Economics and Global Warming. DePaul University March 2012

Transcription

1 DePaul University

2 Introduction Markets and Efficiency Market Failures Public Goods: rivalry and excludability Tragedy of the Commons [Hardin, G. (1968)] Externalities Policy Approaches 2

3 Introduction & Overview Why Global Warming? A misnomer? Average temperatures as an index Differences betweenequatorandpoles equator and Change in gradient causes change in circulation Some places warmer and some cooler drier andwetter A problem of the commons 3

4 Introduction & Overview Greenhouse Gasses (GHG) Absorb radiation and trap heat in the atmosphere Carbon Dioxide Nitrous Oxide Chloroflourocarbons (CFGs) Water Vapor! Man Made or naturally occurring Both Posit that consumption of fossil fuels increases CO 2 and ALL ELSE EQUAL contributes to Global Warming. 4

5 Introduction & Overview Impacts of increased GHGs Positive and negative Rising sea levels Disrupt agriculture Disrupt forestry Disrupt natural ecosystems Increase weather extremes Possibility of abrupt shifts in climate 5

6 Market Failure Markets are deemed to provide efficient outcomes (Pareto Optimal) under certain conditions Lack of Market power No externalities No Public goods Complete and Symmetric Information Utilizing SMC yields higher price and lower quantity in equilibrium i SMC P B A PMC D Q 6

7 Market Failure The environment as a social good. Earth s atmosphere is Global Open access Therefore vulnerable to overuse The Tragedy of The Commons [Hardin (1968)] Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries ( ) Finally, however, comes the day of reckoning, that is, the day when the long desired goal of social stability becomes a reality. At this point the inherent logic of the commons remorselessly generates tragedy. 7

8 Market Failure Exclusive Non Exclusive Rival Private Good Semi Public Good Non Rival Semi Public Good Pure Public Good Partial Non Rival Non rival to carrying Common Pool Ecological (Congestible) capacity Systems 8

9 Market Failure Rival My consumption disallows yours Exclusive Cannot bar consumption once available The environment is non exclusive and partially non rival. A ton of carbon emitted anywhere has its impacts widely spread. The beneficiaries of pollution do not bear the full cost. And there are many sources of pollution. 9

10 Market Failure Typical solution Set marginal benefits equal to marginal costs. So that the marginal cost of reducing contaminants is equal to the marginal benefit of doing so. Problem: While benefits of polluting can be somewhat identified the costs of doing so are much more difficult to track. Markets will not develop as there are no property rights. Consequently, prices will not reflect people s willingness to pay for pollution abatement. This is a distributional issue given the commons nature of the environment that is complicated by lack of property rights as well as the lack of excludability. Industry versus industry (entrenched versus new) Region versus region (international cooperation amongst nation states) Today s population versus tomorrow s (generational and discount rates) 10 Uncertainty (how large is the impact)

11 Policy Approaches Direct Command and Control Emission Taxes or Fees Emission Permits Investment in R&D 11

12 Policy Approaches Direct Command and Control (typical) Gov t specify Allowable technologies Pollution standards (maximum allowable discharge) Energy efficiency standards New bulbs anyone Energy star 12

13 Policy Approaches Emission Taxes or Fees Based upon amount of Carbon dioxide emitted. Too many sources to administer reasonably. Frequently just tied to fuel. The taxes could very well be passed on to the consumer (tax incidence). How large should the tax be? Marginal costs of reduction may climb quickly and marginal benefits not so quickly. If set too high will cause damage to the economy unnecessarily No good estimates of correct price Revenue can be utilized to offset the cost of the tax or to underwrite research. 13

14 Policy Approaches Emission Permits Cap and Trade Do we give them away or auction them What is the targeted amount? Nordhaus DICEModelis a greatthoughtexperiment thought experiment examining the impact of a variety of assumptions Don t forget the international coordination problem! 14