6 Climate Change

• Economics of climate change

  🡺 theoretical insights

  🡺 empirical findings

  🡺 design of policies, at the domestic and international levels, 

  to mitigate (reduce, avoid) and adapt to climate change

  🡺 assess the benefits and costs of mitigation
• Social goal:  

  Improved well-being of humans, 

  present and future generations
• Climate - average weather in a place over many years;

                      long-term average of meteorological conditions

                      (for example, over a 30-year period)
• Climate change - a shift in those average conditions
• Greenhouse gases trap the sun’s heat and cause the planet’s temperature to rise
• The world is now about 1.1C warmer than it was in the 19th century (relative to the1850s) and the amount of CO2 in the atmosphere has risen by 50%

  Climate scientists say global warming needs to be kept to 1.5C by 2100
• State of scientific debate

  1. The planet is indeed warming.

  2. Climate modelers more than 20 years ago successfully predicted the subsequent global warming, giving them high credibility.

  3. With business as usual, we are facing drastic and disruptive changes in climate.
• Martin Weitzman (Harvard): 

  • the risk (nonnegligible probability) of catastrophe, rather than the details of cost-benefit calculation, makes the most powerful case for strong climate policy
• debate: pace of action 

  • quick early aggressive action vs. gradual ramping up of policy
• Paris Agreement – to cap global warming at 2 degrees Celsius above pre-industrial levels, and at 1.5C if possible      
• Philippines:  0.025 percent of total global greenhouse gas emissions 

  🡺 adaptation (Philippines highly vulnerable to climate change effects)

  🡺 mitigation
• Main sources of greenhouse gases – target of mitigating measures

  • Electricity generation (consuming fossil fuels, energy use)

  • Land use changes (primarily deforestation)

  • Agriculture (mostly from soils and livestock)

  • Transport (energy use)
• Economic activity - energy intensity – carbon intensity

  • alter mix of economic activities, promote energy efficiency, adopt technologies to reduce carbon per unit of energy
• Damaging consequences: droughts, floods, storms, extreme weather, wildfires, sea level rise (water-related), mass extinction of species

  • Examples:

  Europe: extreme rainfall and flooding

  Pacific island nations: rising seas

  Africa: droughts and food shortages
• • Biophysical changes affect human welfare

  Example: Farmland turns into desert (failed rains) 

  → crop shortage, food insecurity → hunger

   

  With fewer resources to adapt to climate change, developing

        countries are expected to suffer the most though they have produced

        less greenhouse gas emissions than the advanced economies
• Kinds of damages:

  • Market damages: reflected in changes in prices or quantities of marketed goods 

    (crop prices, land rents to reflect land productivity)

  • Non-market damages: no obvious connection with

                      price changes or observable demands

      (welfare loss due to lost ecosystem services)
• Climate change is a long-term and global problem.

  • Even if we stabilize emissions soon, many greenhouse gases, including carbon dioxide, stay in the atmosphere for more than a century and the effects on climate occur with a lag
  • Rich countries dominate current emissions
  • Developing countries highly vulnerable to climate change impacts of these past emissions
  • Without action to mitigate (business-as-usual), emissions will rise strongly. Emissions from developing countries are likely to rise more rapidly (examples: China, India)
• Effects differ widely around the world. Economic and social impacts of climate change would be distributed very unevenly across the globe.

  Large damages in the tropics; 

  potential benefits in the temperate zone

  🡺 makes international coordination difficult
• Effective action requires international collaboration.
• Game theory: to find collaborative solutions to games with “free-rider” problems and incentive structures that can make collaboration more likely
• Broad strategies to address climate change

  1. Mitigation – reduce, avoid emissions
  2. Adaptation – reduce the impact of climate change
  3. Climate engineering
• Environmental economics: a conceptual framework

  • Standard theory of externalities
  • Markets
  • Market failure
  • Role of the government
  • Criteria for evaluating environmental policies

  efficiency

  cost effectiveness 

  fairness, sustainability

  • Efficient level of pollution control
  • Cost-effective pollution reductions
  • Environmental policy instruments
• Paul Krugman (2008 Nobel Prize in Economic Science):

   

  Single central insight in economics: 

  There are mutual gains from transactions 

  between consenting adults.
• Mutual gains example:

  going price of a widget is PhP10

  buyer (consumer): widget is worth more than PhP10 to buyer

  seller (producer): widget costs less than PhP10 to make

  outcome: trade occurs and benefits both seller and buyer
• Effective competition in the widget market

  • price adjusts such that:

  number of widgets people want to buy

        =   number of widgets other people want to sell

   

  • outcome maximizes the total gains 

  to producers and consumers

  • market outcome is “efficient” (Pareto optimal): 

  nobody can be made better off without 

           making someone else worse off
• Figure 1. Market Equilibrium

  A) Market

  
• Markets

  🡺 outcome may not be what we consider “fair” or “just”
• Basic economics: pursue social goals through “aftermarket” interventions, another set of policy instruments; let markets do their job and then use taxes and transfers for redistribution

   

  Example: “free market” electricity pricing to reflect true cost of provision and conditional cash transfers, livelihood programs, education and health programs, other aid to the poor

      aid to the poor: charity in kind vs. charity in cash
• Negative externalities 

  • costs that economic actors impose on others without paying a price for their actions 
  • impose damages on other economic agents (not party to the exchange)
  • an economic agent making a decision does not bear all of the consequences of his action
• What if the widget manufacturer, in the process of producing the widget, dumps toxic sludge into the nearby river affecting water quality and fish catch downstream?

    

  • With negative externalities: divergence between private and social benefit

        social benefit < private benefit

   

  • [With positive externalities: social benefit > private benefit]
• Market failure occurs because too many widgets will be produced, if the manufacturer does not take into account the damages he imposes on others.

  🡺 Outcome will be not efficient: social net benefit not maximized. 

  (social net benefit = social benefit – social cost)
• Example: the market for electricity (generation) from coal-fired power     plants

  • pollutants generated: sulfur oxides (SOx), nitrogen oxides (NOx), particulates, greenhouse gas CO2
  • damages: health risks, public and private property (material damage), ecosystems (acid rain), urban smog (respiratory ailments), global warming effects
• Emission of carbon dioxide and other greenhouse gases:

  “the biggest market failure the world has ever seen” 

         (Nicholas Stern)
• Figure 2. The Market for Electricity

  A) P0, Q0

  B) P*, Q*

  
• Figure 2. The Market for Electricity

  A) marginal social cost/damage

  B) private cost

  
• Other market failures 🡺 market leads to inefficient outcomes

  • monopolies/cartels, incomplete markets, public goods,  
  • improperly designed property rights (open access, fisheries),  information problems (credit markets)
• public goods – exhibit both consumption nonexcludability and

                            indivisibilities 

  • (clean air, clean water, biological diversity, nice landscape, national defense, roads) 🡺 free rider problem
• property rights – bundle of entitlements defining the owner’s rights,           privileges, and limitations for use of the resource
• Role of the government

  • address market failures to make markets more efficient

  • redistribution to address poverty and income inequality
• possible: government failure – failure of political, rather than, economic institutions