Module 3 Test Flashcards

Question

Problems with the wage risk method?

Answer 1

- Assumes workers have understood accurate info - Sample selection bias (Not necessarily average people (lower risk aversion)) - Assumes voluntary and involuntary risks have same value (I.e. car crash where you’re driving and plane crash where you have no control) - Puts a much larger value on life in rich than poor countries - Statistical life does NOT equal individual life

Answer 2

Involves adding up the cost of an engineering solution: really important for ecosystem services evaluation - Cost of replacing an ecosystem service (e.g. Commercial pollination services) - Cost of adapting to environmental damage; cost of complying with needed environmental legislation ○ e.g. Cost of building levees/dikes, repairing from a flow, or of abiding by a new environmental regulation ○ E.g. Important benefit/cost analysis of environmental legislation or climate change mitigation - Central for Ecosystem Services evaluation

Answer 3

- Focuses on experienced human well-being rather than production - Translates subjective response to economic measure by comparing impacts - By using large databases of how happy people are, and what explains it, we can evaluate things in life including the value of pollution, access to park, etc.

Answer 4

Conceptualizes the functions of nature as a service to humanity. They are the attempt evaluate and quantify the services of natures. Evaluating the flow of services everyone gets. - Use values, non-use values, option values - Overlaid on four categories: provisioning, regulating, cultural, supporting

Answer 5

Issues with coming up with a price Not sure that protecting nature will be the financially beneficial option It effectively pushes the natural world further into the system that is eating it alive The role of power is left out in these discussions (example: mangrove vs. shrimp farm --> depends who it is benefiting) Values and framing - corrupt the movement's core values Solution: mobilize - actively resisting and mobilizing against opponents

Answer 6

Gives governments and companies the tools and incentives to protect natural resources and habitats by making it easier to compare alternative outcomes Win-win situations: everyone involved is left pleased with the result Translating biological terms to appeal to economists’ vocabulary will persuade them to care about the environment

Answer 7

1) Evaluating - Stated preferences (WTP and WTA) - revealed preferences (travel cost, property value, and wage risk methods) - engineering approach - Life satisfaction approach (subjective well-being approach) --> aggregation 2) Making tradeoffs - No choice about making a choice 3) Applying our values - Pricing nature - Rights-based approach - Precautionary / other approaches - Policy

Answer 8

More modern tool of CV “Choice experiments” consist of a series of hypothetical binary choices. By looking at many choices, one can infer valuations of specific goods using simple models

Answer 9

Revenue Punitive: tax to reduce individual consumption (Pigouvian: tax equivalent to it’s social cost). - calculated to be the social cost of the externality - Ideally for carbon tax (capture the cost of the externality)

Answer 10

The amount collected from taxes may not be the correct amount to spend on something

Answer 11

Mixed messages - funding cancer research with tax income from cigarettes Visibility - sometimes want to make more visible, sometimes want to hide Free-riding - Receiving a benefit that they were happy to pay for anyway Capital turnover timescales - Average length of time that investment is around R&D investment and scale-up sequence Commitment - Governments are not set up to deal with long-term problems. It is hard to put into place a long run policy that cannot be overturned by the next government. Rebound effect - efficiency can increase consumption

Answer 12

No: - Equity issue - Strategic behaviour: People are now going to get into the game of guessing what Hydro Quebec's next move is. People will hold off their plans to insulate Free-riding: Some people were already planning to insulate. Some fraction of the subsidy is wasted Rebound effect: The objective is to reduce the energy demand. People will turn the heat up (since they stop wearing sweaters) Better policy: Have the recipients pay the bill. If the project is truly cost-effective, there should be a financing mechanism in which the recipient comes out ahead.

