Environmental Economics Final
Non OPEC Oil Exporters
"Competitive fringe" : Salant (1976) proposed an interesting model of monopoly pricing in the presence of a fringe of small non-member oil producers. The cartel is assumed to set the price of oil to maximize its collective profits by restricting its production in the initial years taking the competitive fringe production into account. The optimal strategy, from the point of view of the cartel, is to hold back on its own sales during the initial period, letting the other suppliers exhaust their supplies.
COP21 (Paris Agreement) INDC Schedule
** Look at Lecture 17 Slide 10-12 to see charts on INDC Schedule and National Plans**
Environmental Effects of Energy Subsidy
** Look at Lecture 18 Slide 35 for graph**
Why haven't we reached the switch point yet?
1.Role of private market and price: Hotteling rule 2.Subsidies to the fossil fuel sector 3.Impact of oil cartels 4.Marginal cost of production of renewable energy
Pigovian Tax
A Pigovian tax/fee is an emission tax/fee which is exactly equal to the aggregate marginal damage caused by emissions when evaluated at the efficient level of pollution. ** Look at Lecture 14 Slide 23 for graph**
Renewable Energy Portfolio
A renewable portfolio standard (RPS) is a regulatory mandate to increase production of energy from renewable sources such as wind, solar, biomass and other alternatives to fossil and nuclear electric generation. It's also known as a renewable electricity standard. An RPS is most successful in driving renewable energy projects when combined with the federal production tax credit.
What is 'Adaptation to climate change'?
Adaptation can be regarded as the range of activities carried out to reduce the adverse economic impacts of climate change. Broadly speaking, there are two schools of thought about adapting to climate change: 1) One believes that development is the best form of adaptation and thereby countries should invest in physical and human capital stock, build strong institutions and achieve robust growth. 2) The second approach is to divert significant investments into 'climate-proofing' infrastructure and all other productive capital.
Kyoto Protocol
An international voluntary response to mitigate climate change was launched in 1992, at the Earth Summit in Rio de Janeiro, with the signing of the U.N. Framework Convention on Climate Change (UNFCCC) The Kyoto Protocol was adopted by many developed and developing nations in Kyoto, Japan, in December 1997 and entered into force on 16 February 2005. The rules and requirements for implementation of the Kyoto Protocol were further elaborated in a package of decisions called the Marrakesh Accords in 2005. Each Annex I Party (developed country) participating in Kyoto Protocol has a binding commitment to limit or reduce GHG emissions. The current goal is to limiting global warming to 1.5 degrees C (2.7 degrees F)
Step 3: The deficit or overshoot shows the level of unsustainable growth of a country
Area x Bioproductivity = Biocapacity (Capacity) Population x Consumption per person x Resource and Waste Intensity = Ecological Footprint (Demand) Gap between supply and demand: Overshoot **Look at lecture 12+13 slide 21 for image**
Paris Agreement (COP 21)
At COP 21 in Paris, on 12 December 2015, Parties to the UNFCCC reached a landmark Paris Agreement to mitigate climate change and to accelerate and intensify the actions and investments needed for a sustainable low carbon future. As such, it charts a new course in the global climate effort.
Step 1: Equation for measuring Bio-capacity (BC)
BC = A x YF x EQF Where: BC = bio-capacity of a given land type (gha); A = Area of a given land type within a country; YF = Yield factor of a given land type within a country; EQF=Equivalence Factor
Backstop Technology
Backstop technology is defined as a new technology producing a close substitute to an exhaustible resource by using relatively abundant production inputs and rendering the reserves of the exhaustible resource obsolete when the average cost of production of the close substitute falls below the spot price of the exhaustible resource. For instance, the technology of harnessing solar energy can be perceived as a backstop technology to oil, coal and natural gas. Nordhaus argues that as an essential exhaustible resource depletes, its market price increases forcing entrepreneurs to invest in cheaper substitutes such as the backstop technologies The only economic role backstop technology played was in setting an upper limit to the price of fossil energy, an end point for the price path of an exhaustible resource .
Step 1: How Bio-Capacity is measured?
Bio-capacity refers to the amount of biologically productive land and water areas available within the boundaries of a given country. It is the capacity of ecosystems to produce useful biological materials and to absorb waste materials generated by humans, using current management schemes and extraction technologies. Bio-capacity is calculated for each of the five major land types: •Crop for food , animal feed, fibre, oil, rubber; •Animal grazing for meat, hide, wool, milk products; •Harvesting for wood, fibre, fuel, timber-based products; •Fishing - ocean and river; •Built-infrastructure for housing, energy, transportation, industrial production; •Burning of Fossil fuels (chapters 3 and 4 of the SEEA-2003); oNo waste production area & water withdrawals included. No non renewable mineral resources and non renewable energy extraction included;
Step 1: What is Bio-capacity?
