Climate-change policy: the challenge to economics

1
Climate-change policy the challenge to economics

• Scientists gt 99 in agreement about anthropogenic
  global warming (AWG)
• Economists and policy-makers in less agreement,
  but here is where things get really divergent.

2
What to do about it

• Nothing--rely on adaptation
• Do something, but how and what?
• GHG abatement
• Technology research
• Sequestration natural and technological (CCS)
• Cap and trade
• GHG (carbon) taxes
• Preparation for catastrophic events
• Do something, but how much?

3
Most favor doing something

• Benefit Cost Analysis is VERY difficult
• Stern Review
• British study
• Used very low discount rateputs heavier weight
  on potential future
• Mainline economists
• More gradual policy ramp
• Argument early resources better spent on
  technology and human capital

4
Some difficulties with BCA/CBA

• Big uncertainties about the discount rate (r)
• Big uncertainties about the probability and
  magnitude of a catastrophic event outgassing of
  methane, loss of Greenland or Antarctic ice
  sheets, etc.
• Recent news about the West Antarctic ice sheet
• Possible sea level rise 5-10 feet

5
Lets consider some issues with r

• Many philosophers and ethicists argue for r 0,
  or at least very low
• They argue that it is wrong to place less weight
  on the well-being of future generations
• The Stern Review comes close to this

6
An experiment with economic growth and low r

• Economic growth of 1.3 annually (from Stern)
• r 1 0.01
• Now suppose our actions today reduce future
  consumption by 0.1 (1/10 ) starting in 200
  years and continuing forever.

7

• Approximate current per capita consumption is
  10,000 (with very unequal distribution)
• In 200 years it would be approximately 130,000
• A 0.1 (.001) decline would be 130, the present
  value of which 200 years out would be 130/0.01
  13,000
• Discounting 200 years back to the present at r
  0.01 gives us a PV of approximately 1777 of
  damages

8
Where does CBA get us?

• Would it make sense to ask the current generation
  to go 10,000 1777 8223.
• .to prevent folks 200 years and beyond from
  going 130,000 130 129,870?
• This is a simple thought experiment, but it
  alerts us to the implications of low r

9
Big uncertainty 1

• What discount rate to use
• Ramsey formula for intergenerational discounting
• DDR gains favorMartin Weitzman
• The great economist Tjalling Koopmans (1975 Nobel
  Prize in Economics) cautioned that we should
  never get wedded to a particular idea for the
  discount rate until its implications are
  understood

10
What about catastrophes?

• This is another HUGE wildcard in the CBA debate
• What and how much to do are very sensitive to
  assumptions about probabilities and magnitudes
• CBA works pretty well when dealing with E(X) and
  known probabilities from estimable probability
  density functions (PDF)

11
Ordinary risk analysis under conventional
uncertainty

• Works well when we have a good idea of PDFs and
  probabilities
• Insurance companies
• Risks of morbidity and mortality due to exposure
  to pollutants
• This type of risk analysis is backed up by loads
  of data

12
Profound uncertainty

• The analysis of probabilities associated with
  climate catastrophes has an extra layer of
  uncertainty
• We are uncertain about the probabilities and PDFs
• It is less about risk analysis and more about
  trying to resolve how uncertain we are about the
  uncertainty we face

13
Climate Change Background CO2 emissions from
fossil fuels (2004)
14
Climate Change Background per-capita CO2
emissions from fossil fuels (2004)
15
Kyoto Protocol (1997)

• 150 nations
• Task was to create a legally-binding
  international agreement on climate change.
• Targets and timetables
• Reduce ghgs in aggregate by 5.2 from a 1990
  baseline for the 2008-12 time period.
• Targets are differentiated by nation (U.S. is
  7).

16
Kyoto Protocol (1997)

• Allowable policies
• Emissions trading.
• Joint implementation one country gets credit
  for implementing a project to reduce carbon
  emissions from another country.
• Carbon sinks land and forestry practices that
  remove carbon emissions

17
Kyoto Protocol (1997)

• 127 countries have ratified agreement.
• Participating countries account for 62 of GHG
  emissions.
• Russia was last country to ratify.

18
U.S. Developments

• Signed Kyoto Protocol in 1997.
• Byrd-Hagel Resolution in U.S. Senate (1997)
• The U.S. should accept no climate agreement that
  did not demand comparable sacrifices of all
  participants.
• Passed 95 to 0.
• U.S. pulled out of Kyoto in spring 2001.
• Regional Greenhouse Gas Initiative (RGGI underway
  in 2009)
• Regional cap-and-trade program.
• Northeastern states.
• Pacific states considering their own
  cap-and-trade program.
• Regional trading program being planned for this
  region

19
Economics of Climate Change

• Issues underlying costs of controlling GHGs
• How quickly can society change its energy
  systems?
• Can technology change fast?
• How willing and able are consumers to substitute?
• How flexible will climate change policies be?
• Will marginal cost of controlling GHGs be lower
  in future?
• If green (corrective) taxes are used, will
  distortionary taxes (e.g., income) be lowered?

20
The Broad-then-Deep Strategy

• A broad set of countries should make small cuts
  today and progressively deeper cuts in the
  future.
• Damages occur gradually and catastrophes are
  highly uncertain and in the future.
• Mitigation costs are likely to fall over time
  with increasingly cleaner technology.
• Strategy ensures that payoffs to countries for
  joining a coalition will be higher.

21
Debate on Kyoto Protocol

• Critique of Kyoto Protocol a deep then broad
  strategy.
• Only developed countries make deep cuts today.
• No provisions for bringing in developing
  countries.
• Support for Kyoto Protocol
• Developed countries are most responsible for
  current levels of GHGs.
• An agreement is better than no agreement.