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Lecture 6

Climate Change Agenda
How would a global Czar (which economists like to assume) construct an efficient global climate policy – considering only total costs/benefits/risks?

Without a Czar and even without a world government, can the nations of the world (YOU!) agree to a reasonable, if perhaps not fully efficient, climate policy?

What Do We Know?
Global Mean Temperatures are Rising
Apparent slowdown in recent years likely reflects La NiƱa conditions plus a solar radiation minimum

Why is this Problem Hard? Time-Scales
Emissions of CO2 have a half-life (not from exponential decay) of around a century
The earth is not in equilibrium with respect to current GHG concentrations; it takes lots of heat to warm the deep oceans, lots of time to diffuse
Thus even if GHG emissions were cut sharply, concentrations would remain high & climate change would continue, with a variety of known and unknown damages, for decades
Decisions thus involve time-scales of centuries: the Czar must decide how much to spend today to produce benefits far into the future and for people not yet born

Discounting and Future Generations
Economists disagree about how to discount future benefits to set public policies; three views:
Use the rate the private sector would use, since public investments crowd out private investments
Discount future benefits by “pure rate of time preference” + because people will be wealthier over time (so marginal utility of $ lower)
Zero “pure rate of time preference” (don’t discriminate among generations); discount only because people will be wealthier

Why is this Problem Hard? Uncertainty
Meaning of “uncertain” in technical v. popular discourse
Emissions GHGs depend on population, per-capital GDP, mix of economic activity, future policies, and present and future technologies – all of which are uncertain. Much is uncertain about the climate system – e.g., warming of the deep ocean, possible irreversibilities & tipping points – so global climate impacts of any given GHG emissions trajectory are uncertain Climate models disagree on regional effects (e.g., warming, rainfall) produced by given global changes, thus impacts very uncertain
Regional impacts will likely take us into new ground & produce surprises (esp. in ecology), so damages are very, very uncertain!
Little experience, historically, in successful adaptation to climate change (e.g., Mayans), so ability/cost of adaptation uncertain
Costs of reducing damages via emissions reductions are also uncertain – depend on population, technology, etc.

The Czar Needs to do Adaptive Risk Management
Slow down to reduce the likelihood of a collision – reduce GHG emissions
Lifeboat drills in case of a collision – invest in adapting to climate change
Station lookouts – study the evolving climate system, improve forecasts
Develop maneuvering options – new technologies, geoengineering
Ensure lookouts are heard – build responsive decision processes

Adaptation is Essential, but tricky
Reactive = suffering; proactive = using information about future change to guide investment decisions
Water supply, agriculture, seawalls, disaster preparedness
Key: past weather patterns can’t be assumed to hold

Problem 1: climate models differ in the small-scale predictions that matter
E.g., agriculture in Ethiopia either much dryer or much wetter
Seek robust policies: pave roads to avoid washout, ok if dry

Problem 2: investments are made at state & local levels and in developing nations; expertise lacking
Important federal coordination, research, education roles
Poor nations will be hardest hit; aid, national security issues

New Technologies are Essential, but
Governments have a role in supporting basic research, here as elsewhere
Governments (esp. in the US?) have a terrible record of developing competitive civilian technologies
Government seems to experiment too little, stick with popular approaches too long, confuse technical & economic issues

A much discussed “government failure”; no obvious fixes • Winning combination seems to be government support for basic work, technical education plus industrial R&D to make real products
But industry won’t invest in R&D without reasonable expectations of a market for the final product (other policies)
So MUST reduce emissions

Why the Policy Focus on CO2 Emissions from Fossil Fuels in the Near Term?
Geoengineering (e.g., artificial volcanoes) lets ocean acidification continue, many unknowns; harder as emissions increase
CO2 is the main component of greenhouse emissions, emissions stay in the atmosphere for 100 years
75-85% of CO2 emissions come from fossil fuels, & these emissions are relatively easy to monitor (v. other gases, land use)
The world’s energy system represents a $15 trillion capital investment that takes 30-40 years to turn over (plus other pathdependent stickiness), so near-term decisions can have long-term emissions effects

Why is this Problem Hard? Poor Countries
Picking a goal – e.g. to decide to stabilize CO2 at 550 ppm by 2050 – roughly fixes global emissions “budget” until then because of CO2 ’s long lifetime
Want to make cheap reductions ASAP to avoid the need for draconian cuts later to meet the “budget”
Want to raise intensity over time as new technologies come on line, existing capital stock wears out
Czar’s modelers: to minimize global costs, developing nations must make significant cuts versus “business as usual”
Why Must the Poor Cut? They Will Drive Growth!
To Reduce Global Costs Principle (between and within countries): To minimize total cost, want to equate marginal cost across countries
Same principle applies to a firm producing from multiple plants

How to do it? Two approaches:
Put a price on emissions; all reduce until p = mc
Cap & trade: price of allowances serves the same function

Why are poor countries’ costs of abatement relatively low?
They are building more new facilities, buildings, etc.; it is generally cheaper to make new facilities, etc. efficient than to retrofit old facilities

Much energy use in poor countries is now dirty and inefficient, so the net cost of making it clean (which has benefits) and efficient is relatively low

BUT – IS IT FAIR? Emissions per capita: Metric tons CO2 from fossil fuels per capita, 2009

But what is fair?
Emissions per $GDP: Kg of CO2 from fossil fuels per $US of GDP, 2009.
Who made the problem?
Cumulative CO2 emissions from fossil fuels – rich countries’ contribution is blue

Poor Countries have prevailed, so far
Since 1992, there have been 17 conferences of the parties to the UNFCC (COPs), most recently in Durban, South Africa
COP 3 in 1997 produced the Kyoto Protocol, calling for Annex I nations (mainly rich) only(!) to make reductions in 2008-12
The EU & others ratified; the US did not, and President George W. Bush formally rejected the Protocol in 2001
The EU established a CO2 emissions trading system (EU ETS), may make its goal; others likely will not do so
Subsequent COPs have failed to produce a global agreement on emissions, & the US won’t pass emissions-limiting legislation any time soon
The Czar could solve the fairness problem & maintain efficiency by taxing the rich and using the proceeds to pay for the poor’s emissions reductions