Answer 13

Investments are exactly what is going to have power in the future, putting resources into something - Different things have different lifetimes - When something wears out, we build something new, we replace it

Answer 14

Future is uncertain: - resource/offer might disappear before then, or not be credible. - i might not exist Increased income: - I will have a job, more income by then - Not be worth as much to me - in future you might be earning more and not relying on handouts/ can make own benefits Limited empathy/intrinsic impatience: - I care less about my future self than i do about me now Can exchange for productive asset - let's you do things that might increase its value - sell/exchange good for investment money or labour

Answer 15

When future benefits are not weighed as heavily as current benefits, we say that the future benefits are discounted Due to interest, resources on hand today are more valuable than resources available at a later date The amount we would put aside today to grow to a certain benefit in the future is the present discounted value (PDV) of that benefit

Answer 16

growth of productivity over time (flow of benefits over time)

Answer 17

PDV = (X) / (1 + r)^T where, X= $ received r= discount rate T= years PDV=amount of money one would need to invest in the present to just receive X in T years

Answer 18

High discount rate: less weight given to the future Low discount rate: more weight it given to the future (more certain your investment will pay off)

Answer 19

the future has the same weight as the present

Answer 20

the rate at which money loses real value over time (prices go up for the same thing)

Answer 21

RIR=bank interest rate - inflation RIR is “removed” from most data in advance of any discussion or analysis Market reflection of the private discount rate. This is the opportunity cost of risk-free capital. This could be different from the social discount rate, which policy makers might use for some decisions.

Answer 22

If real per capita economic growth continues at a rate of 2%–3% per year, then people in one hundred years’ time will be 7 (or 19) times as wealthy as us.

Answer 23

innate: what is the value of future utility consumption: what is the utility of future marginal consumption

Answer 24

tells us how much to discount marginal consumption at a particular future date discounting factor = (marginal utility in the future / marginal utility now) x pure time factor (how much we care)

Answer 25

discount factor will grow positive

Answer 26

How much we are discounting over time where “marginal utility” means the value (to the consumer) of consuming an increment of something Discount rate is closely related to the discount factor. The rate tells us how to calculate the discount factor, based on how far in the future the consumption happens a discount rate of 1% means the discount factor is 0.99 next year, 0.98 the year after, etc).

Answer 27

Pure time preference: - how much do we even care about the future? Effect of being richer (having higher consumption or at least productivity) in the future - do we need more resources in the future or now? TRAP: inflation is irrelevant to all of the above

Answer 28

An individual is risk averse if they prefer a “sure thing” to a gamble with a higher expected payoff - E.g.. $50 for sure versus a 50% chance for $110. Risk aversion implies that people will dislike exposure to catastrophic events occuring w/ low probability more than unpleasant events occurring w/ high probability even if they have the same average cost.

Answer 29

risk = severity x probability where, “Severity” here is measured by the loss (cost) involved in the event. Equivalently, we can use benefit or net benefit in place of “severity”.

Answer 30

Voluntary vs. involuntary risk - more likely to object to air pollution vs. smoking (feels like you have more agency) - people see more risk in flying than driving (more control when driving) Lack of knowledge Distrust in experts People are risk averse

Answer 31

Asteroid impact Nuclear apocalypse Mega-pandemic Biotech warfare or mistake General Artifical Intelligence mistake Unfriendly aliens Nanotech mistake Gamma-ray burst Mega-volcano Social collapse

Answer 32

cannot use the same decision-making tools here because these events are so uncertain resource allocation is difficult because of these uncertainties

Answer 33

Need for decision-makers to anticipate harm before it occurs and prove it not a threat. Within this lies an implicit rreveral of the onus of proof: need to prove a proposed activity will not (or very rarely) result in significant harm Some obligation, if level of harm is high, to take action to prevent/minimise harm, even when absence of scientific certainty makes predicting the likelihood of the harm difficult IN OTHER WORDS: - we want people to prove it is not a threat (or else we will take action to mitigate the threat) - need for mitigation increases with possible harm and degree of uncertainty

Answer 34

More than $20M, for a different reason (Travel cost and entrance fee)

Answer 35

False: - In Canada, wages are higher - Expressing cost-benefit is economical - When people are wealthy, their WTP is going to be higher - DISTINCTION is between the method and the ethics. This is a way to value human life through statistical data

