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 KildegaardUniversity of Minnesota, Morris

Directions to Morris…

Greenhouse Gases (GHGs) and the atmosphere

CO2 Emissions and Concentrations

CO2 Emissions

CO2 Concentrations and Temperature

Temperature Change

The Industrial Revolution: A Revolution in Energy Usage

Before After

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

Other GHGs

Methane

Nitrous Oxide

Hydroflourocarbons (HFCs)

Perflourocarbons (PFCs)

Sulphur hexaflouride

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

Can’t we all just get along…?

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)

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

Problems with Kyoto

Economic rationality?

InitialEmissions

$

Abatement

Marginal Damage Cost

Marginal Abatement Cost

E*

Emissions

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

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.

Problems with Kyoto, cont’d.

Which regulatory instrument? It matters…

TDPs vs. “Green Taxes”

InitialEmissions

$

Abatement

Marginal Abatement Cost

# Permits

Emissions

Problems with Kyoto, cont’d.

Which regulatory instrument? It matters…

TDPs vs. “Green Taxes”

InitialEmissions

$

Abatement

Marginal Abatement Cost

Unit emisions tax rate

Emissions

TDPs under uncertainty regarding abatement costs (MAC steeper than MDC)

MAC (perceived)

MAC (actual)

DeadweightLoss

EmissionsPermits

Green taxes under uncertainty regarding abatement costs (MAC steeper than MDC)

MAC (perceived)

MAC (actual)

DeadweightLoss

EmissionsPermits

MDC

Tax rate

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

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?

Choice of Instruments: A Hybrid Approach

MAC (perceived)

MAC (actual)

Emissions

MDC

Tax rate

Cost of Compliance

Choice of Instruments: A Hybrid Approach

MAC (perceived)

MAC (actual)

MDC

Tax rate

Permits granted

Cost of compliance

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

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.”

Discussion…?