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Tom Hickson: scientists > 99\% in agreement about anthropogenic global warming (AWG) Economists and policy-makers in less agreement, but here is where things get really divergent…. Climate-change policy: the challenge to economics. What to do about it. Nothing--rely on adaptation

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climate change policy the challenge to economics
Tom Hickson: scientists > 99% in agreement about anthropogenic global warming (AWG)

Economists and policy-makers in less agreement, but here is where things get really divergent….

Climate-change policy: the challenge to economics
what to do about it
What to do about it
  • Nothing--rely on adaptation
  • Do something, but how and what?
    • GHG abatement
    • Technology research
    • Sequestration: natural and technological
    • Cap and trade
    • GHG (carbon) taxes
    • Preparation for catastrophic events
  • Do something, but how much?
most favor doing something
Most favor doing something
  • Benefit Cost Analysis is VERY difficult
  • Stern Review
    • British study
    • Used very low discount rate—puts heavier weight on potential future
  • “Mainline” economists
    • More gradual policy “ramp”
    • Argument: early resources better spent on technology and human capital
some difficulties with bca cba
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.
let s consider some issues with r
Let’s 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
an experiment with economic growth and low r
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.
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
where does cba get us
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
big uncertainty 1
Big uncertainty #1
  • What discount rate to use
  • 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
what about catastrophes
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)
ordinary risk analysis under conventional uncertainty
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
profound uncertainty
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
kyoto protocol 1997
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%).
kyoto protocol 19971
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
kyoto protocol 19972
Kyoto Protocol (1997)
  • 127 countries have ratified agreement.
  • Participating countries account for 62% of ghg emissions.
  • Russia was last country to ratify.
u s developments
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
economics of climate change
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?
the broad then deep strategy
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.
debate on kyoto protocol
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.