Bio-capacity: Capacity of biosphere to regenerate and provide for life. Bio-capacity is an aggregated measure of the amount of land available, weighted by the productivity of that land. It represents the ability of the biosphere to produce crops, livestock (pasture), timber products (forest), and fish, as well as to uptake carbon dioxide in forests. It also includes how much of this regenerative capacity is occupied by infrastructure (built-up land). In short, it measures the ability of available terrestrial and aquatic areas to provide ecological services.
Global Carbon Emissions
Carbon Emissions 2013: 9.9 billion metric tons To convert carbon to carbon dioxide (CO2), multiply the numbers above by 3.67
Economist (Magazine) on Pigovian Tax
Carbon taxes are a subspecies of Pigovian tax; taxes that are designed primarily to change behavior rather than to raise revenue. Pigovian taxes allow competition to continue and can incentivize a stable increase in innovation. They also impose a cost on pollution, causing businesses to decrease production until the profit from polluting falls below the cost of paying the tax. Under these conditions, the only way for an industry to become more profitable is to innovate in a way that increases production without increasing pollution. Without innovation, any higher rate of production would be unprofitable. Pigovian taxes are able to achieve significant environmental and economic benefits while still encouraging innovation
Compatibility of Cartel Member Interest
Cartel members have a strong incentive to cheat. A cheater, if undetected by the other members, could surreptitiously lower its price and steal part of the market from the others In addition to cheating, however, cartel stability is also threatened by the degree to which members fail to agree on pricing and output decisions.
Types of Regulation
Classical -> Command and Control/ Prescriptive -> Direct Provision by State -> Top Down (Centralized) : Quantity Restriction / Performance Standard Neo Classical -> Market Incentives -> Privatization/ Public-Private Partnership -> Bottom Up (Decentralized): Pigouvian Tax / Subsidies Alternative -> International Protocols -> Voluntary Agreement Schemes : Montreal Principle / Equator Principle Combination of Prescriptive, Market Incentives and Voluntary Agreement: Cap and Trade
What is Climate Change?
Climate change in Intergovernmental Panel on Climate Change (IPCC) usage refers to a change in the state of the climate that can be identified (e.g. using statistical tests) by changes in the mean and/or the variability of its properties, and that persists for an extended period, typically decades or longer. It refers to any change in climate over time, whether due to natural variability or as a result of human activity. United Nations Framework Convention on Climate Change (UNFCCC), defines it as a change of climate that is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and that is in addition to natural climate variability observed over comparable time periods.
Why Poorer Nations are More Vulnerable to Climate Change?
Combination of three features: 1. A higher physical exposure in many areas (e.g. proximity to temperature thresholds) 2. A higher economic sensitivity to climate events (e.g. heavier reliance on agriculture) 3. A lower adaptive capacity (i.e. a lower ability to deal with climate stress)
Ecological Footprint: Background
Concept and calculation method developed by Mathis Wackernagel in University of British Columbia, Vancouver, Canada (1994) along with his supervisor William Rees. Does not focus on intergenerational equity of utility. Focuses on strong sustainability, consumers are deemed responsible for environmental degradation rather than the producers
Intended Nationally Determined Contributions (INDC)
Countries submit "intended nationally determined contributions" (INDCs) every five years, outlining how much they intend to reduce emissions. Each INDC are meant to be more ambitious than the last, namely, ratcheting up. These submissions are then reviewed by UNFCCC to assess their overall impact on stemming the rise of global temperatures. To date 165 INDCs, accounting for over 90 percent of global emissions have been submitted.
Indirect linkages between oil price and renewables
Despite weaker direct links between oil price and renewable energy deployment, developed countries may experience indirect linkages between oil price and renewable energy investment. Oil and natural gas are close substitutes for each other in some sectors. Advances in technology now allow end consumers to switch between fuels (for instance a business could use a power plant that can switch between oil and natural gas or a consumer could use a dual-powered automobile). If the price of one energy source rises significantly, consumers move to other source of energy. This increases demand for the second energy source and its prices then also rise. Following that logic when oil price falls the demand for natural gas falls and therefore natural gas becomes cheaper too. Natural gas and renewable energy face competition in the power generation sector. The power purchase agreements (PPA) for renewable energy is based on the floor price of natural gas. New investment in renewable energy would be stalled if price of natural gas falls.
Step 2: How to calculate Ecological Footprint?
