I. DICE & Social Cost of Carbon

Question 1

Why Does Carbon Stock Matter?

Answer 1

Carbon accumulates so timing matters → The earlier you cut emissions the lower the total stock.

Therefore, pledging neutrality by 2060 but in the mean time still emitting results in insane damage from just the adjustment period.

Question 2

True or False? Cutting emissions today is as important as cutting emissions in 20 years.

Answer 2

True, because of the carbon stock

Question 3

Why do we consider a marginal effect of carbon?

Answer 3

The social cost of one tonne of carbon is different if your carbon stock is zero or if its at today’s level.

Question 4

Structure of the D.I.C.E Model

Answer 4

Climate, Economy, and Stock of Carbon Block.

Question 5

Role of Climate Scientists in D.I.C.E

Answer 5

For a stock of GHG, here is the influence on the surface temperature change, precipitation, probability of extreme events, water resources

Question 6

Assumptions and Controversies w.r.t Abatement Technology

Answer 6

Lambda is abatement.

Assumes increasing efficiency at reducing emissions. Uncertain outcome that has never happened.

Assumes don’t have to sacrifice much future output to reduce emissions - flawed.

Moreover, tries to predict what emissions will be in 40 years. Hard!

Only abatement of emissions is considered - not abatement to deal with consequences (e.g sea walls)

Question 7

Shortcomings of the Damage Equation

Answer 7

Not comprehensive enough

Damage to output is often only a function of temperature difference

Ought to depend on biodiversity, sea level rise, probability of extreme events etc

Question 8

Impact on SCC of Non-comprehensive Damage Function

Answer 8

Many mechanisms (other than temperature) not accounted for.

Therefore, SCC has lots of uncertainty and need richer models.

E.g: How biodiversity changes impact damage to output.

Question 9

Shortcomings of Emission Measurement in D.I.C.E

Answer 9

Takes large industrial emissions and applies transformation rate.

Lacks: land emissions, deforestation and, agricultural activity

Question 10

Emissions and Reservoirs

Answer 10

Emissions accumulate in 3 permeable reservoirs → atmosphere, lower ocean, upper ocean

We care about how emissions impact surface temperature and movement between reservoirs

Question 11

Emissions and State Variables

Answer 11

Emissions don’t affect the state today, just state tomorrow

Emit today, different reservoirs, higher temp tomorrow, warms planet, impacts future consumption/production

Hence, we have to discount changes tomorrow to present → DISCOUNT RATE MATTERS!

Question 12

How SCC Varies with Discounting and Models

Answer 12

SCC $$ declines a lot with larger discounting

Different models induce very different SSC → uncertainty

Question 13

Define Externalities

Answer 13

A technological externality is present when the production or consumption of a good affects the production possibilities of other firms or the utility of consumption of other consumers.

+ve & -ve externalities

Question 14

Define Social Cost of Carbon

Answer 14

Variation in welfare overall due to a marginal increase in GHG/carbon impulse.

If it’s $100/tonne, that’s the cost/value of one tonne of carbon in terms of consumption today.

Tells you where the tradeoff is.

Question 15

Impact of Country Utility Functions on SCC

Answer 15

Must aggregate very different country situations to get aggregate welfare and uniform SCC.

Different welfare functions yield divergent SSCs

Question 16

Does a Concave Welfare Function Make Sense?

Answer 16

Yes, for equality -> Helps aggregate situations of two different populations

Northern population that emits more and is less impacted and a southern population that doesn’t pollute as much but will face a lot of damage

Question 17

Numerator of the SCC Formula

Answer 17

Welfare Variation. Damage to welfare of one more ton of carbon.

Question 18

Denominator of the SCC Formula

Answer 18

Slope of the utility function. Puts welfare variation in terms of today’s consumption. Helps us get a $ value.

Question 19

Relevance of SCC for Abatement

Answer 19

The SCC decide whether you’re willing to engage in abatement or not.

Is your carbon arbitrage in financial terms.

Countries will purchase abatement if the cost is less than the negative effect.

Innovators should become more competitive through SCC because of this bar of carbon arbitrage.

But, again, SCC is different for different countries.

Question 20

Meaning if SCC > Consumption Today

Answer 20

Nothing besides you just borrow today and bring some future consumption into the present through borrowing to make this investment and change happen.

Question 21

Sources of Controversy with SCC

Answer 21

Just pacifying the preferences has huge impact on how much effort happens in the model and the trajectory you forecast. But, aggregating those very different situations is hard.

People will see the how much welfare they loose from damages and then calculate up to what point is it efficient for them to curb effort. Therefore, what determines the effort put in is the SCC.

Lot of uncertainty $100-$400

Question 22

Would a social planner make richer or poorer countries pay for the investment of climate change?

Answer 22

Easier for some countries to give up on consumption, so optimal social planner makes richer countries pay.

Question 23

SCC, Burden, and The Political Problem

Answer 23

The countries that pollute a lot are not the ones that will suffer more.

Place like Russia & Germany have negative SCC yet produce lots of emissions → They could benefit from warming.

Political problem: we don’t live in a world where everybody losses. You get much less of an impact in Russia than Brazil. Brazil would like to reduce emissions but other countries say why should I pay if I am less impacted?

Mismatch between social and private costs.

Question 24

Why Do Poorer Countries Suffer the Most?

Answer 24

South is much more extractive and in general have way more volatility → commodity dependence. Don’t have any buffer or other economic sector that is large enough to absorb those shocks.

In terms of human activity, combination of humidity and heat literally kills you

Shocks last longer. Recovery in the US is so fast - hurricane are goods for the economy since so much funds go to rebuilding and sometimes rebuilt better so sometimes see better impact. But, in developing countries, it can take years

Question 25

Why Must a Carbon Price/Tax Be Uniform Globally?

Answer 25

Unit of CO2 = Unit of CO2. Everybody should pay the same price.

But, we don’t have a global government that could impose that and reconcile Russia vs Brazil.

Question 26

True or False? Rich countries are likely to suffer higher capital losses from sea level rise?.

Answer 26

True.

Poor (hot) countries have larger SCC than rich (cold) countries

USA has a lot of costal land at risk. Some of it like Florida is highly industrialized with a lot of housing. So we have residential capital close to the sea.

Question 27

Would you expect rich countries to make efforts to curbing their consumption/production?

Answer 27

No, from their perspective SCC is very low or negative

Hence, no consumption loss associated so any reduction effort would be a pure loss

Won’t internalize their negative externalities fully.

Either must be disciplined enough to take whole world’s welfare into account or for a world government to enforce bindingly.