks

To weigh the estimated benefits of climate change policies against the costs of these policies

economists use models showing how the Product of the Economy results from inputs such as labor, capital, and natural resources. • Economists calculate marginal abatement costs - that is, the costs of reducing an additional unit of carbon - for a variety of measures taken

atmosphere is an example of a

global public good that is being polluted

shifts the demand curve to the left

income falls, price of a substitute good falls, falls out of style, complementary good's price increases

• If this was not the case it would be feasible to reallocate L and K in such a way to

increase the production of one of the goods without reducing the other.

Tradable permits

licenses to emit limited quantities of pollutants that can be bought and sold by polluters (AKA Cap and Trade)

A pure public good

non-rival and non-excludable e.g. defense, lighthouses, street lighting

Positive externality inefficiency

not enough externality is produced compared to the allocative efficient outcome

Budget Constraint

the limited amount of income available to consumers to spend on goods and services

The Coase Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Neg externality inefficiency

too much externality is produced compared to the allocative efficient outcome

Trading Within Approach

• (Industrialized) countries without sufficient emission permits may buy additional allowances from (developing) countries with an oversupply of permits • Win-Win-Situation: Countries with scarce emission rights can still emit and countries with an oversupply of permits can earn additional money which can be used for investments in low carbon development

Political acceptability

• All policy goes via political systems • Politicians sensitive for lobbying • "Climate policy is costly!!" • "If costs are high, industry will loose jobs!!" • Policy (target + instrument chosen) must be acceptable for • polluters

Traditional economists believe that in order to achieve optimal emission levels

• An efficient pathway should be ascertained by deploying a benefit-cost analysis • Economists believe that an appropriate policy instrument should be introduced to hit the relevant emissions targets • The mainstream economic approach involves pre-determining the optimal pathway and the use of a policy instrument

The Stern Review on the Economics of Climate Change (2006)

• Assessment of evidence on the impacts and on the economic costs of climate change • The review's conclusion: "The benefits of strong and early action far outweigh the economic costs of not acting"

Abatement costs and the endogeneity of technological change

• Characterization of technologies by decreasing or increasing returns to scale? • Level of detail in technology sub-models: How many regions, industries, fuels, abatement technologies and end uses are included? • Does the model include macroeconomic feedback from investment in abatement technology? • Is technological change exogenous or endogenous?

Cost minimization models

• Cost minimization models are designed to identify the most cost effective solution to a climate-economics model • Some models include a climate module, while others abstract from climate by representing only emissions (No feedback loop) • These models have very complex "bottom-up" energy supply sectors, modeling technological choices based on detailed data about specific industries

The Stern Review - Criticism

• Economists discussed the review very critically - why? - Results of Stern Review are not based on optimization - Long time horizon (beyond 2100) - Inclusion of non-market impacts (high uncertainty in valuation of these impacts) - Extrapolation of damages into the future (neglecting the development of adaptive capacity over time) - Choice of very low discount rate

Limitations and weaknesses IAMs

• High level of integration: many processes occur at a micro level, not included in current IA models. • Inadequate treatment of uncertainties: IAMs are prone to an accumulation of uncertainties. • Absence of stochastic behaviour: most IAMs exclude extreme conditions that may significantly influence the long-term systems behaviour; • Limited calibration and validation: the high level of aggregation implies an inherent lack of empirical variables and parameters,

Integrated Assessment Models (IAMs)

• IAMs have been used by scientists and economists to jointly model natural and socio-economic processes • These models apply "damage functions" • Used to predict the impacts of GHG emissions and to evaluate the optimal abatement path • These models seek to translate future damage in terms of present monetary value

Paris Agreement

• In 2015, 184 countries submitted national climate commitments, known under the Paris Agreement as nationally determined contributions (NDCs). • 197 countries signed the Paris Agreement (Nov 2019) • This agreement establishes a 5-year cycle during which each country must review its own objectives, • In November 2016, more than 80 countries representing 60% of global emissions formally ratified it

Endogeneity of technological change

• In many IAMs, technological change is exogenous, change is external, originating from foreign sources • More realistic approach would make technological change dependent on investment and R&D efforts • Models including endogenous technological change provide lower estimates of climate damages

Positive effects of GHG accumulation:

• Increased agricultural production in cold climates • Lower heating costs • Reduced mortality from exposure to cold • The potential benefits are only expected to occur in the northern regions such as Iceland, Siberia and Canada. • Most other regions of the world, will have a high probability of experiencing strong negative effects

Static cost-effectiveness

• Instrument is cost‐effective if real resource cost of obtaining policy target is no greater than that of any other instrument

Decreasing vs. increasing returns to scale

• Many models, assume technologies are characterized by decreasing returns to scale • The assumption of decreasing returns may be realistic for resource-based industries • but it is clearly inappropriate to many new, knowledge-based technologies

The impacts of climate change

• Melting of the polar ice caps • Rising sea levels • The disintegration of marine ecosystems • The increasing scarcity of drinking water • The increasing frequency of extreme climatic events • Increasing geographic dispersion of pathogens.