EFc = EFp + EFi- EFe Where: EFc = Footprint of consumption associated with product or waste EFp = Footprint of production associated with product or waste EFi = Footprint of imports associated with product or waste EFe = Footprint of exports associated with product or waste Note: The Unit of calculation is Global Hectares
Economics of Climate Change
Economics can assess the impact of current economic activities that might accelerate global warming. Economics can assess the impact of climate change on our future economy. To reduce the damages that future generations will have to face, this generation must reduce consumption of harmful goods and services starting today. Economics can offer policy solutions to achieve that goal. Finally, equity issues, both within and across generations, are central to an economic assessment of climate change.
Fossil Fuel Subsidy
Energy subsidies damage the environment, causing more premature deaths through local air pollution, exacerbating congestion and other adverse side effects of vehicle use, and increasing atmospheric greenhouse gas concentrations. Energy subsidies impose large fiscal costs, which need to be financed by some combination of higher public debt, higher tax burdens, and crowding out of potentially productive public spending (for example, on health, education, and infrastructure), all of which can be a drag on economic growth. Energy subsidies discourage needed investments in energy efficiency, renewables, and energy infrastructure, and increase the vulnerability of countries to volatile international energy prices. Energy subsidies are a highly inefficient way to provide support to low-income households since most of the benefits from energy subsidies are typically captured by rich households.
Example: Command and Control/Prescriptive Regulation
Environmental Law US Clean Air Act 1970 - Congress passed this Act. The Clean Air Act gives EPA important enforcement powers. 1990 - Congress dramatically revised and expanded the Clean Air Act, providing EPA even broader authority to implement and enforce regulations reducing air pollutant emissions.
Example of a Regulatory Agency
Environmental Protection Agency (EPA) EPA is called a regulatory agency because Congress authorizes EPA to write regulations that explain the technical, operational, and legal details necessary to implement laws. Regulations are mandatory requirements that can apply to individuals, businesses, state or local governments, non-profit institutions, or others.
Types of Financing
Equity: Project equity is supplied by project sponsors, including private equity firms or developers themselves. This is sometimes called "cash equity." Debt: Project debt is supplied by a bank or group of banks ("syndicate") that lend against the expected cash flows from the project.
Step 1: How is Biocapacity measured?
Equivalence factors (EQF) reflect the relative productivity of world average hectares of different land types. A productivity-based scaling factor that converts a specific land type (such as cropland or forest) into a universal unit of biologically productive area, a global hectare. Yield factor (YF): A factor that accounts for differences between countries in productivity of a given land type.
Feed-in Tariff Provisions
FITs typically include three key provisions: •Guaranteed grid access (=network of delivering electricity) •Long-term contracts (anywhere from 10-25 years) •Cost-based purchase prices
Conditions for Successful FIT
Feed-in systems needs to be flexible on the adjustment to market developments. It is therefore important that they are designed smartly to support renewables in a cost efficient way. - Among others, this can be achieved by implementing stepped tariff design, or a regular degression of tariffs - The introduction of growth corridors for more expensive technologies - Feed-in premiums might be helpful to improve the market integration of renewables
Type of FIT
Fixed Price FiT Policy: Payment levels remain independent from the market price, offering a guaranteed payment for a pre-determined period of time. Premium Price FiT: Offers a premium on top of the spot market elasticity price to explicitly account for the environmental and societal attributes of RE or to help approximate RE generation costs.
Step 3: Conclusion
Global sustainability cannot be (ecological) deficit-financed; simple physics dictates that not all countries or regions can be net importers of biophysical capacity.
Green, Social, and Sustainability Bonds
Green Bonds enable capital-raising and investment for new and existing projects with environmental benefits Social Bonds are the use-of-proceeds bonds that raise funds for new and existing projects with positive social outcomes Sustainability Bonds are bonds where the proceeds will be exclusively applied to finance or refinance a combination of both Green and Social projects.
Naufa's Presentation: US Reality
Green line is actual US oil production over time. Red line is Hubbert's prediction. The peak occurred in the 1970s but after a dip the production started rising sharply again from the 2000s.
Green Power
Green power is a subset of renewable energy and represents those renewable energy resources and technologies that provide the highest environmental benefit. EPA defines green power as electricity produced from solar, wind, geothermal, biogas, eligible biomass, and low-impact small hydroelectric sources. Green power sources produce electricity with power technologies and produce no fossil-fuel based greenhouse gas emissions. EPA requires that green power sources must also have been built within the last 15 years in order to support "new" renewable energy development.
Earth Transforms Sunlight into Infrared Energy
Greenhouse gases like carbon dioxide and methane absorb the infrared energy, re-emitting some of it back toward Earth and some of it out into space.
