LEC4: Economics of climate change

Question 1

What is the difference between Nominal GDP and Real GDP?

Answer 1

1. Nominal GDP
   The nominal GDP might be higher from one year to another purely because
   of higher prices (inflation), even though in real terms no more goods are
   produced.
2. Real GDP
   Real GDP explicitly removes the effect of inflation*. It expresses the value
   of final goods in terms of some specific base year prices.
   Real GDP more effectively measures the changes in real production/output
   in an economy and shows actual economic improvement.

Question 2

How to calculate GDP

Answer 2

One way to calculate the GDP is to count actors on final goods.
the sum of money spent by different
GDP = Domestic consumption (C) + invest domestically (I) + governments (G)
+ NX (difference between export and import)

Question 3

What doesnt GDP consider?

Answer 3

However, this method does not take into account the grey and black market and the depreciation of natural capital.

Question 4

What is Green Adjustment?

Answer 4

A green adjustment attempts to account for a loss of natural capital in calculating GDP.
The green GDP can be calculated by
estimating the cost of lost natural capital
and subtract it from the annual GDP figure.

Question 5

What are the two primary market failures?

Answer 5

Two primary market failures are:
1. External effects (externality) are effects of an economic decision that are not
specified as a benefit or liability in the contract.
2. Public goods free riding) and
tragedy of the commons.

Question 6

What are the different types of cost considering Climate Change?

Answer 6

There are different kinds of costs:
1.
Marginal private cost (MPC) = marginal cost to decision-maker
The cost of every additional unit.
2.
Marginal external cost (MEC) = costs imposed by decision-maker on society
The cost of every additional unit for society.
3.
Marginal social cost (MSC) = MPC + MEC = full cost to society

Question 7

What is tragedy of the commons?

Answer 7

The tragedy of commons occurs when the element of rivalry pushes people to use the good as much as possible. Without regulation this will lead to depletion of the good.

Question 8

What is the Free Riding problem?

Answer 8

This gives incentive to
free riding, which means that someone receives the (external) benefits from something but does not bear the costs.

Question 9

What are the IPCC economic consequences of climate change?

Answer 9

1. Economic damages from climate change have been detected in climate-exposed sectors.
2. Some extreme weather events, such as tropical cyclones, have reduced economic growth in the short term.
3. Some positive effects have been identified in regions that have been
   benefited
   from lower energy demand as well as comparative advantages in agricultural
   markets and tourism.

4.Non-climatic factors including some patterns of settlement, and siting of
infrastructure have contributed to
the exposure of more assets to extreme
climate hazards increasing the magnitude of the losses.

5. Individual livelihoods have been affected through changes in agriculutural
   productivity, impacts on human health and food security, destruction of homes and
   infrastructure, and loss of property and income, with adverse effects on gender and
   social equity.

Question 10

What is the Neoclassical Economic Growth Model?

Answer 10

The neoclassical economic growth model provides two sources of growth that make
up the real GDP:
1. Labour inputs (hours of work)
2. Labour productivity (average output per hour).

When analysing real GDP growth per capita, aspects related to labour productivity are
more relevant

Question 11

What are the 3 scenarios after a natural disaster?

Answer 11

1. Decline and rebound: their economy can be affected in the short run and they recover to the same level after.
2. Decline and no recovery: economy is affected, but there is not enough resources or capital to rebuild its economy in the long run. They are affected long term.
3. Decline and boost (BBB): economy is affected, but is put on a new trajectory that results in a larger economy in the long run.

The decline and rebound scenario has been established as the most plausible.

Question 12

What is Klomp and Valckx 2014 about?

Answer 12

1.The study examines natural disasters which, due to climate change, increase in frequency leading to more situations of the following type:

2.The study did not investigate the slow-onset of global warming and increasing temperature on labour productivit

Question 13

Why is it difficult to solve climate change?

Answer 13

Capping emissions is not enough

The stock of CO2 matters, not the flow; there is a need for net-zero emissions.

Conflicts of interest (globally and intergenerational)
Between/ within countries and generations; losers and winners of policies.

Requires Global Cooperation

Question 14

What is an Abatement policy?

Answer 14

An abatement policy is a policy designed to reduce environmental damages.
E.g., taxes on emissions of pollutants, and regulatory incentives to use fuel
efficient cars.

