the economics and policy of climate change api-35/econ1661 section notes jisung park april 2013...
TRANSCRIPT
The Economics and Policy of Climate Change
API-35/Econ1661 Section Notes
Jisung Park
April 2013These slides incorporate material originally produced by Geoffrey Heal, Rich Sweeney, Liz Walker, and Gabe Chan
Outline of next three sections Science
Climate Science Physical impacts
Economics I: Cost-Benefit Analysis of Climate Change Benefits Uncertainty Aggregation – Ethics, Discounting, Inequality Debate on ethical positions and Uncertainty
Economics II: Policy Design / Instrument Choice Overlapping instruments and other temptations REDD Geoengineering and the “Free-Driver” Problem Debate on policy alternatives
Climate Change is sort of a big problem
“Climate change is the mother of all environmental externality problems.”
- Martin Weitzman (2012)
“Climate change is the result of the biggest market failure the world has ever seen.”
- Nicholas Stern (2007)
Hepburn and Park, 2011
What Role can Economics Play? Where to go (How much mitigation?)
Cost-Benefit Analysis Find the “optimal” emissions trajectory? Target level: 350ppm? 450ppm?
How to get there (Which policy tools?) Instrument Choice:
Carbon Taxes? Cap-&-Trade? Top-down, Bottom-up?
Looking Ahead: The Economist’s challenge How to quantify the social welfare losses arising from these
physical impacts, given multiple layers of uncertainty and interdisciplinary contingencies?
Climate Science & Modeling
Physical Environmental Impacts
Economic Valuation of
Impacts
Aggregation of Valuations
SOCIAL COST OF CARBON ($)
Why do we need to learn Econometrics? The Bigger Picture
Policy Analysis
Empirics
Economi
c
Theory
POLICY RECOMMENDATIONS
SOCIAL COST OF CARBON ($)
Outline of next three sections Science
Climate Science Physical impacts
Economics I: Cost-Benefit Analysis of Climate Change Benefits Uncertainty Aggregation – Ethics, Discounting, Inequality Debate on ethical positions and Uncertainty
Economics II: Policy Design / Instrument Choice Overlapping instruments and other temptations REDD Geoengineering and the “Free-Driver” Problem The way forward? Debate on policy alternatives
8
Radiative Forcing and the Greenhouse Effect
The mean annual radiation and heatbalance of the Earth. From Houghton et al., (1996: 58), which used data from Kiehl and Trenberth (1996). Figure from Withgott and Brennan (2007)
Uncharted Territory
10000 5000(yrs before 2005)
Useful rules of thumb: GHG Concentrations/Emissions
10
Annual increase between 2 and 3 ppm Over a decade concentration increases by
roughly 20-30 ppm Currently at 390 ppm: (390 is CO2-only: including all GHGs concentration is
nearer 440) Will reach 410-420ppm by 2020 Current annual emissions: 40 billion tons CO2
equiv Check out:
http://cdiac.ornl.gov/pns/current_ghg.html
Stocks vs Flows
For Climate Change, what matters is the STOCK of GHG’s
Flow
Stock
1212
This is CO2-e not C, from all sources, not just fossil fuels
12
Where is it coming from?
Where is it coming from? Despite popular misconceptions…
Transport is relatively small (13%) Forestry is over 1/6th (17.4%) Building efficiency improvements are
somewhat trivial (7.9%)
Who is responsible?
14
Historically
Who is responsible?
Relative contributions by major countries to a) cumulative CO2 emissions, b) current annual CO2 emissions, c) the growth in CO2 emissions, and d) population
(Raupach, et al., 2007)
Who is responsible?
Relative contributions by developing and developed countries to a) cumulative CO2 emissions, b) current annual CO2 emissions, c) the growth in CO2 emissions, and d) population
(Raupach, et al., 2007)
17
Distributional Inequality in GHG per person
Annex 1: 16.1 tCO2eq / capita
Non-Annex 1:4.2 tCO2eq / capitaBut how much of your carbon footprint is actually within your individual control?