1. Role of market : Hotteling Rule
Hotelling's Rule by Harold Hotelling, an US economist in 1931 in his paper: The Economics of Exhaustible Resources. He looked into the following question: How much of the asset should I consume now and how much should I store for the future? In other words, the agent has to choose between the current value of the asset if extracted and sold and the future increased value of the asset if left unexploited. Hotelling figured that choice for extraction of oil/coal will depend on two key variables— a) the interest rate and b) the expected rate of increase in the price of oil (Marginal User Cost). Hotelling's rule: Hotelling observed that the owner of a finite natural resource is indifferent to either exploiting it or leaving it in situ when the marginal profit (Scarcity rent) increases at the prevailing bank interest rate. In other words, the resource will not be produced at all unless it can be produced at a rate that equals the prevailing interest rate offered by the banks in the market.
Measurement Unit: Global Hectare (gha)
If this hectare is twice as productive as a world average, biologically productive hectare. Then it is worth 2 gha if this hectare is half as productive as a world average, biologically productive hectare. Then it is worth ½ gha
Adaptation in the Coping Period
In Ethiopia, poor people try to retain their livestock by reducing their consumption of food, because they are very close to the poverty trap threshold and do not have access to lands or other credit markets to buy alternative assets in future. This is called 'asset smoothing'. In Honduras, a well-developed land market allows the poor and rich people to sell their assets and maintain their consumption level through further credits and loan opportunities. This is often termed 'consumption smoothing'.
Neo Classical Growth Models: What Do They Say About Adaptation?
In order to retain an unchanging level of capital per worker over time, we have to invest enough to create new capital to offset this loss over time. If the rate of capital replenishment is greater than the loss due to depreciation and population growth then the capital stock will grow. If the rate of replenishment is lower than depreciation plus population growth then the capital stock will shrink. Climate change can affect the equilibrium capital-labor ratio. Suppose, for example, that climate change leads to more rapid depreciation of capital, that will increase the investment rate required to keep the ratio of capital to labor constant. In the new long-run equilibrium, the ratio of capital to the effective labor force is lower.
Environmental Impact of Subsidies
In the long run: - Tax is for raising average cost and subsidies are for lowering average cost. - There will be more firms in the sector with subsidies for taking advantage of the lower average cost of production than under Pigouvian tax regime. - Subsidy will therefore result in overuse of natural resources because it encourages higher outputs of goods. - Subsidies cannot cover the cost of negative externalities. - Subsidy requires a lump sum transfer from the Government to producers or consumers. Funds have to be obtained from the total budget of the Government. This is a drain on the Government resources. In the short run: - Tax and subsidy both raise marginal cost of production and therefore reduces pollution or production of goods that pollute. - A subsidy will allow old firms to continue operating even if they are cost inefficient- with tax or in a market scenario these cost inefficient firms will shut down allowing only newer firms with better cost efficient and low pollution technologies to survive in the market.
Green Bonds
International Capital Market Association: A "green bond" is differentiated from a regular bond by its label, which signifies a commitment to exclusively use the funds raised to finance or refinance "green" projects, assets, or business activities The World Bank: A green bond is a debt security that is issued to raise capital specifically to support climate related or environmental projects European Commission: A green bond is a type of listed or unlisted bond or capital market debt instrument issued by a European or international issuer that is aligned with the EU Green Bond Standard.
What does EPA do apart from writing regulations?
Issuing permits: Permits are issued by the Government to companies that emit, setting out what technologies they have to use in their production process to reduce emission &/ the amount they can emit. Permits include plans for the companies to measure and report the air pollution emitted. Companies have to pay a fee to receive their permits. Enforcement: If the companies violate the rules EPA has enforcement powers - (fines, suing the company, taking them to court).
What is CBDR & RC?
It addresses both differentiation in responsibility and capability under this law: •Responsibility should include both historical responsibility and responsibility for the future. •Capability: CBDR&RC needs to be applied in creative ways to financing capability, technological capability, and capacity building capability (the means of implementation). It means providing financial aid to developing and poor countries, technology transfer to developing and poor countries and aiding with building their capacity to implement new policies by training governments in these countries.
What is "Climate Change Mitigation"?
It incorporates specific climate related physical targets, which may include absolute or relative GHG limits, GHG concentration levels (e.g. CO2 or CO2-equivalent (CO2-eq) stabilization scenarios), or maximum allowable changes in temperature or sea level. It includes explicit or implicit policies and/or measures of which the primary goal is to reduce CO2 or a broader range of GHG emissions (e.g. a carbon tax, carbon cap)
Environmental Regulation EPA Definitions
Laws: written by Congress provide the authority for EPA to write regulations. Regulations: explain the technical, operational, and legal details necessary to implement laws. Compliance & Enforcement: EPA helps regulated entities meet federal requirements, and holds entities legally accountable for environmental violations. Policy & Guidance: EPA issues policy and guidance documents to assist the public and regulated entities.