Answer 36

you observe someone’s behaviour and make an assumption about them

Answer 37

it makes intuitive sense to voters // appeases opposition parties - There is nothing natural about the cost of domain matching spending revenue - Motive of a tax is to change the incentive

Answer 38

Aggregation over individuals, over time, and over possible outcomes (future has risk and uncertainties)

Answer 39

When there are improvements in productivity/efficiency, rather than the efficiency going entirely to save resources, some of that new opportunity is used up in increased consumption example: fridge

Answer 40

where people are using more of a resource in response to increased efficiency of use of that resource Jevons Paradox ≡ a rebound effect >100% Although promoting energy efficiency is a valuable tool to save money and stimulate economic productivity, it is possible for energy efficiency improvements to increase energy use. This Jevons Paradox is not likely, but the more general (less strong) case of the "rebound effect", in which some of the expected conservation from efficiency gains is lost to increased use is the norm.

Answer 41

direct: increased consumption of the good (subsitution effect) - When strong enough, leads to Jevon Paradox indirect: increased consumption of other goods (wealth effects) - If we save money from the improved efficiency of a service, then we will use that money to buy another service, so we are still consuming the resource

Answer 42

What happens when we face the predictions and generate targets for climate change. When the impact of implement a green policy backfires. Example: - Announcement of policies to phase out fossil fuels - Response: companies sell it faster since it might be not profitable in the future or illegal (perverse incentive) - Liquidation of reserves - Accelerated climate change Same effect with the development of cheaper clean energy technology

Answer 43

closing roads could speed up traffic - Road A and road B are equally preferable --> drivers would split up - Adding a road that allows to travel between two routes --> everyone takes it, slows down transportation even if it was supposed to make it faster Increases GHG emissions slows traffic Encourages urban sprawl and driving to work - Induced demand --> the number of people using the road increases. It gives people the incentive to drive more and live far from their workplaces.

Answer 44

Combine policies to balance out perverse outcomes Need to put a new constraint on the resource to avoid or limit the rebound effect

Answer 45

Fridge LED lighting Internet efficiency

Answer 46

Increased consumption by everyone, due to spillovers of more economic activity Efficiency increased in general, productivity spills over into general economic growth = everyone is wealthier due to tech advances which means we consume more resources

Answer 47

Evaluate: - identify preferred collective outcome - What we want humanity to do - What is best for society/ what do we want everyone to be doing? Policy: - insrtuments to get there - How we will get there: Planner’s Problem

Answer 48

Social cost of carbon Abatement (mitigation) cost

Answer 49

Too expensive to go carbon neutral tomorrow and we might lose the ability to mitigate because it could cause society to collapse Current fossil fuel energy infrastructure: $55 trillion If you want to make change in society you have to think of what the investment change will be

Answer 50

Think about costs versus benefits. Suddenly shutting down all our food provision systems, health supports, government infrastructure, etc, due to lack of ready carbon-neutral alternatives, could cause more death, suffering, and harm than our worst climate change projections. A disruption that catastrophic might not only fail but leave society so weakened that it is permanently less able to mitigate and adapt on a more feasible timeframe.

Answer 51

Answer 1: because there is a more efficient (cheaper) way to get the same emissions: some places could reduce more than 10% per year really easily. And some would find it hard. How can we make sure that the low-hanging fruit (easy reductions) are done as fast as possible, and the harder ones done at whatever maximum pace is practical? every emitter has a different hardship in cutting back, the physical capital (investments) of some take longer to replace --> give some more time those who can replace faster --> must cut back faster Answer 2: that’s a very fast transition. It might cause more mayhem/harm/disruption (labour / income / consumption / strife / etc) than the environmental damage would. So think about costs versus benefits. Slightly slower might be better, overall.

