Economics 331

1. Economics 331 1

2. Finale on climate change policy Today: Endgame Alternative perspectives • Environmentalist perspective • Conservative perspective • Reprise on learning • Tipping points and policy

3. Endgame for course 1. Final exam (absence by Dean’s excuse only) ECON 331. Assigned to exam group 33 Friday, May 6, 2011. 9:00 am – 11:00 am 2. Structure: probably three parts: will probably have choice. 40 minutes for “prepared questions” (to be posted); 40 minutes problems; 40 minutes more problems 3. I will post last year’s exams (but no answers) 4. Review sessions: WN 1 next week; WN 1 week after; office hours by Lint 5. Grades will be approximately based 20 percent on the problems, 30 percent on the paper, 20 percent on the midterm, and 30 percent on the final, all with adjustments. 6. Paper due noon April 27 (hard copy outside my office; electronic copies to WN and LB) 7. Hard deadlines for seniors. No postponements for last-minute procrastinations.

4. The spectrum of economic views on climate change Strong --------- Stern ------------------A----B----C----------DICE------D-----------Lomberg--- Weak policies $100 /tCO2 $10 - $20/tCO2 $1/tCO2 policies Stern: Stern Review, also summarized in his Ely lecture, American Economic Review. Lomberg has organized the Copenhagen consensus of (largely) conservative thinkers to rank major issues. A, B, C, D are other models

5. The Copenhagen Consensus: Priorities for Action “In ordering the proposals, the panel was guided predominantly by consideration of economiccosts and benefits.” http://www.copenhagenconsensus.com Economics 487b, Spring 2007

6. Environmentalist critique Stern/Krugman critique* of the DICE model approach: • Uses too high a discount rate • Ignores the uncertainty and the “fat tail” of low-probability catastrophic outcomes • Uses a temperature sensitivity coefficient of 3 °C per CO2 doubling instead of more realistic 6 °C Next slide shows the sensitivity of the emissions control rate if we introduce these sequentially. Which are most important? *Stern Review : http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/sternreview_index.htm Krugman, “Building a Green Economy,” NYT Magazine, 2010, http://www.nytimes.com/2010/04/11/magazine/11Economy-t.html

7. Emissions Controls for Environmentalist Assumptions

8. Reprise on learning

9. Original example

10. Revised example with lower damage in bad state.

11. Conclusion Example shows how expected strength of policy can either go up or down with learning. No general theorem about whether learning increases or decreases your abatement (or investments more generally)

12. How can we treat tipping points and threshold effects?

13. OOPS!!!!!!! k k* k** k***

14. Note: Have new and different locally stable equilibrium k k** k* k***

15. Non-linearities in the climate system Most of the impacts literature examines gradual climate change, with roughly linear systems and impacts. Scientists have been particularly concerned about discontinuities, abrupt climate change, tipping points, catastrophic impacts. How can we deal with thresholds in our economic analysis? A very tough problem on the frontier.

16. Examples from climate system Source: Lenton et al., “Tipping Elements,” PNAS, Feb 2008, 1786.

17. Optimum Without Thresholds Total Damage Total Abatement Cost 0 Temperature* Temperature 17

18. Optimum With Thresholds Total Damage Total Abatement Cost 0 Temperature* Temperature 18

19. Optimum Without Thresholds Marginal Abatement Cost Marginal Damage 0 Temperature* Temperature 19

20. Optimum With Thresholds ???!!!??? Marginal Abatement Cost Marginal Damage 0 Temperature* Temperature 20

21. Which is the real maximum? Net income 0 Temperature 21

22. Have multiple equilibrium for system and policy • DICE type model. • Catastrophic damage at 3 °C = 50 % of output • Have abatement choice about whether to pass the threshold as function of costs and benefits. • Abatement cost varies from 1% to 100% of output. • Next slide shows whether optimally pass the threshold as function of abatement cost. • Note that SOLVER can’t reliably get the right answer near the cross-over because it is local optimizer!

23. Solutions for temperature Note: 1. Have algorithm problems because multiple local maxima. 2. Sharp discontinuity in solution around threshold.

24. Solutions for PV net income Note: Solution is continuous for PV income (although bad)

25. Solutions for first-period control rate Note: had slightly wrong graph in class. Note: Paradox that control rate goes UP around switch point. Why? First you speed up, then when you know you are going to miss your plane, slow down.

26. Where do we go from here? It is in YOUR hands… Where do we go from here? It is in YOUR hands… Y