pricing climate change and the climate policy goal
TRANSCRIPT
Pricing Climate Change
And the Climate Policy Goal Encore Fall 2016 Class 4
Encore Fall 16 1
The Global Warming Problem:
An Economist’s View
It’s a price problem: a significant cost is not included in market prices
Corollary: problem solved if market prices include the cost
The “goal”
Outcome produced by economy in which prices do include the cost
Climate mitigation is a product – like men’s shirts
Possible responses of a climate hawk
Climate mitigation is not like men’s shirts
It’s like men’s shirts but the cost to be include is very large
Encore Fall 16 2
Estimated Prices
Encore Fall 16 3
Cost of additional ton = Benefit of one-ton reduction
Costs and Benefit of Reductions
Encore Fall 16 4
No regrets
actions
SCC
Net Benefit
SCC and Reducing Emissions
Cost/ton Benefit/ton
Econ 101: Supply and Demand
Supply Demand
Encore Fall 16 5
Comparison
Parallels
Cost = Supply curve
Benefit = SCC = Demand curve
Net benefit = Benefit – cost
Maximum benefit at intersection of benefit and cost
Differences
Slope of the SS & demand curve: factual assumption
Determinants of the SCC/demand curve
Encore Fall 16 6
“Who are those guys?” – The
Three Models
DICE: Developed 1990 by William Nordhaus of Yale
University
PAGE: Developed 1991 by Chris Hope of Cambridge
University
FUND: Developed early 1990s by Richard Tol of
Universities of Sussex and Amsterdam
Encore Fall 16 7
Encore Fall 16 8
BUT . . . .
Do we consider cost in determining what/how much to do?
What is the cost?
It isn’t zero
It isn’t infinite
What non-zero finite amount?
How to answer?
Gut feeling
Analysis
Samuel Gompers approach: The answer (whatever it is) is greater than what is now politically feasible
Encore Fall 16 9
Some Issues
The price of time
The price of risk
Geographical scope
Non-market goods
Encore Fall 16 10
The price of time: the discount rate
Because damages continue far into future, discount rate has large
impact on present value.
Value in 2016 of $1 billion in 2100
At 1% discount rate: $645 million
At 3% discount rate: $272 million
At 5% discount rate: $117 million
Encore Fall 16 11
-
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
7,000,000,000
8,000,000,000
0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%
Discount Rate
Discounting $1 Trillion from 3000 AD
Encore Fall 16 12
0.5% $ 7,389,162,739
1.0% $ 55,945,891
1.5% $ 433,925
2.0% $ 3,447
2.5% $ 28
3.0% $ 0.233437643
3.5% $ 0.001989279
4.0% $ 0.000017346
4.5% $ 0.000000155
Discounting $1 Trillion from 3000 AD
Encore Fall 16 13
Obligation to the (fairly) far future
Is there one?
Can it be given analytical content: what/how much should we do?
How would a moral and well-educated man in 1032 AD define his obligations
to us?
Encore Fall 16 14
For extended discussion of discounting and the “wealthy
Bangladeshi” issue:
Weisbach and Sunstein, Climate Change and Discounting: A
Guide for the Perplexed,
http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?art
icle=3018&context=journal_articles
Encore Fall 16 15
Representing Uncertainty
Median and average: no information
Confidence level – for example, 90% probability that value is between X and Y
Probability density function (PDF)
Presents most information
Output is no better than input
Encore Fall 16 16
0
1
2
3
4
5
6
7
2 3 4 5 6 7 8 9 10 11 12
Dic
e T
ota
l
Number of Alternatives
Representing Uncertainty: Probability Density Function for (Honest) Pair of Dice
8.3%
Encore Fall 16 17
Equilibrium temperature increase with
doubling of CO2 concentration
Encore Fall 16 18
Encore Fall 16 19
How to Analyze
Like a friendly neighborhood poker game
Assign dollar value to damages from 6o world
Multiply by probability of reaching median of 3.4o x probability of 6o
Invoke precautionary principle: Avoid 6o world at all costs
Intermediate position? Analytically determinable?
Encore Fall 16 20
For discussion of risk:
Climate Shock
Ghosn and King, Thinking About Climate Risk: The Worst
Cases Matter, http://www.business-
standard.com/article/opinion/arunabha-ghosh-david-king-
climate-risks-the-worst-cases-matter-115072001245_1.html
Wagner, Statistics 101: Climate policy = risk management
http://blogs.edf.org/climate411/2015/09/10/statistics-101-
climate-policy-risk-management/
Encore Fall 16 21
What kinds of things should SCC include?
Marketed goods and services – including labor
Economically valuable non-market goods and services
Non-economic but valued goods and services
Values not based on human valuations
Encore Fall 16 22
One of these things is not like the others
Possible to assign a monetary value to first three
Example for third category: Use survey to determine value people place on
continued existence of polar bears
Seemingly not possible for the fourth category: example does not estimate
the intrinsic value of polar bears but the value that humans place on them.
Consider it decisions without inclusion in SCC? Considering multiple non-
commensurate values
Encore Fall 16 23
US or Global: PM May’s Speech
Encore Fall 16 24
But we also value something else: the spirit of citizenship.
