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Chaos unfolding without control of greenhouse gases

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Title: Chaos unfolding without control of greenhouse gases


1
Chaos unfolding without control of greenhouse
gases
  • Relevance of carbon taxes and cap-and-trade
  • Martin and Elizabeth David


2
Outline
  1. Consequences of climate change
  2. Our decision problem
  3. Institutions
  4. Mechanisms for affecting CO2e
  5. Weaknesses of current legislation
  6. Discussion

3
Why reduce CO2e now?
  • Sea levels may rise 3m major rivers may cease to
    flow both extreme drought and extreme rainfall
    events are likely.
  • The probabilities of these events over the next
    50-100 years are uncertain.
  • The last 20 years contain 10 of the warmest
    global climate years in 120 years.
  • The trend in the last 20 years exceeds the past.
  • The level exceeds any levels detected from
    geological data over 100,000 years.

4
Extreme events are decisive to risks of GW
  • Class 5 tropical storms
  • Flooding of low-lying areas due to increased
    probability of rainfall events over 3 inches
  • implies loss of crops, less infiltration, dam
    failures
  • Melting of glaciers Greenland, Antarctic, and
    Himalayas forebode
  • sea level rise
  • drought in major rivers

5
What to do now?
  • Take no action
  • Eat drink and be merry for tomorrow we die.
  • Act now
  • to abate CO2e emissions
  • We may avert some of the worst possible futures.
  • We can adapt to
  • change in sea level
  • local climate regimes.
  • No success is assured, its likelihood is
    uncertain.

6
What does uncertainty mean?
  • Future climate events are drawn from a
    distribution likely to have a higher mean and
    more variance than the past 120 years.
  • Both floods and droughts are more likely.
  • Warming makes some land uninhabitable
  • Islands and seacoasts
  • Areas without access to potable water
  • Areas too boggy to cultivate (Siberia)
  • Likelihoods are not estimable from historic data.

7
Weitzmans distribution game
  • Conventional deck of cards A1, K13
  • mean 7, Pr(n) 1/13 where 0ltnlt14
  • 1. Replace 6,7,8 with Random draws from n? 6,7,8
  • variability rises, mean is constant
  • 2. Replace 1,2,3 with Random draws from ngt 3
  • mean rises, variability shrinks with duplicates
  • 3. When higher numbers are added to the deck
  • 14,15,16,17,18,19 mean and variability rise.
  • If the highest card comes from a rising
    distribution, predicting risk of extreme events
    is impossible.

8
How can CO2e be reduced?
  • Supply
  • Increase thermal efficiency of fossil fuel
    consumed
  • fix leaky pipes and storage facilities
  • cogeneration, geothermal HVAC
  • reduce losses on transmission grids
  • Increase sources of renewable energy
  • Solar, wind, tides, harnessing photosynthesis
  • Demand
  • Reduce fossil energy consumption
  • Increase thermal efficiency of structures
  • Reduce fossil-powered vehicle use or increase
    miles/gallon

9
Institutions Mechanisms
  • Generic requirements
  • Monitoring / transparency
  • Enforcement / stipulated penalties
  • Self-enforcing institutions
  • CO2e specific options
  • Carbon Tax
  • Cap-and-trade
  • Command and Control (CAC)

10
Institutions controls on producers -1
  • Regulated public utilities
  • siting, price, investment, emissions
  • Electricity grid and pipelines
  • siting, construction, access
  • V.L. Smith (Nobel 02) pioneer in institutions
  • Agencies FERC / WI/PSC / EPA

11
Institutions controls on producers 2
  • Large energy consumers
  • emissions
  • Small energy producers (solar wind)
  • access to grid, price for energy
  • Commercial /residential
  • building codes, weak incentives for cogeneration