18
Attribution – Anthropogenic?first humans out of AfricaHistorical Atmospheric CO2 Concentration
Outline of next three sections Science
Climate Science Physical impacts
Economics I: Cost-Benefit Analysis of Climate Change Benefits Uncertainty Aggregation – Ethics, Discounting, Inequality Debate on ethical positions and Uncertainty
Economics II: Policy Design / Instrument Choice Overlapping instruments and other temptations REDD Geoengineering and the “Free-Driver” Problem The way forward? Debate on policy alternatives
Weather vs Climate Weather is a short-term realization from a
long-term Climate distribution
21
Temperatures are Rising
Variations in the Earth’s surface temperature in the Northern Hemisphere (IPCC, 2001)
Sea-Level is Rising
222222
Sea level movement
23
Potential Future Sea Level Rise
For those interested in the details…
Epidemiological studies suggest warm nights are more important in determining mortality and morbidity responses from heat waves
Projected Warming Scenarios
313131
Temperature forecasts
Forecast warming greatest in Arctic
Research question: should we care about absolute degree changes or stdev from normal variability?
Ecosystem Services Among the natural processes that will be
affected, which are the ones that will have significant human welfare implications?
Temperature and Precipitation changes will impact.. Water availability and quality Crop Yields and growing seasons Coastline Habitability Soil availability and quality
Biodiversity Loss What about the processes (and entities) that
are not human? Where does biodiversity loss fit in? Up to 30% of species gone by 2100. Only through the social welfare function?
Where UV = use-value, EV = existence value Norton (2010): Economics as a discipline commits the
sin of assumed “value monism”
Physical Impacts: Summary Average temperature increases worldwide
(tremendous regional heterogeneity) Increased temperature variability in some
areas Shifts in rainfall patterns
(even more tremendous regional heterogeneity) Sea-level rise Biodiversity loss (up to 30% of all species by
2100) Ocean acidification -> Coral bleaching Increased storm intensity and frequency in
most regions
Some Figures worth Remembering World GDP ~ $70 trillion US GDP ~ $15 trillion Social cost of carbon estimates: $23-$38/ton
(Greenstone et al, 2013); (-10$ to $200+ with a wider net)
Implied size of potential carbon market: >$800 billion annually
Questions and Comments?(Won’t spend any more time debating the
science)
Outline of next three sections Science
Climate Science Physical impacts
Economics I: Cost-Benefit Analysis of Climate Change Benefits Uncertainty Aggregation – Ethics, Discounting, Inequality Debate on ethical positions and Uncertainty
Economics II: Policy Design / Instrument Choice Overlapping instruments and other temptations REDD Geoengineering and the “Free-Driver” Problem The way forward? Debate on policy alternatives
The Economist’s challenge How to quantify the social welfare losses
arising from these physical impacts?
Climate Science & Modeling
Physical Environm
ental Impacts
Economic Valuation of Impacts
Aggregation of
Valuations
SOCIAL COST OF CARBON ($)
(Refresher)Where to go and how to get there Where to go (How much mitigation?):
Cost-Benefit Analysis Find the “optimal” emissions trajectory? Target level: 350ppm? 450ppm? +2C? +3C?
How to get there (Which policy tools?): Instrument Choice:
Carbon Taxes? Cap-&-Trade? Top-down, Bottom-up?
Disconcerting Issues “Climate change pushes economists beyond
their methodological comfort zone.” (Weitzman)
Key Issues Uncertainty Missing Damages Long-Time Horizons (Discounting) Ethics and Inequality
Uncertainty: Vast and MultiplicativeTemperature and Precipitation Projections
Ecological and Physical Impacts
Valuation Methods and Aggregation Issues
ALL OF THIS NEEDS TO SPIT OUT ONE POLICY-RELEVANT NUMBER?
Uncertainty: Vast and Multiplicative Social Cost of Carbon Estimates:
Vary by two orders of magnitude (Tol, 2008) Most recent “synthesis estimate” by Greenstone
et al (2013):
Missing Damages? Most IAM’s to date are highly incomplete
(Heal, Weitzman, Hanneman) For example, DICE Model (Nordhaus):
Damages driven primarily by… 1) Agriculture 2) Sea-level rise Even within agriculture, substantial controversy
over underestimates due to leaving out effect of rainfall: E.g. (Mendelsohn vs Schlenker)
Missing Damages? Recent research documents significant
Missing Damages: Storm Intensity and Frequency (Hsiang & Jina,
2013) Large, persistent effects on economic growth: up to
70% of present GDP in NPV terms (Japan, South Korea, Phillipines)
Over $4 trillion Highly heterogeneous (Australia and India benefit
slightly) Still inexact – what was the “damage” from
Sandy?
Missing Damages? Labor Productivity (Park & Heal, forthcoming; Dell
et al, 2011) +1 deg C => -1.2% GDP growth per year in poorer
countries Adaptation implication: AC in poor and hot countries?