Barriers to Switch Over to Backstop Technology/Renewable Energy
Marginal cost of production of renewable energy Subsidies to the fossil fuel sector Impact of oil cartels
Relationship Between Marginal User Cost and Marginal Extraction Cost
Marginal extraction cost often increases rather than remaining constant. The more a coal mine gets used and degraded it costs more to extract the coal from the mines. Also, lower grade coal is extracted at a later stage (one unit of energy production needs more amount of low grade coal). When marginal extraction cost rises marginal user cost starts to decline.
Marginal User Cost
Marginal user cost in an opportunity cost. It reflects foregone future marginal net benefit Every unit extracted now raises the cost of future extraction (this was not the case in constant marginal extraction cost scenario). It means that the future generation will consume less (their net benefit from using one more unit is less) due to higher future marginal extraction cost (even if we save one additional unit for them to use). By the last period, the marginal extraction cost will be so high that opportunity cost (marginal user cost) of current extraction drops to zero. In other words, total marginal cost = marginal extraction cost only In this scenario, coal will not be completely depleted; some will be left in the ground because it is more expensive to use than the substitute.
Difference Between Mitigation and Adaptation
Mitigation consists of reducing emissions (or removing greenhouse gases (GHGs) out of the atmosphere) at the beginning of the chain to avoid or minimize climate change in the first place Adaptation consists of responding to economic damages of climate change at the end of the chain
What to Derive from Growth Models?
Neo-classical growth models suggest that climate-induced reductions in the stock of factors of production (both capital and labor) can have significant implications for transitional and long-term growth. Climate change may itself alter the growth trajectory of a country, for example by reducing productivity (particularly in agriculture), destroying productive assets (during extreme events) or altering investment priorities (from productive investment toward adaptation). Additional expenditures for adaptation have limited impact on long-term economic growth.
2. Energy Subsidy
OECD definition: any measure that keeps prices below market levels, or for producers above market levels or that reduces costs for producers and consumers. US Energy Information Administration: any government action designed to influence energy market outcomes, whether through financial incentives, regulation, research and development or public enterprises. Any government action that concerns primarily the energy sector that lowers the cost of energy production, raises the prices received by energy producers, or lowers the prices paid by energy consumers.
3. Impact of Oil Cartels
OPEC: Organization of the Petroleum Exporting Countries Established in 1960. 12 members: Middle East: Saudi Arabia, Iran, United Arab Emirates, Iraq, Kuwait, Qatar, Africa: Algeria, Angola, Nigeria, Libya, South America: Ecuador, Venezuela.
Evidence of Climate Change
Ocean warming dominates the increase in energy stored in the climate system, accounting for more than 90% of the energy accumulated between 1971 and 2010 (high confidence). The rate of sea level rise since the mid-19th century has been larger than the mean rate during the previous two millennia (high confidence). Since the beginning of the industrial era, oceanic uptake of CO2 has resulted in acidification of the ocean; (high confidence), corresponding to a 26% increase in acidity, measured as hydrogen ion concentration. Greenland and Antarctic ice sheets have been losing mass (high confidence). Glaciers have continued to shrink almost worldwide (high confidence). Northern Hemisphere spring snow cover has continued to decrease in extent (high confidence).
Impact of Oil Cartel
Organization of Petroleum Exporting Countries (OPEC), an economic cartel responsible for approximately one third of global oil production, announced it would not decrease its rate of oil production. Indicating that OPEC and its chief member Saudi Arabia are fighting to stay relevant in an oil market increasingly dominated by production from U.S. shale oil.
Planned vs Autonomous Adaptation
Planned Adaptations are deliberate policy decisions on the part of public agencies. Autonomous adaptations are initiatives that occur naturally by private actors without intervention of public agencies. Planned Adaptation: Thames Barrier in the UK to save the island from sea level rise Autonomous Adaptation: Abandoned village at a dried-out lake in Libya. In the past, people living on crab fishery here. When the lake lost its water, they lost their livelihood. ** Look at Lecture 15+16 Slide 22 for chart**
IMF Report at COP 21 (Paris) in 2015 on Fossil fuel subsidy
Post-tax energy subsidies are dramatically higher than previously estimated—$4.9 trillion (6.5 percent of global GDP) in 2013, and projected to reach $5.3 trillion (6.5 percent of global GDP) in 2015. Among different energy products, coal accounts for the biggest subsidies, given its high environmental damage and because (unlike for road fuels) no country imposes meaningful excises on its consumption.