12
How to reduce CO2e emissions?
  • Create incentives for people to change business
    as usual activities
  • Make plant managers see emissions as costly to
    their business
  • Punitive approach penalties for emissions
  • Positive incentives for emission reductions
  • Make consumers realize that emissions are
    expensive to them and their health
  • Punitive approach penalties for emissions
  • Positive incentives for emission reductions

13
Reducing CO2e emissions
  • Approach will vary by producing industries
  • Regulated public utilities
  • Other large users of fossil fuels
  • Smaller industrial commercial activities
  • Approach will vary across consumers
  • Poor can not afford to pay more for energy
  • Wealthy can invest in alternative energy sources

14
Mechanisms Carbon Tax 1
  • Tax emissions (CO2e) from fossil fuel use to all
    businesses and consumers
  • monitoring emissions must be continuous and
    precise
  • all emissions must be covered

15
Mechanisms Carbon Tax 2
  • Scope tax fossil fuels (CO2e) used by
  • Consumers
  • Exporters
  • Business investors, including capital goods
  • Governments Nonprofit organizations
  • Flexibility
  • Tax rate can be adjusted up/down
  • If reduction in CO2e exceeds policy target, rate
    can be lowered.
  • Incentive for all users to reduce CO2e

16
Mechanisms Carbon Tax 3
  • Drawbacks
  • New nationwide bureaucracy
  • Stickiness of tax rates
  • legislators loathe to change tax rates
  • Measurement of CO2e needed for all producing
    establishments
  • Can tax purchases, knowing carbon content, when
    taxing emissions is impractical.

17
Mechanisms Cap-and-trade
  • Scope Encompass all CO2e releases by plants
    within the USA
  • Permit attributes
  • emission allowed (denomination)
  • life (period during which permit is valid)
  • transferability (eligible purchasers)
  • Enforcement
  • monitor emissions
  • stipulated forfeitures

18
Mechanisms Cap-and-trade 2
  • Drawbacks
  • Continuous monitoring of CO2e essential
  • Multi-year permits encourage hoarding
  • Issuing permits (at no cost) in proportion to
    past emissions subsidizes facilities in
    proportion to past insults to the environment

19
Chicchettis options for Public Utilities
  • Historic utility (HU) model
  • Build new capacity (requires PSC OK)
  • Sell energy product (price determined by PSC)
  • Maximize reliability of delivery
  • Demand-side management (DSM) model
  • Encourage users to reduce energy purchases
  • Purchase renewable energy from dispersed sources
    (e.g. residential solar panels)
  • Regulators must make DSM more profitable than the
    historic utility model.

20
Mechanisms Command and Control
  • Regulations specify allowed emissions
  • EPA required to regulate emissions that impact
    public health
  • Allowed emissions established by protocol which
    entails public comment, review, and notice of
    final rules
  • Rule-making may take many years.
  • Rules may differentiate among types of emitters
    (e.g., agricultural and industrial emissions.)
  • Rules can be challenged in court.

21
Weaknesses of current legislationQuestions that
must be answered affirmatively
  • Scope
  • Are all fossil fuel users affected?
  • Strength of incentives for change
  • Are users aware induced to change?
  • Distribution of cost and benefits
  • Is the societal impact distributionally neutral?

22
Weaknesses (ACES) American Clean Energy and
Security Act
  • Reduction
  • base year 2005 (EU uses 1990)
  • 2020 target -17 (EU target 20)
  • 2050 target -83
  • Failure to auction all discharge permits
  • CBO estimates close to 1000 billion revenue from
    auctioning all permits.
  • CBO estimates 300 billion from ACES.