Missing Damages? Violent Conflict (Miguel et al, 2013; Hsiang et al,
2011) Large and significant increases in civil conflict
Also some suggestive Evidence of Climate Change affecting…
Health and Human Capital Accumulation (Greenstone et al, 2012; Graff-Zivin et al, 2013) Effects on mortality, morbidity, even test scores
Long Time Horizons: Discounting“Climate policy involves time scales hitherto unprecedented in policymaking, periods of at
least100 years.” (Heal, 2008)
At these time scales, the choice of discount rate can DOMINATE the cost-benefit analysis E.g. $1,000,000 in damages occurring 200 years
from now, discounted at 7% has an NPV of $1.32
Discounting
What happens to NPV of SCC at “benchmark” discount rate of 7%?
Discounting and Ethics Becomes a matter, in part, of
Intergenerational Ethics
“The problem of discounting for projects with payoffs in the far future is largely ethical.” -
Kenneth Arrow“Discounting later enjoyments versus earlier
ones is simply a practice that is ethically indefensible.” - Frank P. Ramsey
Discounting and Ethicsr = ρ + ηg
r : discount rate ρ: pure rate of time preference (arguably an
ethical parameter) η: elasticity of marginal utility (also ethical in
the context of global social planner) g: future consumption growth rate
Discounting and Ethics Are later generations worth intrinsically less?
Stern says no, justifying ρ = 0.01
Is Consequentialist Utilitarianism the “right” premise/framework? See: Hepburn et al, 2011; Norton, 2010
Who’s the relevant “unit” of welfare maximization? Nation State? In which case, what to do with
minus infinity welfare of small island states (Gerrard, 2011)
Climate Change, Ethics, Inequality By and large (with caveats about vast
uncertainty aside), CC is a problem caused by developed countries, with consequences borne disproportionately by developing countries.
What’s a “fair” solution?
Let’s have a debate What do you think? Should developing countries receive transfers
from rich industrialized nations? Should reduction allocations be based on per
capita emissions? Per unit GDP produced? What should rho be?
Outline of next three sections Science
Climate Science Physical impacts
Economics I: Cost-Benefit Analysis of Climate Change Benefits Uncertainty Aggregation – Ethics, Discounting, Inequality Debate on ethical positions and Uncertainty
Economics II: Policy Design / Instrument Choice Prices vs Quantities revisited Overlapping instruments and other political temptations REDD Geoengineering and the “Free-Driver” Problem Debate on policy alternatives
Instrument Choice Basics Three Major Types:
1. Market-based mechanisms (Tax, Cap-and-Trade, Hybrids)
2. Voluntary Reductions (Corporate Social Responsibility)
3. Direct Regulation (“Command and Control” mandates)
Jisung Park - University of Oxford
Why Market-based Instruments? Demonstrated efficiency gains from market-
based schemes E.g. Clean Air Act 1990
Encourages innovation Market drives new technologies and sectors that
may not be imaginable at the moment Etc, etc, etc
Tax or Cap?Prices vs Quantities Review Weitzman 1974: Key result is…?
Given MC uncertainty Relative slopes of MB and MC curves matter Determines which policy tool is preferable ex ante (MB uncertainty matters only when?)
Prices vs Quantities applied to Climate Change Useful Heuristic
What is the possible scenario we are worried about?
MB/MC slopes What is the preferred policy?
Environmental catastrophe
Marginal benefit (MB) curve is steeper (or kinked)
Quantity - put a “hard” cap on emissions
Economic overburdening Marginal cost (MC) curve is steeper (or kinked)
Price - put a “limit” on potential costs
Discussion – Tax or Cap? On balance, what seems more sensible? No clear correct answer…
Multiple Instruments: Political Temptations Why can’t we have the best of both worlds?
E.g. Carbon Tax at the state level, Cap and Trade at the National level?