Price Elasticity of Oil Demand
Price Elasticity of demand determines how responsive demand is to price Δd/Δp = 0 or less = low elasticity. Δd/Δp = 1 or more=high elasticity Low elasticity means when the percent of quantity change is smaller than the percent change in price. In this case oil producers will earn more revenues by increasing price. Cartelization is profitable when elasticity is nearly 0. Global scenario: Traditionally oil has had low price elasticity However, price elasticity of demand depends on: Opportunities for conservation Availability of substitutes Demand for oil is more price elastic in the long run because of the above factors.
The Factors That Make Oil Cartel Possible
Price Elasticity of oil demand Income Elasticity of oil demand Non OPEC Suppliers Compatibility of member interests
Why Regulate?
Public Interest Theory (Normative) Correct: Market Behavior Social Behavior Government Behavior Interest Group Theory (Positive) Rent seeking from: Private clients/voters Pressure groups Labor unions Political parties Bureaucrats Government agencies
Command and Control Regulation/Prescriptive
Quantity restriction can be brought about about by setting Pollution Standards, a maximum rate of production of waste, effluent or pollution that is legally permitted. Ex: Ban on DDT in agriculture, asbestos in construction, etc. Quantity restriction can be brought about by setting Performance Standard, pollution permitted per unit of a product and to achieve that the government sets out the process changes and/or technology changes. Ex: Fuel Economy Standard for Passenger Cars and Trucks
Ecological Footprint: Methodology
Rejects money as the unit for accounting because monetary analysis in Neoclassical economics suggests that environmental resources are substitutable. This methodology measures every natural resources and market goods that we consume in terms of land area (Global Hectares) required for producing those goods. The EF methodology puts the burden of environmental degradation on the countries that consume. For example, developing countries are extracting minerals but developed countries are consuming the goods using those minerals. Therefore, ecological footprints of developed countries are higher than developing countries.
EPA Definitions: Renewable Energy
Renewable energy includes resources that rely on fuel sources that restore themselves over short periods of time and do not diminish. Such fuel sources include the sun, wind, moving water, organic plant and waste material (eligible biomass), and the earth's heat (geothermal). Although the impacts are small, some renewable energy technologies have an impact on the environment. For example, large hydroelectric resources can have environmental trade-offs associated with issues such as fisheries and land use.
Ecological Footprint
Resource accounting methodology that answers the research question, "how much of the regenerative capacity of our planet/country/city do we use?"
Background of CBDR & RC
Rio Principles were established in the United Nations Conference on Environment and Development [UNCED]) and the UNFCCC in Rio in 1992. They albeit soft law, guide not only the UNFCCC climate change related agreements but also other multilateral/ international agreements launched thereafter. The Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed countries i.e. Annex I Parties should take the lead in mitigating climate change and the adverse effects thereof.
Example of Performance Standard (USA)
Section 111 of the Clean Air Act authorizes the EPA to develop technology-based or process-based standards which apply to specific categories of stationary sources. These standards are referred to as New Source Performance Standards (NSPS) and are found for manufacturers of glasses, cement, rubber tires, fiberglass, etc. As of 2013 there were approximately 90 NSPS in the US.
Steps to Calculate Ecological Footprint
Step 1: We need to find out the Bio-Capacity of a country Step 2: We need to estimate the annual per capita consumption (ecological footprint of consumption per person) of major consumption items and estimate the land area appropriated per capita for the production of each consumption item. Step 3: We need to find out what is the difference/gap between the bio-capacity and ecological footprint of consumption. The methodology calculates: How much do people demand from biologically productive surfaces (Footprint), compared to how much can the planet regenerate on those surfaces (biocapacity) Ecological Footprint calculates the deficit or overshoot of resources in a country or globally
Types of Tax Credits
Tax Benefits: Renewable energy projects in the United State are eligible for Federal income tax credits and accelerated depreciation, which reduce the federal income tax of the project owner. Production Tax Credits (PTCs) under Section 45 of the tax code give renewable electricity project owners a tax credit for every kilowatt‐hour of electricity produced in the first 10 years of operation. It is indexed to inflation. The taxpayer must sell the energy to an unrelated buyer to claim the tax credit. Investment Tax Credits (ITCs) under Section 48 of the tax code give renewable energy project owners a tax credit based on the amount of capital invested in a project. The tax credit is earned when the project is placed in service. Only the taxpayer who originally placed the equipment into service can claim the credit except in the case of certain leasing transactions.