Failures of the Kyoto Protocol

• Non-participating countries benefited from the efforts made by the participating ones • Kyoto participants covered more than 65% of global emissions in 1992 but less than 15% in 2012. • A new binding agreement with unique objectives, to all countries was rejected as inapplicable. • Instead, each country propose its own targets with its own decisions in terms of the level of reduction and the time horizon • Paris agreement was reached in December 2015 at the twenty-first Conference of the Parties (COP-21), in Paris.

Optimal growth models

• Optimal growth IAMs tend to be more transparent because they are relatively simple • Social welfare is often defined as the utility of a representative agent, and the overall objective is to maximise aggregated welfare over time • These models compare alternative paths of emissions over time in order to find the policy that maximises overall social welfare • Dynamic optimization models, solve all time periods simultaneously, As when decisions can be taken with complete foresight.

3 Principles of WBGU budget

• Polluter pays principle: - Emphasis on particular responsibility of industrialized countries because of high cumulative emissions in the past. • Precautionary principle: - Call for timely action by all countries to prevent irreversible damage. • Principle of equality: - Allocation of global CO2 budget on an equal per-capita basis; Idea of equal rights to the benefits of the global commons.

Scientific Foundations of Stern Review

• Requirement of early peaking of emissions - Emissions have to peak before 2020 to keep global warming below 2 degrees. - The later the peak, the more severe the reductions in global emissions will have to be.

Future Projections and Scenarios

• Scientists argue that to protect our climate, drastic actions to reduce emissions must take place immediately The increase in the average temperature would be 1.5 ° C to 4.8 ° C • Until 2020, to succeed in the turning point of the energy transition

The Stern Review - Equity Background

• Stern Review acknowledges strong ethical reasons for weighting the impacts on poorer countries more strongly • The review gives a rough estimate on how equity weighting would influence results: • Damage costs with EW > damage costs without EW

Main drivers of uncertainties in IAM results

• Technical uncertainties: arise from the quality of appropriateness of the data used to describe the system • Methodological uncertainties: Methodological uncertainties arise from lack of knowledge and refer to questions as: what analytical tools and methods are appropriate? • Epistemological uncertainties: uncertainties concern the conception of a phenomenon. This type of uncertainty arises from structural uncertainty and variability

In what sense is pollution beneficial?

• The imposition of stricter emissions standards is costly, in terms of lost output, • Production of goods that could not otherwise have been made

Partial equilibrium models

• These models correspond to reduced General equilibrium models • Provide a detailed analysis of the interaction between environmental impacts and a particular sector of the economy. • These are usually used to assess potential climate-induced damages to a subset of the economic sectors. • Prices of the other economic sectors (not included in the model) are kept constant

General equilibrium models

• These models have a more detailed representation of the economy with multiple sectors • Models are solved by using economic data to derive a set of equilibrium prices for which all markets are cleared • General equilibrium models tend to use "recursive dynamics", they can be solved sequentially (one period at a time) • General equilibrium models are often very complex

Advantages of command and control:

• Very effective: past experience shows succesful reduction in emissions of many pollutants • Politically attractive: firms prefer CAC to taxes and permits • Because technology standards produce economic rents for firms; • Rents can be sustainable if coupled with more stringent requirements for new sources: entry deterrence!

stock-flow model

𝐴ሶ 𝑡 = 𝑀𝑡 − 𝛼𝐴𝑡 𝐴ሶ 𝑡 = 𝑑𝐴 / 𝑑𝑡 𝑀𝑡 is the current period emissions of GHGs which add to the stock 𝛼𝐴𝑡 is the decay of the stock of GHGs due to chemical processes

Benefit of pollution

𝐵𝑡 = 𝐵𝑡(𝑀𝑡)

The objective of the policy (law) maker is to choose a target level of GHG in each period to maximise the discounted net benefits over some time horizon T:

𝑀𝑡 ≥ 0 review this i dont know