Answer 52

55 trillion dollars

Answer 53

Hardest way to reduce emissions Takes CO2 out of thin air and condenses it Countries would pay companies like Carbon Engineering to take carbon out of air and continue their emissions, but they’d still be carbon neutral. instead of changing their emissions people will pay to take out their emissions from the air instead of changing their investments (if it is cheaper to do so)

Answer 54

The total (summed), discounted (“net-present”) value of all future damage caused by emitting an extra unit (tonne) of GHG today (or in a given year). Includes changes in net agricultural productivity, human health, property damages (floods), changes in energy systems

Answer 55

Crucial in calculating social cost of carbon (very hard to do), it is the global climate-economy feedback model. Spatial geophysical model coupled with economic model This is the aggregation problem Calculates how future people will suffer

Answer 56

One possible sequence of future emissions (or concentrations) over time, by country. To calculate SCC, have to assume emissions pathway. One possible sequence of future emissions over time, by country

Answer 57

The price will rise in the future because effects of climate gets worse; worse to emit in future if you wait to emit it, the SCC is higher --> concentration of GHG is higher Because the effects of climate get worse, one ton of GHG is a bigger problem than if we emit it today even worse to emit in the future (when opportunities to mitigate have passed by us) taking different discount rates changes the growth of the cost

Answer 58

Mitigation Adaption Geoengineering

Answer 59

Avoidance by reducing GHGs through information, subsidies, prices, regulations Trying to fix the problem, how will we solve or reduce the problem

Answer 60

coping by preparing for or responding to damage through disaster management and development of policies (Building up resilience) - example: air conditioning Doing nothing to solve the problem, making life more tolerable under the new circumstances, how do we live with the problem, can look like development in order to build resilient cities and more comfortable lives Big problem worldwide is level of wealth, general development, and desire to adapt

Answer 61

emergency countermeasures that reverse climate changes without treating GHG cause Example: solar radiation management geoengineering

Answer 62

adding fine particles, such as sulfates, into the upper atmosphere to reflect solar radiation. With less sunlight reaching the planet’s surface, the global climate would cool rapidly, balancing out the increase in temperature caused by emissions Affordable method to gain leverage on the problem: risk control (NOT subsitute for action)

Answer 63

Only deals with one aspect of climate change at a time (does not deal with ocean acidification) Unknown uncertainties/risks Moral hazard: This approach may subvert incentives to cutting emissions --> knowledge that geoengineering is possible --> climate impacts look less fearsome --> a weaker commitment to cutting emissions now

Answer 64

Start with science: what are the sources of GHGs? - Have to look for what mitigation is physically possible for each source/ mechanism Then economics: look at cost of each option and decide which one is cheapest (has best effort and resource allocation) - What resources will we put into play to carry this out? - How many people will be diverted from productive jobs to help? - How much of our consumption and production won’t happen as a result? - Difficult to find out in great detail what the optimum option is

Answer 65

Depends on the particular technology and the speed of learning Makes discussing marginal cost curve very difficult because we dont know the costs for large developments Example: Which are more financially feasible, the first one thousand wind turbines installed or the second thousand? - The first million will be built at the more favorable sites. - But the second million will benefit from the learning acquired building the first million

Answer 66

The collective cost is almost insignificant individually BUT each have the same tiny piece of damage - GHG spread across the world - Multiply by the world population is adds up People do not suffer the vast majority of the effects of their own emissions Affect is mixed amongst the entire human population - Not contained in time nor in space - Shared very broadly - No gobal leadership

Answer 67

Canada is emitting a relatively small fraction of the global emissions By comparing to how much we spend on adaptation, we are adapting to the total amount of other countries Adaptation we are spending now is both past emissions and everyone else's - Makes no difference - Small country in a big world, even if we are a fossil fuel middle power Paying for the cost of other countries' emissions

Answer 68

Quantity is fixed Government decides on a quota (maximum) of GHG emissions for the period (e.g. 1 month) Firms bringing fossil fuels or etc into the economy bid on permits at an auction - Can write 500k permits and write them off - Government can also mitigate marketplace for companies to broker permits, this is where a carbon price emerges. Every emitter sees how profitable it is to reduce emissions Given reduction is achieved at a minimum cost - Given to company that can reduce emissions at the cheapest cost In effect in: EU, North America (only 2 participants, QC and California, briefly Ontario)

Answer 69

getting hard to change polluters to pay the easier to change polluters to reduce even more than they would otherwise Investments in mitigation goes to lowest hanging fruit (firm with easiest ability to reduce emissions) helps identify where emission reductions can be achieved most cost-effectively.