US Model: Tax Credit and Tax Equity
Tax equity: Developers partner with relatively passive structured equity or "tax equity" investors who can more efficiently use the federal tax benefits generated by their projects. A tax equity investor contributes a capital investment and in return secures tax benefits and a return on investment from the project. Tax equity investors traditionally have been banks, insurance companies, and other financial institutions that have a large, predictable tax liability. Tax credits and other tax benefits, however, can only be used by clean energy developers who are profitable enough to actually pay income taxes. Because of this, many developers, whether they are start-ups that have not yet reached profitability or are established power companies that earn most of their income in currently depressed energy markets, have little or no ability to use tax benefits themselves. Hence, they must find investment partners with enough income to benefit from tax credits, accelerated depreciation and similar policies. Investment by such tax equity partners is, in fact, one of the few financing mechanisms currently available to fund renewable energy projects. Tax equity investors in renewable energy projects receive a return on investment based not only on the income from the asset or project, but also on federal income tax deductions (through the utilization of tax credits).
Cash Grant Program
The 1603 cash grant program Tax equity investment, while critical to clean energy development, does have significant limitations. The primary constraints are the limited supply of tax equity investors relative to demand for clean energy project finance, the high transaction costs associated with tax equity financing, and barriers tax equity can create for additional debt financing. All of these limitations are avoided by the section 1603 cash grant program that Congress enacted in 2009. This program allows project sponsors to elect to receive a cash grant in lieu of the 30% investment tax credit (ITC) for projects initiated by December 31, 2011. This program has allowed clean energy investment to far exceed the amount of financing available in the tax equity market
Conference of the Parties (COP)
The COP is the supreme decision-making body of the UNFCCC. All countries that are Parties to the Convention are represented at the COP, at which they review the implementation of the Convention and any other legal instruments that the COP adopts and take decisions necessary to promote the effective implementation of the Convention, including institutional and administrative arrangements. The COP meets every year, unless the Parties decide otherwise. The first COP meeting was held in Berlin, Germany in March 1995.
Kyoto Protocol COP 26
The COP26 (Nov 2021) asks nations to consider further actions to curb potent non-CO2 gases, such as methane. It includes language emphasizing the need to "phase down unabated coal" and "phase-out fossil fuel subsidies." This is the first-time negotiators have explicitly referenced shifting away from coal and phasing out fossil fuel subsidies in COP decision text.
US Clean Air Act Leads to Regulations for Establishing NAAQS
The Clean Air Act (CAA) is the comprehensive federal law that regulates air emissions from stationary and mobile sources. Among other things, this law authorizes EPA to establish National Ambient Air Quality Standards (NAAQS) to protect public health and public welfare and to regulate emissions of hazardous air pollutants.
IPCC Assessment Report Summary
The Intergovernmental Panel on Climate Change (IPCC) is the leading international body for the assessment of climate change. It was established by the: United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) in 1988. Currently 195 countries are members of the IPCC. It reviews and assesses the most recent scientific, technical and socio-economic information produced worldwide relevant to the understanding of climate change. It does not conduct any research, nor does it monitor climate related data or parameters.
How People Cope with Increased Frequency of Climate Shocks
The Period of the Hazard -> Immediate loss of assets and income of households <- Extent and type of natural calamity The Coping Period -> Asset Smoothing & Consumption Smoothing <- Price of assets, access to credit and insurance market, access to aid, and depth of labor market The Recovery Period -> Poverty Trap & Asset and Income Recovery <- Social capital, informal and institutional safety nets
Taxonomy
The aim of taxonomy is to: - Create a uniform and harmonized classification system that can be used for reference internationally - Avoid market fragmentation - Protect against greenwashing - Provide the basis for further policy actions such as standards, labels, incentives, etc.
The Link Between Oil Price and Renewables
The link between oil price and renewables appears to be weakening (Mckinsey 2015) IN DEVELOPED COUNTRIES. Crude oil and renewable energy are not direct substitutes in the power market, and therefore when the price of one increases, the demand for the other does not also increase. Very little of oil is used for power. Renewables energy, in contrast, are used mostly to create electricity. The observed historic correlation between crude oil and renewables primarily results from the secondary influence of market perception. Too often the price of crude oil is used as an all-encompassing indicator for the health of energy markets. The incomplete (or, perhaps, overly broad) association between crude oil and renewables can create an environment of disincentives for policymakers, project lenders, and private investors.
The Role of Substitutes or "Backstop Technologies"
The point at which the extraction will become zero is where the substitute can be produced at a lower marginal cost. The transition point is called the switch point. This switch point can be delayed if there is technological progress that lowers marginal extraction cost of fossil fuels or new resources are discovered (at low exploration cost).
