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The Economics of Climate Change: An Economic Critique of Kyoto, and an Alternative Proposal

The Economics of Climate Change: An Economic Critique of Kyoto, and an Alternative Proposal. Dr. Arne Kildegaard University of Minnesota, Morris. Directions to Morris…. Greenhouse Gases (GHGs) and the atmosphere. CO2 Emissions and Concentrations. CO2 Emissions.

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The Economics of Climate Change: An Economic Critique of Kyoto, and an Alternative Proposal

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  1. The Economics of Climate Change:An Economic Critique of Kyoto, and an Alternative Proposal Dr. Arne Kildegaard University of Minnesota, Morris

  2. Directions to Morris…

  3. Greenhouse Gases (GHGs) and the atmosphere

  4. CO2 Emissions and Concentrations

  5. CO2 Emissions

  6. CO2 Concentrations and Temperature

  7. Temperature Change

  8. The Industrial Revolution: A Revolution in Energy Usage Before After

  9. Revolution in Energy Use (cont’d.) • Exploitation of carbon-based fossil fuels • Consequent CO2 emissions • Deforestation (elimination of carbon sinks) • Consequent elimination of carbon sinks  Inevitably, higher atmospheric concentrations

  10. Other GHGs • Methane • Nitrous Oxide • Hydroflourocarbons (HFCs) • Perflourocarbons (PFCs) • Sulphurhexaflouride

  11. Consequences: a non-exhaustive list(from the UNIPCC) • Rising sea levels • Island nations and coastal cities • Freshwater resources (desertification) • Human health • Vector-borne diseases (e.g. malaria) • Agriculture • Cereal production to fall 20% by some GE analyses • Redistribution from tropics to temperate zones • Species and habitat

  12. Can’t we all just get along…?

  13. UN Framework Convention on Climate Control (UNCCC) • Rio Conference • COPs (Council of Parties) Rounds • “Targets and Timetables” (COP1) • Kyoto Protocol (COP3, December, 1997) • Subsequent modifications (COP4-10) • U.S. Repudiation (March, 2001)

  14. Key Features of Kyoto, as Amended • Targets and Timetables •  93% of 1990 emissions by 2008-2012 • Binding restrictions on “Annex” B countries only • 38 countries + EU • Tradeable Discharge Permits (TDP) Scheme • To minimize total cost of compliance • Treaty Enters into force when countries comprising 55% of Annex B emissions ratify

  15. Problems with Kyoto • Economic rationality? $ Marginal Abatement Cost Marginal Damage Cost Emissions Initial Emissions E* Abatement

  16. Problems with Kyoto, cont’d. • Financial Transfers and political sustainability • Wilcoxen & McKibben estimate U.S. permit purchases @ $27-$54 billion • Financial Tranfers and economic instability • Dutch Disease

  17. Problems with Kyoto, cont’d. Who will monitor compliance? Governments must bear the domestic economic and political costs of monitoring, while whatever benefit is shared internationally.

  18. Problems with Kyoto, cont’d. $ Marginal Abatement Cost Which regulatory instrument? It matters… TDPs vs. “Green Taxes” Emissions Initial Emissions # Permits Abatement

  19. Problems with Kyoto, cont’d. Which regulatory instrument? It matters… TDPs vs. “Green Taxes” $ Marginal Abatement Cost Unit emisions tax rate Emissions Initial Emissions Abatement

  20. TDPs under uncertainty regarding abatement costs (MAC steeper than MDC) MAC (actual) MAC (perceived) Deadweight Loss Emissions Permits

  21. Green taxes under uncertainty regarding abatement costs (MAC steeper than MDC) MAC (actual) MAC (perceived) Deadweight Loss MDC Tax rate Emissions Permits

  22. Choice of Instruments Under Uncertainty • When MDC “steeper” than MAC TDPs dominate tax schemes • When MAC “steeper” than MDC  Taxes dominate TDP schemes But: “free permits” are politically much more attractive than taxed emissions

  23. Choice of Instrument: A Hybrid Approach • At the margin, a tax is better • Why not grant permits for the first n units of emissions, and sell permits at a fixed price thereafter?

  24. Choice of Instruments: A Hybrid Approach MAC (actual) MAC (perceived) Cost of Compliance MDC Tax rate Emissions

  25. Choice of Instruments: A Hybrid Approach MAC (actual) MAC (perceived) Cost of compliance MDC Tax rate Permits granted

  26. Hybrid Approach: Advantages • Appropriate instrument, given uncertainties of cost and relative slopes • Avoids financial transfers between countries • Appropriate incentives to monitor • Tax revenues for government • Firms police each other • Flexible • As more scientific information becomes available, countries can change tax level appropriately

  27. References • McKibben and Wilcoxen (2002): “The Role of Economics in Climate Change,” Journal of Economic Perspectives, V.16, No.2, Spring. • United Nations Framework Convention on Climate Change Secretariat (2003): “Caring for Climate: A Guide to the Climate Change Convention and the Kyoto Protocol.”

  28. Discussion…?

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