Topics Today 12908

1
Topics Today (12/9/08)

• Case study on climate change.
• Kyoto Protocol.
• Homework 8 is due today.
• Practice final exam questions and review sheet
  are available on web site.
• Comprehensive Final Exam Thursday, 12/18 at 245
  pm, in CHEM 1351.

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Kyoto Protocol

• 127 countries have ratified agreement.
• Participating countries account for 62 of ghg
  emissions.
• Reduce ghgs in aggregate by 5.2 from a 1990
  baseline for the 2008-12 time period.
• Developing countries are not participating.
• Notable withdrawals include the U.S. and
  Australia.

3
Designing an International Agreement

• Insights from Repeated Games
• Self-enforcing agreements are possible.
• Need a credible threat (i.e. trade sanctions)
• Retaliation becomes more difficult as the number
  of countries increases.
• Retaliation damages both the enforcer and the
  free-rider.
• Retaliation may not induce cooperation if
  free-riding benefits are high.

4
Designing an International Agreement Free
Riding and Repeated Games

• Suppose two countries A B in an infinitely
  repeated game w/ r0.1 and the grim trigger
  strategy
• PV(Reduce) 10 10/0.1 110
• PV(Deviate) 25 8/0.1 105
• Incentive for both to reduce.

• Note These are per-country payoffs.

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Designing an International Agreement Free
Riding and Repeated Games

• Suppose two countries A B in an infinitely
  repeated game w/ r0.1 and the grim trigger
  strategy
• PV(Reduce) 10 10/0.1 110
• PV(Deviate) 35 8/0.1 115
• Incentive for neither to reduce gt higher free
  riding incentive.

• Note These are per-country payoffs.

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Designing an International Agreement

• Insights from Cooperative Games
• A Chief U.S. complaint of the Kyoto Protocol is
  that it doesnt include developing countries.
• Their payoffs are probably higher outside the
  Kyoto Protocol than inside the Protocol.
• How to increase payoffs to developing countries
  from participating.
• Direct side-payments (e.g. Montreal Protocol).
• Market-based policies (e.g. TPPs) can lower
  costs.

7
Policy Instruments for Climate Change

• Points to consider
• Climate change policies have a tradeoff between
  flexibility and stringency.
• To keep costs down, more stringent policies
  require more flexibility.
• Inefficient / inflexible policies (i.e. CAC).
• Efficient / flexible policies (i.e. TPPs).

8
Policy Instruments for Climate Change

• Green taxes
• Efficient policy that reduces pollution at least
  cost.
• Incentive for consumers to
• Reduce consumption.
• Switch to less-carbon-intensive fuels (i.e. solar
  power instead of coal, hybrid cars instead of
  gas, etc.).
• Power producers will reduce pollution by
• Switching fuel
• Increasing pollution control

9
Policy Instruments for Climate Change

• Tradable Pollution Permits
• TPPs are a least-cost policy when pollutants mix
  uniformly gt very relevant for CO2.
• Within-nation trading
• Set level of desired emissions reduction and
  allocate tradable permits to firms and / or
  countries.
• Probably not applicable for motorists.
• Efficient way to reduce emissions from power
  plants.

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Policy Instruments for Climate Change

• Tradable Permits
• Between-nation trading (Clean Development
  Mechanism (CDM) of Kyoto)
• Nations can generate emission reduction credits
  for other nations.
• Ex/ U.S. could pay Australia for emission
  reduction credits.
• Devil is in the details gt how to monitor and
  enforce such a system.

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Policy Instruments for Climate Change

• State of Global Greenhouse Markets
• European Union (all 25 member states)
• Emissions Trading Scheme (ETS) launched in Jan.
  2005.
• 12,000 industrial plants are enrolled.
• Goal is to reduce emissions by 8 below 1990
  levels.
• Permit prices plunged in May 2006 gt permits were
  not scarce.
• EU has revised the cap, and prices have
  recovered..

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Policy Instruments for Climate Change

• State of U.S. Greenhouse Markets
• Regional Greenhouse Gas Initiative
• 9 Northeastern states launched market in fall
  2008.
• Cut power plant emissions of CO2 by 10 by 2020.
• Prices opened around 5/ton in September,
  recently traded at 4.18/ton.

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Importance of Efficient Policies

• Ex/ two countries (A, B) with a trans-boundary
  pollutant (e.g. CO2).
• Goal is for each to reduce pollution.
• Cost of abatement for country A is 11.

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Importance of Efficient Policies

• Country B has two firms with different abatement
  costs.
• Total cost of abating 4 units for country B
• Command-and-control (CAC) 16
• Tradable Pollution Permits (TPP) 9

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Importance of Efficient Policies

• Suppose country B doesnt use a least-cost
  policy. Payoffs

B has a dominant strategy gt Dont reduce. A
doesnt have a dominant strategy. Nash
Equilibrium Neither country reduces.
Dominant strategy one strategy is better than
another strategy for one player, no matter how
the opponent plays.
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Importance of Efficient Policies

• Payoffs if country B does use a least-cost policy

B has a dominant strategy gt Reduce. A doesnt
have a dominant strategy. Nash Equilibrium Both
countries reduce.
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Course Summary

• People (and countries) behave according to the
  incentives they are given.
• To alter human behavior we must alter incentives.
• Ex/ Alter property rights faced by people.
• Ex/ Alter expected payoffs for countries.
• Costs and benefits drive decisions, whether or
  not they are ever explicitly quantified.
• The more we understand costs and benefits, the
  better our decisions.