The role of market and rising price are the highlights of Hotelling's rule
The rising price fulfills a number of useful functions. First, the rising price encourages conservation. As the resource becomes scarcer and its price rises, users will be motivated to be more economical in its use. Uses with low yields may be abandoned altogether, and uses with high yields will be pursued only as long as their value at the margin is enough to compensate for the high price. Second, the rising price encourages the discovery of new sources of supply—at least in cases in which the world supply is not totally fixed and already known. Third, the rising price encourages innovation. New products that will do the same job may be developed, as well as new processes that use alternative resources. For example, a rising price of oil encourages the development of alternative sources of energy, such as solar and wind power.
Sustainability
The term "Sustainable Development" was popularized in the famed "Brundtland report: Our Common Future" published by the World Commission on Environment and Development, in 1987. Sustainable development was to ensure that humanity meets the needs of the present without compromising the ability of future generations to meet their own needs Development is sustainable when it does not decrease the capacity to provide non-declining per capita utility for infinity
How is waste calculated?
The term "carbon footprint" is often used as shorthand for the amount of carbon (usually in ton) being emitted by an activity or organization. The carbon component of the Ecological Footprint takes a slightly differing approach, translating the amount of carbon dioxide into the amount of productive land and sea area required to sequester carbon dioxide emissions.
Hubbert's Peak Oil Theory
Theory: It is widely accepted that oil is a finite resource; there are basic laws which describe the depletion of any finite resource: - Production starts at zero - Production then rises to a peak which can never be surpassed - Once the peak has been passed, production declines until the resource is depleted. These simple rules were first described in 1956 by a US geophysicist, Dr. M. King Hubbert.
Total Marginal Cost of Production of Fossil Fuel
Total Marginal Cost = Marginal Extraction Cost + Marginal User Cost
European Model: Feed In Tariff
Under a FiT scheme, governments set prices often at a premium for different types of renewable power to compensate producers for the higher cost of producing clean energy. Utilities are required to purchase power from renewable resources at this price, but can either spread the additional costs across their entire customer base or receive compensation from the government to recover the incremental costs.
Carbon "Lock-in" in Developed Countries
Unruh (2000, 2002) has argued that industrial economies are in a state of carbon lock-in to current carbon intensive, fossil fuel- based energy systems, resulting from a process of technological and institutional co-evolution, driven by path-dependent increasing returns to scale. He introduces the notion of a Techno-Institutional Complex (TIC), to capture the idea that lock-in occurs through combined interactions among technological systems and governing institutions. It therefore follows that developing countries are better placed than developed ones to rapidly diffuse technological innovations throughout their industrial structure. Owing to their late start in industrializing, many developing countries have yet to install significant capacity. This means that they can readily select between competing technologies according to their expected returns and, moreover, adopt the new technology as an integral part of capital expansion (IBRD, 1992). But consider the role of free trade here.
User Cost
User Cost is the opportunity cost of non-availability of a natural resource at a future date due to using up the resource today rather than leaving it in the situ. Marginal user cost = Market price of one additional unit of coal - Marginal extraction cost
Hubbert's Peak Oil: Variables Used in his Calculation
Variables for calculation: - Proven oil reserves in the US - Cumulative production in the US ( historical data over time) - Estimation of future discoveries Based on these variables Hubbert figured that each oil field would show a bell curve in production of oil. The data plotted on the curve for each US oil field was historical data. They all showed the same trend. Based on that historical trend Hubbert predicted 1970 as the peak oil period for the US. He further used the same principle to predict the global peak oil.
Additional Notes on Pigovian Tax
William Baumol argues that it is extraordinarily difficult to measure the social costs of any externality and therefore to find the appropriate level of pigovian tax. Social cost of carbon (SCC) is the marginal cost of emitting one extra tonne of carbon (as carbon dioxide) at any point in time In recent years SCC has been used as a measure for pigovian taxes.
Marginal User Cost
marginal user cost rises with extraction of depletable natural resources over time reflecting scarcity and opportunity cost of the future generation. Total Marginal Cost = Maximum WTP When the total marginal cost is equal to the highest price that someone is willing to pay for the depletable resource, the demand and supply is equal to zero after this point. No more resources will be left or extracted at this point
Income Elasticity of Demand
Δd/Δy = 0 or less = low elasticity Δd/Δy = 1 or more= high elasticity World scenario: Oil has high income elasticity
How Poor Regions are Affected
•drought and water shortages •floods and extreme storms •crop failures and food insecurity •reduced agricultural productivity •loss of low-lying lands and islands •desertification (the gradual transformation of habitable land into desert) •loss of biodiversity and ecosystem migration and conflict
