Lecture 5: Climate change economics

Question 1

What is a cumulative or stock pollutant?

Answer 1

A pollutant that does not dissipate or degrade simnifically over time and can accumulate in the environment, such as CO2 or chlorofluorcarbons

Question 2

What is a present value?

Answer 2

Figuring out how much something is worth today compared to its value in the future. Reflecting the idea that a dollar today is worth more than a dollar in the future.

Question 3

What is a discount rate?

Answer 3

if you have $100 and you could either spend it now or invest it to make more money, the discount rate helps you decide how much extra money you’d want in the future to make it worth waiting.

Question 4

What is opportunity cost?

Answer 4

The value of what you give up by not spending the money on something else right away (trade off cost).

Question 5

What does a high discount rate mean?

Answer 5

You really want to have the money now, so you might need a lot of profit in the future to make it worth waiting for. In environmental terms: We want results and benefits quickly, we don’t want to wait - present value of future benefits is lower - net value is less positive.

Question 6

What does a low discount rate mean?

Answer 6

You’re okay waiting for money. in terms of environment: we really care about those future benefits, and we’re willing to wait for them, so the present value of the future benefits is higher

Question 7

What is abatement?

Answer 7

Vermindering - Noise/air pollution/water pollution/emission abatement. - strike a balance between human activity and preserving ecosystems by minimising the negative impact of those activities.

Question 8

What does a low discount rate say?

Answer 8

The statement suggests that, because the low discount rate places a high value on the potential long-term damages caused by climate change, it tips the balance in favor of taking aggressive actions today.

Question 9

Stern uses a low discount rate of 1.4 % to balance present and future costs: what are 3 differences between stern and Nordhaus?

Answer 9

• Stern uses a lower discount rate
• Stern takes precautionary principles into consideration
• Difference in the assessment of the economic costs of action to mitigate climate change.

Question 10

Why are market-oriented approaches considered cost efficient?

Answer 10

Because rather than attempting to control market actors directly, they shift incentives so that individuals and firms will change their behaviour or take external costs and benefits into account.

Question 11

What are examples of market-based policy tools ?

Answer 11

Pollution taxes and transferable or tradable permits.

Question 12

What are revenue- neutral tax shifts?

Answer 12

Fe: belasting op ink omen gaat omlaag, belasting op gas gaat omhoog, - vin doen baluns dat eerlijker is voor iedereen.

Question 13

What are advantages of tax instead of cap&trade?

Answer 13

• More simple to understand/more transparent
• With tech. change that lowers cost of carbon reduction, a carbon tax will automatically further lower carbon emissions. with cap and trade, technology will instead reduce the price of permits, resulting in some firms emitting more
• Can be implemented more quickly
• Provides greater price predictability.

Question 14

Advantages cap and trade:

Answer 14

• It avoids the negative connotation of a tax - creates less political opposition than a carbon tax.
• Some businesses believe they can lobby governments for free permits, rather than buy them
• Emissions are known with certainty because the government sets a number of available permits!

Question 15

What is a nationally determined contribution (NDC)?

Answer 15

A voluntary planned reduction in CO2 emissions

Question 16

Why is the atmosphere a public good?

Answer 16

It is non excludable and non-rival

Question 17

What are 4 characteristics of climate change?

Answer 17

• Affects a global public good (atmosphere)
• Global externality in both its cause and effect (GHG)
• GHG emissions are accumulating pollutants
• Potential for uncertain catastrophic consequences (fe: extreme weather)

Question 18

What are 3 main categories of the cost of climate change?

Answer 18

1. Cost on current and future generations
2. Cost of mitigating climate change
3. Cost of adaptating climate change

Question 19

What are monetised impacts of climate change?

Answer 19

Agriculture: crop yields (e.g. drought and warmer climate turn into crop losses, costly in the agricultural
sector)
- Fisheries: acidification
- Forestry: changes within lifetime of a tree (forest cant adapt to climate change)
- Water use: Southern Europe, California, Africa (when drier climate)
- Coastal zones: seal level rise, land loss (bc of erosion), protection costs
- Energy use: more net energy for cooling when warmer climate
- Nature and biodiversity: (some) ecosystem losses (coverage of species decline bc of climate change,
WTP to prevent this is included in the costs)
- Health: malnutrition and diseases

Question 20

What are arguments pro discount?

Answer 20

1. Individuals prefer money now
2. Future costs matter less if wealth increases due to economic growth

Question 21

What is the SCC (societal cost of carbon)?

Answer 21

The cost of each additional ton of CO2 emission to society.

Question 22

What happens if the mitigation costs are lower than the social cost to carbon ?

Answer 22

Reduce CO2, otherwise accept it

Question 23

How does the discount rate impact the SCC?

Answer 23

A high discount rate results in a low SCC.

Question 24

What are arguments for a high discount rate?

Answer 24

1. Society is impatient as individuals
2. Returns of emission abatement should be high as other market investment returns
3. A low discount rate, implies unrealistically high optimal current savings.

Question 25

What are arguments for a low discount rate?

Answer 25

1. Society is immortal and not impatient
2. Sustainability implies low discounting
3. High market returns are not a good guide for env. problems
4. Environmental values become scarcer, and grow negatively
5. Future economic growth is uncertain
6. inter-generational equity.

Question 26

What do we need to know to make a c/b analysis by how much pollution should be reduced in what moment of time?

Answer 26

• info about Econ. costs of climate change
• info about how much it costs to reduce GHG emissions.

Question 27

What does an integrated assessment model do? (IAM)

Answer 27

• It tries to determine how much emissions should be reduced at what point in time
• It combines climate change and socio-economic models
• Climate change reduces economic output via a simplified damage function
• Balance the costs of climate policy with the cost if climate change
• Fine-tune how much GHG emissions should be reduced

Question 28

In which 3 ways are integrated assessment models used?

Answer 28

1. They give advice on the economically optimal emission reduction pathways, which can be used as guidance for the Paris agreement.
2. Can be used for cost-benefit analysis of national mitigation projects
3. Can be used for pricing CO2 emissions (carbon tax).

Question 29

What is a major difference between the stern and Nordhaug analysis?

Answer 29

The choice of discount rate :
Stern: 1.4%
Nordhaus: 6%