Neatly Dovetail
ed
Kitchen Sink
Political Rationale
Political Rationale
Political Rationale
Economic Rationale
Multiple Instruments in Theory Good Reasons to Combine Instruments:
Multiple Externalities : Environmental externality (carbon) + Innovation externality (technology)
Political ConstraintsRedistribution, action-bias, etc
Multiple Instruments in Practice European Union (EU):
Emissions Trading System (ETS)+ …… carbon taxes in Sweden, Norway, Denmark, and
recently the UK and Ireland…renewable subsidies in Germany, Spain (solar)…additional trading schemes in UK (CRC)
United States:State and Federal RPS Regional and state-level emissions trading schemes
+ CAFÉ standards
Unintended Consequences of Overlapping Instruments Combining multiple overlapping instruments
can lead to severe unintended consequences Collapse of carbon market Leakages Net Efficiency Loss (same abatement at higher
cost) Loss of Credibility
Taxes combined with Cap and Trade
Source: Fankhauser, Hepburn, Park 2011 (Climate Change Economics)
Impact of Taxes combined with Cap and Trade
Source: Fankhauser, Hepburn, Park 2011 (Climate Change Economics)
Technology Standards/Subsidies and Trade Tech-specific subsidies or mandates on top of
a permit trading system Can lead to lower permit prices and greater
inefficiency Three possible scenarios:
Above margin (no effect) Below margin (increases rent) Inter-margin (most problematic)
Subsidies and Trade: Above-margin (e.g. CCS)
Source: Fankhauser, Hepburn, Park 2011
Subsidies and Trade:Below-margin (e.g. Nat gas)
Source: Fankhauser, Hepburn, Park 2011
Subsidies and Trade: Intra-margin
Source: Fankhauser, Hepburn, Park 2011
Jisung Park - University of Oxford
Why is this problematic?
Same abatement, but greater cost ($) Presents the “illusion” of more abatement Undermines long-term viability of carbon
market
Hybrid Alternatives Multiple Instruments ≠ Hybrid Instruments Hybrid instruments are preferable:
Price Ceilings (“Safety Valves”): pay minimum Price Floors: pay maximum Price Collars Auction Reserve
If combining cap-and-trade with standards, make sure to adjust the level of the cap
Other Policy Instruments? We’ll talk about the following two:
REDD Geoengineering?
REDD Reducing Emissions from Deforestation and
Forest Degradation
REDD Pros
Low-Hanging Fruit: low abatement costs per ton (in principle)
Possible “Co-benefits”: Biodiversity conservation, Water filtration
Cons Implementation issues: Monitoring, Permanence,
Financing Whose cap? Unintended side effects: Land grabs, Indigenous
impacts
Geoengineering and the Free-Driver Problem
Geo-Engineering: the “G-word” Definition (Royal Society of Sciences):
“The deliberate large-scale intervention in the Earth’s climate system, in order to moderate
global warming.”
Here, focus on “Albedo Enhancement” or “Solar Radiation Management (SRM)”
1. Solar Radiation Management (SRM) What is SRM?
Geoengineering Supporters Argue Climate change is already happening Mitigation is far from the optimal path Some geo-engineering technologies - Solar
Radiation Management (SRM) in particular - are developing faster than anticipated.
Geoengineering: the “G-word” “Formerly a freak-show in otherwise serious
discussions of climate science and policy, geo-engineering today is a bedfellow, albeit one of which we are wary”
-Victor, 2008
Historical Progression: Climate Science…Mitigation…Adaptation…Geo-
Engineering as Backstop?
Three Stylized observations1. SRM is cheaper, and closer to
implementable reality, than previously believed
2. Climate Damages are likely very heterogeneous
3. No international treaties on SRM (yet)
1. Solar Radiation Management (SRM) SRM Geo-engineering is…
Fast, Cheap, Imperfect, (Keith, 2010)
To offset a doubling of pre-industrial CO2 levels, you need to scatter just 2 % of the light that hits the planet.
Most recent cost estimate: $1-8 billion/year (McClellen et al, 2012)
2. Climate Damage Heterogeneity
Source: http://www.guardian.co.uk/environment/interactive/2009/oct/22/climate-change-carbon-emissions
3. Lack of Policy Architecture Policymakers have begun dialogue as of 2010,
but no treaties exist Can the Genie be kept in the bottle? Can’t detect even if a country were to
“surreptitiously geoengineer” (Keith, 2013)
What happens if an individual country (say, Bangladesh) decides to act unilaterally?
“FREE-DRIVING” Global Public Gob Problem
(not a typo)
“Free-Driving” Given
Vast Climate Damage heterogeneity&
Unilaterally implementable SRM technology
There is some world in which one country chooses the level of the “public bad”, which is sub-optimal for the rest of the world.
Public “gob” – “good or bad”: good for you, bad for others (Weitzman, 2013)
Debate: What’s the best solution available? Geoengineering:
Fund research? Ban research? Ban testing? Negotiate international treaties? Create norms? Transfer to most likely “rogue geoengineers”?
More Broadly: Top-down? Bottom-up? Fund silver-bullet
mitigation technology? Fund adaptation?