23
Weaknesses American Clean Energy and Security
Act
  • Withdraws EPA power to regulate CO2e
  • Permits purchase of offsets in lieu of reductions
  • Excludes small facilities
  • No incentives for small combined-cycle
    electricity generation
  • valuable to raise thermal efficiency to 80
  • Examples shopping centers, large buildings

24
Carbon tax or cap-and-trade now!
  • Act now
  • Insist on transparency
  • Expect resistance to good policy
  • Questions?
  • Contact david_at_ssc.wisc.edu

25
Uncertainty trumps business as usual
  • Homeowners insure against fire risks lt0.01
  • Nationally, we need policies that provide
    infrastructure to
  • mitigate costs of extreme events, even if they
    occur 50 years from now
  • adapt our economy to be robust to more extreme
    meteorological events
  • Reducing CO2e emissions (insurance that) reduces
    the risk of events from extreme draws in the
    unknown distribution of bad outcomes.

26
What to do?
  • Netherlands is strengthening its dykes removing
    habitation from below sea level.
  • US needs to plan for diversion of the Mississippi
    into the Atchafalya R.
  • US needs to cease unsustainable water withdrawals
    (mining water) and subsidizing water for
    irrigation

27
The commons,success failures of economic
science
  • Commons can be governed without private ownership
  • Elinor Ostrom (2009 Nobel, economics)
  • Behavioral science
  • insight into how decision-makers perceive risk
    and justice
  • Kahneman Tversky (2002 Nobel economics)
  • the prisoners dilemma and bubbles
  • Cassidy New Yorker 10/5/09, (John Nash 1994 Nobel
    economics)

28
The following slides were not discussed
  • I will be happy to answer questions

29
Benefits of CO2e reductions should use a
distribution of outcomes
  • Benefit-cost analysis
  • requires projecting estimated distributions for
    more than 100 years
  • historic evidence on climate
  • lacks fine geography
  • reflects a distribution that has shifted recently
  • historic US national economic data
  • about 80 years for national product 50 years for
    industrial sectors
  • Projections for 2110 are highly uncertain

30
6. How do we transfer wealth to the future?
  • Future productivity gt present
  • resource base gt present
  • Techno fix (US bias)
  • Increased human resources (increased ability)
  • Greener earth sustainable use of the
    environment
  • We drink our own sewage.
  • Land resources endowed to future must have
    sustainable characteristics.
  • Built environment must be sustainable and
    suitable for coming climate conditions.
  • Financial assets bequeathed are irrelevant.

31
4. Time over generations
  • Insurance is a metaphor for paying premiums now
    (investing) to ameliorate risk of future
    disasters.
  • How do we value future benefits?
  • We need to assess risk under uncertainty.
  • Historic data certain to understate future risks.
  • Extreme events will dominate the value of current
    precautionary behaviors.

32
Time over generations
  • Rate of time preference
  • individual consumption What compensation do I
    need to wait for pleasurable consumption next
    year, as against immediate consumption?
  • Expressed as a discount rate 1/(1-r) for 1 year
    (1-r)-n for n years.
  • bequest motive What portion of my lifetime
    wealth should be used to endow consumption for
    the next generation?
  • Typically involves a negative rate of discount as
    individuals forego consumption to benefit
    children, land trusts, or foundations

33
Strength of bequest motive
  • Clearly evidenced by parental financing of
    childrens education
  • Relatively few empirical estimates of strength
  • Studies of charitable contributions give some
    estimates of willingness to endow persons outside
    the family and for facilities that are operable
    past 50 years into the future
  • Public facilities space research, schools,
    levees, dams give some evidence of motives to
    bequeath outside the family and to future
    generations.

34
What social rate of discount is appropriate to
climate change?
  • gt0. Benefits in 100 years are worth little at
    discount rates gt.01
  • 0. No discounting is appropriate
  • lt 0. People living now, will pay a premium to
    assure that future have not less access to
    well-being than those alive today.
  • No answers are available from existing research.

35
Institutions controls on producers 3
  • Farms and agriculture cooperatives
  • production subsidies, special loan terms
  • CRP subsidies to reduce run-off
  • economic pressure from suppliers and buyers
  • little market power for farmers
  • great market power for inputs and purchases
  • some problems eased by agricultural services from
    USDA, cooperatives
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