Chapter 3

Question 1

Examples of abatement costs

Answer 1

1. Switch from fossil fuels
2. Investment in energy efficiency
3. Transport alternatives
4. Agri CH4 &N20 reduction
5. Land use changes

Question 2

Abatement costs higher if…

Answer 2

1. Fewer reduction options
2. cost of options higher
3. costs of options fall slowly
4. rate of cost decline doesn’t respond to climate policy
5. Economy less responsive (elasticities low or capital lasts longer)

Question 3

What assumption is key to determining future abatement costs?

Answer 3

Rate of tech change

Question 4

Stringent targets mean

Answer 4

higher costs

Question 5

Cost incidence means?

Answer 5

Who pays

Question 6

Main sources of GHGs

Answer 6

Energy & food
(necessary goods)

Question 7

Ultimately who pays

Answer 7

Consumer & society

Question 8

How can carbon pricing be regressive?

Answer 8

Lower income
spend higher share of income on necessities.
Use older appliances.
Have fewer switching options.

Question 9

Explain claims we can reduce emissions & save money. (Negative costs)

Answer 9

Economic models assume perfect markets.
But, starting point is imperfect in reality.
Costs may be negative or positive.

Question 10

Negative costs arise if…

Answer 10

policy reduces overall market failure/ overall distortion.

Question 11

Tax is more distortionary if

Answer 11

Tax base is narrower
Price elasticity is higher

Question 12

If tax revenue is used to reduce another distortion…

Answer 12

could partially/more than offset the costs of the tax. E.g., labor tax

Question 13

What are the carbon tax interaction effects?

Answer 13

1st dividend: tax reduced emissions

2nd dividend: used to reduce other, more distortionary taxes

However, carbon tax raises prices, reducing real wages & returns. So incentives to work and invest are lower. (undoes double dividend)

But if tax is recycled to reduce payroll tax, employment & welfare is increased