Lecture 5: Climate Change Economics Flashcards
What are economic characteristics of climate change?
- It affects a global public
good; the atmosphere —> Non-excludable & non-rival - Global externality in its
cause and effects —> Private costs of emissions < Societal
costs & free riders - Accumulating pollutants —> Long-lasting in the atmosphere & Intergenerational welfare consequences
- Uncertain catastrophic
consequences —> It is difficult to estimate the cost of the
externality & Irreversibility/economics of risks
What are the 3 main categories of costs of climate change?
- Costs of consequences of
climate change on current
and future generations - Costs of mitigation of
climate change - Costs of adaptation to
climate change
How are the two economic methods called to estimate climate change costs?
Enumerative method
Statistical Methods
Explain the Statistical Methods
• Based on economic differences
between areas with a different
climate
• Use economic differences due to
climate to derive costs of a future
climate
• Difficult to control for all not-climate
causes for differences in economies
• Assumes that current economic-
climate relations are representative
for the future
Explain the Enumerative method
• Model economic impacts of physical climate change effects
• Translate changes in agricultural productivity to GDP changes
• Value of land lost and protection costs for sea level rise
• Value ecosystem losses with WTP for preventing loss
• Valuation of non-market effects from a few studies are applied to
a global scale (‘benefit transfer’)
• Assumes that empirical results derived for a few countries (e.g.
USA) are applicable to other regions
• Difficult to control for changes in vulnerability and adaptation
What is the Ramsey rule used for?
Most climate change costs occur in the future. Such costs are discounted at a rate r using the Ramsey rule
What is the motivation behind discounting?
- Expression of pure impatience; individuals prefer money now
- Future costs matter less if wealth increases due to economic
growth
What are the Marginal costs of consequences of climate change?
• Often expressed as Social
Cost of Carbon (SCC)
• Or the societal costs of each
additional ton of CO2
emission
• Crucial for cost-benefit
analysis of emission
abatement projects and for
setting a level of a carbon tax
Marginal costs of consequences of climate change
Example:
Cost mitigation < SCC value → reduce CO2
Cost mitigation > SCC value → accept CO2 emissions
What are arguments in favour for a high discount rate?
1) Society is as impatient as
individuals
2) Returns of emission abatement
should be as high as other market
investment returns (opportunity
costs)
3) A low discount rate, implies
unrealistically high optimal
current savings
What are arguments against a high discount rate?
1) Society is immortal and not impatient
2) Sustainability implies low discounting
3) High market returns reflect risks, short horizons, market imperfections, and pollution
4) Environmental values become
scarcer, and grow negatively
5) Future economic growth is uncertain, as is the discount rate
6) Inter-generational equity
What is the Integrated Assessment Models (IAM)?
• Combine climate change and socio-economic models
• Climate change reduces economic output via a simplified damage
function
• Balance the costs of climate policy with the costs of climate change
(emissions) over centuries (e.g. 1990-2200)
• “Fine tune” when and how much greenhouse gas emissions should
be reduced
• Many IAMs, but 3 are most influential (DICE, FUND and PAGE)
What are the Challenges with cost-benefit analysis of climate policy?
• Discounting
• Monetary valuation of human life (what value?)
• Developing countries vs. developed countries
• Inequality distribution of impacts and income
• Substitutability nature with capital (total cost of CC, firms’ impact + natures’
impact)
• Extinction of species
• Vital ecosystems and sectors (agriculture)
• Incomplete treatment of risk
• Neglect of certain costs or incomplete inclusion
Neglected cost categories - mention some examples of decreased and increased climate change costs
+ Political instability and violent conflicts
+ Extreme and irreversible climate change
+ Large migration flows
+ Large biodiversity losses
- Faster generation of renewable energy
- Shipping at the poles
- Effects of warmer weather on clothes, food and traffic congestion
Why is e stimating the costs of climate change important?
for guiding optimal climate policy
- Agreements on emission reduction (Paris agreement)
- Cost-benefit analysis of national mitigation projects
- Pricing CO2 emissions (carbon tax)
