University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire

The Economics of Externalities & Climate Change

The Economics of Externalities & Climate Change

Eric JamelskeDepartment of Economics

University of Wisconsin-Eau Claire

jamelsem@uwec.edu

University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire

OverviewOverview

Negative Externalities Economics & The Environment Climate Change as a Negative Externality Choices Climate Science Climate Change, Global Warming, Extreme Weather Public Opinion Research

University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire

Negative ExternalitiesNegative Externalities

An externality arises when an activity influences the well-being of others with no compensation for that effect.

When the impact is adverse, the externality is negative.– OVER-DO IT!

Climate Change as a Negative ExternalitiesClimate Change as a Negative Externalities

If the US could go its own merry way—keeping the CO2 it emits over its own territory, warming up its own atmosphere, bearing itself whatever costs (including hurricanes) that result, that would be one thing. But that is not so.

The energy profligate lifestyle of the US inflicts global damage immensely greater than any war it might wage. The Maldives will within 50 years be our own 21st century Atlantis, disappearing beneath the ocean; a third of Bangladesh will be submerged.

Climate Change as a Negative ExternalitiesClimate Change as a Negative Externalities

A subsidy means that a firm does not pay the full costs of production. Not paying the cost of damage to the environment is a subsidy, just as not paying the full costs of workers would be.

In most of the developed countries of the world today, firms are paying the cost of pollution to the global environment, in the form of taxes imposed on coal, oil, and gas. But American firms are being subsidized—and massively so.

InternalizingNegative Externalities

InternalizingNegative Externalities

There is a simple remedy: other countries should prohibit the importation of American goods produced using energy intensive technologies, or, at the very least, impose a high tax on them, to offset the subsidy that those goods currently are receiving.

There is a way out through a common (global) environmental tax on emissions. There is a social cost to emissions, and this environmental tax would simply make everyone pay the social cost. This is in accord with the most basic of economic principles, that individuals and firms should pay their full (marginal) costs.

The world would, of course, have to agree on assessing the magnitude of the social cost of emissions.

Or…..Or…..

Under some scenarios, the Maldives will be under water shortly.

Would taking drastic measures to cut carbon emissions substantially reduce this likelihood? If so, would relocating the population (about 370,000) to higher ground be substantially cheaper than reducing greenhouse gasses sufficiently to halt the effects of planetary warming?

Are there other offsetting benefits to people in cooler climates that should properly be considered?

Carbon Tax DetailsCarbon Tax Details

According to the Center for Climate and Electricity Policy, a tax of $25 per ton of carbon-dioxide emitted — through the combustion of fossil fuels used in electricity production, commercial and residential heating and transportation —

— would raise approximately $125 billion annually which could be invested in R&D for the development of clean energy alternatives.

Such a tax would add about 21 cents per gallon of gasoline and about 1.2 cents per kilowatt-hour of electricity.

Carbon Tax DetailsCarbon Tax Details

A prominent politician has proposed a $100 per ton tax on carbon emissions from fossil fuels —

— clearly such a tax has the potential to reduce the buildup of GHG in the atmosphere, but at a significant cost.

Such a tax is estimated to increase the price of coal by about $70 per ton (300%) and increase the price of oil by about $8 per barrel (13%).

There are too many uncertainties about the impact of such a tax and thus we should be very cautious of implementing this plan.

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Energy/Transportation AlternativesEnergy/Transportation Alternatives

Coal (SO2, Acid Rain, GHG, Carbon)

Oil & Gas (Cars, Trucks, Refineries)

Nuclear (Radioactive Waste)

Solar, Wind, Water, Biofuels

Clean Coal, Natural Gas

What Needs To Be Done?What Needs To Be Done?

Shift to fuels with higher ratio of useful energy to CO2 emissions.

Develop technologies that use less energy per unit output.

Shift demand to products with lower energy intensity of production.

Plant trees, reduce deforestation, carbon sequestration

Natural Gas, Clean Coal, Nuclear, Solar, Wind

Reduce output (less stuff)

WE will need fossil fuels like oil and gas for the foreseeable future. So there’s really little choice (sigh).

We have to frack for natural gas and we must approve the Keystone XL pipeline to get Canadian oil.

This mantra, repeated on TV ads and in political debates, is punctuated with a hint of inevitability and regret.

But, increasingly, scientific research and the experience of other countries should prompt us to ask:

To what extent will we really “need” fossil fuel in years to come?

To what extent is it a choice?

Need vs Want (Choices)Need vs Want (Choices)

Birds, Coastal and Hillside Views, Desert Tortoises

Intermittent energy sources meaning the sun/wind isn’t always shining/blowing

Large amounts of land will be needed, thus taking it away from alternative uses such as farming, housing, recreation or open/green space.

To reduce CO2 emissions by one billion metric tons, wind power would require thirty million acres of land, about the size of New York 

To reduce CO2 emissions by one billion metric, solar power would require five million acres of land, about the size of Connecticut

IPCC – AR4: A State of the Planet ReportIPCC – AR4: A State of the Planet Report “Warming of the climate system is unequivocal, as is now evident from

observations of increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea level.”

“Global atmospheric concentrations of carbon dioxide, methane and nitrous oxide have increased markedly as a result of human activities since 1750 and now far exceed pre-industrial values determined from ice cores spanning many thousands of years.”

“There is very high confidence that the net effect of human activities since 1750 has been one of warming.”

Advances since the TAR show that discernible human influences extend beyond average temperature to other aspects of climate. Anthropogenic warming over the last three decades has likely had a discernible influence at the global scale on observed changes in many physical and biological systems.

Anthropogenic warming and sea level rise would continue for centuries due to the time scales associated with climate processes and feedbacks, even if GHG concentrations were to be stabilized.

http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm

University of Wisconsin-Eau ClaireUniversity of Wisconsin-Eau Claire

Scientific Consensus on Climate ChangeScientific Consensus on Climate Change

“Reviews of scientific literature and surveys of climate scientists indicate striking agreement, anthropogenic GHG have been responsible for “most” of the ‘unequivocal’ warming of the Earth’s average global temperature over the second half of the 20th century.”

- Anderegg et al. (2010)

“Despite claims sometimes made by some groups that there is not good evidence that Earth's climate is being affected by human activities, the scientific community is in overwhelming agreement that such evidence is clear and persuasive.”

- Oreskes (2004)

Climate Change Resources & InformationClimate Change Resources & Information

Intergovernmental Panel on Climate Change– http://www.ipcc.ch/

United Nations Framework Convention on Climate Change– http://unfccc.int/2860.php

National Aeronautics and Space Administration– http://climate.nasa.gov/

National Oceanic & Atmospheric Administration– http://www.noaa.gov/climate.html

The World Bank– http://climatechange.worldbank.org/