climate change - 3

Question 1

Results from the DICE - 2016 model

Answer 1

DICE - 2016 predicts
(i) a slightly lower carbon emissions than the 2013 version, (because it takes into account the abatements), and
(ii) slightly lower temperature rise than the 2013 version, the results are more or less as projected by the IPCC

It also estimates the Social Costs of Carbon (SCC) - SCC(t) = dC(t)/dE(t)

Question 2

Social Costs of Carbon (SCC)

Answer 2

SCC equals the economic impact of a unit of emissions in terms of the t-period consumption as a numeraire.
Estimates of SCC are a critical ingredient in climate change policy: they provide policy makers a target to aim for if they are seeking an economically efficient policy for carbon pricing.
Estimates of SCC differ across models depending upon the policy target.See Table 1 (Nordhaus 2019): For less ambitious temperature targets and damage functions, the SCC is in the range of $43 - $108 per ton for 2020.For targets 20C and below, the SCC is $158-$279 per ton for 2020.
Finally, studies indicate that SCC is highly uncertain because of the uncertainties related to economic growth, emission intensities and damage functions. Another major issue concerning the SCC estimate is the appropriate discount rate.

Question 3

Main conclusions from Norhaus model

Answer 3

Policies to slow emissions should be introduced as soon as possible. In a market context, carbon prices should be equalized in every sector and in every country.Effective policies should have the highest possible participation: i.e. the maximum number of countries and sectors should be on board as soon as possible. Free-riding should be discouraged.

Question 4

Stern Review

Answer 4

Using somewhat different specification of an IAM model, Stern Review estimates that the total cost of BAU (Business as usual) climate change to equate to an average reduction in global per capita consumption of 5%, at a minimum, now and forever (up to 20% of GDP, if a wider range of risks and impacts is taken into account)
Can be as high as 11% if non-market impact (e.g. human health) is included
A disproportionate burden of climate change impacts fall on poor regions of the world
Cost of climate change mitigation: equivalent to losing around 1% of global GDP each year (with the goal of a stabilisation between 500 and 550ppmCO2e)
Whilst IAM estimates may differ depending on the model structure, all agree that effects of warming above 2-3 degrees would reduce global welfare, and that even mild warming would harm poor countries.

Question 5

Nordhaus vs Stern

Answer 5

According to Nordhaus, the ‘optimal’ economic policies to slow climate change involve modest rates of emissions reductions in the near term; followed by increasing reductions in the medium and long term, whereas Stern Review strongly recommends immediate and substantial policy action. Why this difference? Due to discounting : While both the Stern and Nordhaus studies used standard economic methodology, Stern’s approach gives greater weight to long-term ecological effects. Due to their treatment of uncertainty, Stern’s approach gives a heavier weighting to uncertain, but potentially catastrophic impacts. This reflects the application of a precautionary principle.

Question 6

Least-cost pollution control using transferrable emissions permits.

Answer 6

We consider marketable permits (also known as tradeable permits or tranferrable permits) that are applied on the quantity of emissions
Marketable permits are based on the principle that any increase in emissions must be offset by an equivalent decrease elsewhere
There is a limit set on the total quantity of emissions allowed, but the regulator does not attempt to determine how that total allowed quantity is allocated amongst individual sources
Suppose that permits have been allocated at no charge to firms in some arbitrary way. Once that has taken place firms holding permits (both types who hold sufficient number of permits to cover their desired emission level and those who do not have sufficient permits) evaluate the marginal value of permits to themselves. These valuations differ across firms
Firms decide to buy or sell permits by comparing the marginal valuations of permits with the price of the permit and the abatement costs. For example,a firm that has insufficent number of permits will not buy permits if the price of the permit exceeds their abatement costs
In equilibrium, marginal abatement costs will equalise across frms => transferable permits, like taxes and subsidies, any given target level at a least-cost.