That spirit that means you respect the bonds and obligations that
make our society work. That means a commitment to the men and
women who live around you, who work for you, who buy the goods
and services you sell.
That spirit that means recognising the social contract that says you
train up local young people before you take on cheap labour from
overseas.
. . . .
But today, too many people in positions of power behave as though
they have more in common with international elites than with the
people down the road, the people they employ, the people they
pass in the street.
But if you believe you’re a citizen of the world, you’re a citizen of
nowhere. You don’t understand what the very word ‘citizenship’
means.
US or Global: What’s the Standard
Consider only direct climate impact on US
Also consider:
Collateral impact via global economy or national security
Effect of US actions on actions of other countries: leverage
Global impact
Encore Fall 16 25
The Two Degree Goal
(And the 1.5 Degree Aspiration)
Encore Fall 16 26
Reverse engineering goal’s implications
Encore Fall 16 27
Policy
Change
Change In
Net Emissions
Change In CO2
Concentration
Change In
Equilibrium
Temperature
Climate
Sensitivity
Climate
Goal
Quantifying and Using Climate Sensitivity
Increase in equilibrium temperature from doubling CO2: ∆T2x
∆T = ∆T2x * (LN(Concentrationnew/Concentrationold)/LN(2)
Example
∆T2x = 3.0o
CO2 old = 280
CO2 new = 400
Increase in equilibrium T: 3.0o * .36/.69 = 1.53o
Encore Fall 16 28
The Carbon Budget
Long atmospheric residence time of CO2
Timing of emissions has little effect on long-run atmospheric
concentration or final equilibrium temperature
Carbon budget: Cumulative emissions consistent with certain
probability of staying within 2o limit
Encore Fall 16 29
Four paths for a carbon budget
Encore Fall 16 30
The carbon budget and the price of delay
All paths start at the same point
Total emissions are equal to the area under each path and is the same for all four trajectories.
The three trajectories that delay the start of reductions compensate by more rapid reductions
The last trajectory, requires an almost instantaneous reduction to zero; any further delay could not be offset without negative net emissions.
Encore Fall 16 31
Implications of the Carbon Budget
2o budget: around 900 additional gigatons
Exceeded by fossil fuel reserves
To meet target, some reserves must be left in the ground
Encore Fall 16 32
Encore Fall 16 33
Assume
Fossil fuel reserves and fossil fuel-using capital stock mostly owned by
profit-seeking organizations
No order will directly bar extraction or use. Reality—
CPP effectively bars new coal plants
Fracking regulations may effectively bar exploitation of some natural gas resources
Implication: extraction or use must become unprofitable
Encore Fall 16 34
Effect of delay and rate of decrease
Encore Fall 16 35
Effect of temperature goal and delay
Encore Fall 16 36
Or Plan B
Solar Radiation Management (SRM)
Negative emissions
Reduce the burden
Wind, solar, nuclear
Fossil fuel plants plus CCS or CCU
Go negative
Air capture
Replace fossil fuels with biomass/biofuels in large fixed facilities and capture emissions
(BECCS)
Encore Fall 16 37
SRM
Advantages
Relatively cheap
Fairly simple technology
Fast-acting
Disadvantages
Restoring previous average temperature does not restore previous climate
Does not affect ocean acidification
It’s relatively cheap and fairly simple: reverses mitigation problem
Encore Fall 16 38
A temporary, moderate and responsive SRM
39 Encore Fall 16
Negative emissions
CO2 absorbed by natural sinks and anthropogenic carbon capture
must exceed emissions
Wind, solar, nuclear, fossil fuel CCS can reduce size of problem but
cannot go negative
Encore Fall 16 40
Point Capture
Fossil fuel CCS
Can reduce net emissions into atmosphere: compare with cost/ton of reducing gross
emissions
Cannot achieve negative emissions
Bioenergy carbon capture and storage (BECCS)
Potentially can achieve negative emissions with centralized biogenic
energy
(Point source gross emissions without CCS + additional gross emissions
from CCS + emissions from growing, harvesting and transporting energy
crop) – (capture at point of combustion + capture by growing crop)
41 Encore Fall 16
Encore Fall 16 42
Encore Fall 16 43
Negative Emissions: Air capture
Advantages
Scalable
Can offset non-point source emissions
No location constraints – co-locate with effective storage or CO2 market
Issues
Technical feasibility
Cost
44 Encore Fall 16
Encore Fall 16 45
Air Capture as Backstop Technology
Point capture-reducions air capture
Trajectory 1
Trajectory 2
46 Encore Fall 16
47
Reduce Harm
Adaptation:
Reduce harm from warming
Situational
Mitigation:
Reduce warming
Solar Radiation Management
(SRM)
Small scale: white roofs
Large scale:
Sulfate aerosols
Reduce GHG concentration
Encore Fall 16
48
Reduce GHG concentration
Reduce emissions
Reduce energy intensity:
energy per $
Reduce carbon intensity: CO2
per energy
Increase uptake
Point-source capture
Open air capture
Reduce Net Emission
Encore Fall 16
Why CO2? Because it stays up so long
49
No interannual change Atmosphere biosphere
Very short term ~50% absorbed by ocean
Thousand years ~80% absorbed by ocean
Millions of years Volcanoes vs carbon burial
Encore Fall 16