Answer 70

Price is fixed Government decides on a price that should be paid for emission of GHG Firms bringing fossil fuels or etc into the economy buy permits at the fixed price The price is fixed but achieves maximum reduction for given cost, since those who mitigate first and most into climate cost are those who will benefit most from it Sweden, Norway, Denmark, BC, and used to be Australia

Answer 71

Coverage: - difficult to implement a carbon pricing system that covers all of the GHG in the economy and that is partly because some of them are really hard to measure (for (we usually do not include forestry, land-use change, waste disposal into our carbon pricing systems.) Horizon/timeline/ramp: - The degree to which the policy signals to the private sector or anyone making investment decisions what the far future price will be - Important for people to make climate smart investment decisions - Tells how well government can commit to the future, carbon caps, policy prices, etc. Revenue budget neutrality: Both these systems generate income. - Can return it to people - Way to ensure the government doesn't get any net income from these is policies is by a) packaging the policy so government spends all revenue on public domain b) returning all revenue gain on tax returns or cheque handouts Handouts and allowances: How permits are allocated - In order to appease workers (voters), good idea to initially hand out lots of permits for free until they’re auctioned off later - Softens blow of new policy, reduces disadvantage trade exposers have (i.e. one company is taxed while the other, across the border, isn’t) Offsets: - Way to deal with some parts of emissions which aren’t fully covered by carbon price system - Its a payment to someone else to reduce emissions which aren’t covered by system you’re in Commitment

Answer 72

someone in QC paying someone in Guatemala to reduce their emissions. But this international technique doesn’t work when you’re under carbon system because it doesn;t count towards the cap, so have to pay someone else in the same system (i.e. forestry industry)

Answer 73

Succeed in imposing a uniform price on carbon across the whole economy Means many decision makers (individuals + industries) are choosing the amount they emit knowing the price Both generate revenue for government Both require monitoring and enforcement - require people the pay a tax or require people to relinquish a permit based on how much they emit) --> need a system in which you can monitor how much people are emitting

Answer 74

Cap and trade: - Future price is less certain in cap and trade system - possibly easier to distribute permits, even if just for political/visible reasons Carbon tax: - No one knows what quantity of emissions will be in a year in taxes system (left to the market) - price is fixed

Answer 75

If environmental (damage) costs are highly sensitive to the amount of mitigation, we need a quantity control to limit the suffering. The environmental risks of climate change are uncertain in the long term (damage costs come gradually over time (climate changes slowly), and what matters environmentally is only the total emissions over decades).

Answer 76

If mitigation costs are highly sensitive to the amount of mitigation, we need price certainty to limit the suffering. The costs of mitigation are uncertain in the short term (we know we can decarbonize if were to take sufficient time to innovate, etc, but if we impose constraints on production too suddenly, it could cause enormous suffering and even destroy our capacity to keep addressing the problem).

Answer 77

- we want to make sure people are investing in the right things - no policies at all --> high uncertainty - investors do not have enough information to make good investment decisions - hold back and make no investments hoping that policy information will resolve itself - inefficient and non-optimal investments if uncertainty in price - uncertainty can bring emissions forward in time (gives incentive to emit sooner)

Answer 78

short term, we need price certainty (want to avoid rapid change) long-term: quantity control feedback in that the price is going to change based on emission amounts

Answer 79

Not solving CAPs, and so it is not enough (Doesn't actually get us to solving the problem) Activism and making collective change is the solution