When deciding on abatement policies, it is necessary to think about benefits and costs of these policies, including opportunity costs, i.e., what is forgone when abatement is
implemented.

Question 15

What is an abatement cost curve?

Answer 15

Abatement policy options can be assessed by using abatement cost curves.
This curve shows the per-unit cost of reducing greenhouse gas emissions
using different abatement policies,ranked from the most cost-effective to the least.

The least-cost abatement curve shows how total abatement depends on total
abatement expenditures. We see that at the beginning, because we employ a lot of cheap policy options that can do a lot for the environment, the curve is very steep.

Question 16

What is the least-cost abatement curve and the frontier?

Answer 16

We see that at the beginning, because we employ a lot of cheap policy options that can do a lot for the environment, the curve is very steep.
You should always choose a point at the frontier, if you have two options at the same cost of abatement you should always choose the option with the highest environmental quality impact

Implementing any of the abatement policies costs money and diverts resources from the
production of other goods and services:
the opportunity cost of an improved
environment would be reduced consumption.

To study environment-consumption trade-off, we horizontally invert the least-cost abatement curve. Such a flip will give us the feasible set.

Question 17

What is the Feasible Set?

Answer 17

The feasible set shows
the trade-off between consumption and environmental
quality.
The steeper the feasible frontier the smaller the opportunity costs of environmental quality in terms of forgone consumption

Question 18

What is an indifference curve?

Answer 18

Indifference curves show a combination of two goods in various quantities that provide equal satisfaction to an individual.
An individual will always want to enjoy more satisfaction, thus they will always want to be on a ‘higher’ indifference. So an individual will always want to be on the highest indifference curve.

Question 19

What is the optimal abatement level?

Answer 19

The optimal abatement level is where the slope of the feasible set equals to the slope of the indifferent curve.

In that case the public is on the ‘highest’ indifference curve and at the frontier of the feasible set.

The steepness of the curve tells us how much people value consumption vs
environment.

Question 20

What would produce a different choice of abatement level?

Answer 20

1. Different costs of abatement: abatement becomes cheaper due to technological
   advancements.
   Technological improvements can enlarge the feasible set by making
   abatement more efficient or reducing the environmental costs of consumption.
2. Different values: citizens care more about the environment, or they become more concerned about climate change.
   If they care more about the environment they are
   willing to give up more
   consumption for greater environmental quality.
   Different values can be created via lifestyle interventions, like taxes changing consumption patterns and nudging.

Question 21

What are the two most effective abatement policies?

Answer 21

.
**Carbon taxes
** A carbon tax is a fee that emitters must pay for each tonne of greenhouse
gas emissions they produce. It is a type of Pigouvian tax that aims to compensate for the negative externalities.

• Carbon tax is the most efficient policy to reduce carbon emissions
• A carbon tax should increase every year until emissions reduction goals are met. A rising carbon price will encourage technological innovation.
• It can replace other less-effective policies.
• To prevent carbon leakage and to protect nation competitiveness, a border carbon adjustment system should be established.
• To maxise the fairness, all profit from emission taxes should be returned to citizens.
  **But even if the carbon tax is levied on the firms, the end user (consumers) of
  goods also bear the burden of this tax. As increasing taxes will cause firms
  to up the price. **

Cap and Trade
.
- A cap and trade policy
creates a market for emissions.
- The government sets a limit (cap) on pollution and creates enough permits to
meet this cap. Then they allocate permits and firms buy/sell permits among themselves.
- Cap and trade is combined (quantity- and price-based) policy
- An advantage of cap and trade policy compared to tax is that
the costs of this policy are not perceived as much by the citizens, even though they receive
the same burden. It is a more politically feasible option.
- Additionally, a cap and trade system guarantees that the required cap on
emissions will be achieved. Something which a carbon tax cannot secure.
Hence, the cap and trade system should be perceived as a more prudent policy.

Question 22

What are the 3 main considerations when evaluating climate policies?

Answer 22

Three main consideration of the public when evaluating climate policies:
1. Perceived effectiveness of policies.
2. Perceived costs of policies.
3. Distributional issues (the public prefers more wealthy people to bear the
consequences of climate change policies).