Answer 80

We need to be able to account for all GHGs that are emitted. 2 ways: - Places that are emitting a lot of GHG (factories, cement industry) - Fossil fuels (wherever someone is importing and selling fossil fuels) Infinite supply of permits (no constraints on the number of permits) - Everyone knows the price (fixed price) - Buy too many permits, can sell to others or sell them back to the government

Answer 81

If you want to emit, you need to buy the permit - know how much you will emit in advance - government does not decide on the price, it decides on the number of permits per year If you don't have a permit, you cannot emit - Quantity is fixed - Does not matter how it is handed out In practice is a combination of giving it to wealthy companies and auctioning them off to get maximum possible price - Auctioning means finding the ones who will pay the highest and give them the permits and give them to the people who offer the most money A problem is that it makes people outsource (start importing elsewhere and not making it domestically) --> do not have to pay for the emissions associated with the production of the resource - Gives an advantage to foreign producers - Part of the reason we hand out these permits to the existing producers

Answer 82

Imported goods cost more now. Changes relative prices of goods that produce a lot of emissions - Makes people shift what they buy to lower carbon alternatives Did not save money (paying same amount), just avoiding what now costs more If one changes nothing in purchases, amount one gets back from the cheque balances out the extra prices of carbon-intensive goods And so, option of breaking even and changing nothing - Consumers will tend to save money by buying the cleaner option - Those who shift to less carbon-intensive goods will in the end have more money

Answer 83

Can't emit without a permit Doesn't actually matter if we give them all away - People are allowed to trade them - People are gonna make the best use out of buying and trading them - Make the best use possible Encourages to opt for green energy - Avoids companies from outsourcing Have the possibility to get 100% profit

Answer 84

Turns out that we can have the same outcome for cheaper Pricing is a way to do things more efficiently

Answer 85

Companies are making the stuff that consumers are buying - Part of the same cycle - Consumers have the power (decide what companies make)

Answer 86

Evaluation of alternatives (mitigation vs. Adaption) - Choosing how much money, resource, time we want to spend on each Mitigation planner's problem: evaluation of actions (disinvestment, consumption shifts,...) - What do we want everyone to do ideally Learning vs. Saturation Implementation (policy design) - Choice of instruments (GHG pricing...) - How we want to get to the ideal outcome Design of GHG pricing (cap, auction, trade, tax) Consideration of dynamic risks: costs of control vs. Environmental damage

Answer 87

Skeptic, when having an opportunity for the government to regulate or invest in something directly, maybe cheaper way to do it by letting many people (individuals or companies) to do a similar thing in own innovative way/ way that’s best for them Do things that can be done cheaply quickly So questions you have to ask: who is going to own it if the government invests? Will it be forever or eventually give it away? - Use carbon price for companies

Answer 88

Policies with less political weight Even if they’re not as cost-effective they can be enacted sooner because there is less resistance Uses carbon price with lower revenue Technology lead approach suffers less from collective action problem because it diffuses after it’s developed It also spreads to all areas of the world

Answer 89

Extra cost is borne by a mixture of the producer (who pays initially) and the final consumer The degree of who bears the cost varies on a whole array of factors: 1) If the consumer pays the cost they either become poorer or choose cheaper alternative - demand may reduce 2) If producer pays the cost it may lead to layoffs - Price is offset by giving these firms handoffs or work-arounds to avoid losing to foreign competitors

Answer 90

100%: consumer is paying the increase completely 0%: producer absorbs the entire cost

Answer 91

Optimal blend is short-term has features of tax and features of a cap for long-term Means feedback so you know what prices are in short-term and have more certainty of what prices are in long-term (driven by emission). Prices will change based on emission amount Need agreed upon emission quota/reduction Can be helped by agreed upon date for zero emissions Way better than agreeing upon temperature change

Answer 92

Transportation

Answer 93

50% of total energy is from renewables Our cost to reducing emissions further is likely to be higher (used up the low-hanging fruit)

Answer 94

Agriculture and waste

Answer 95

Floor and ceilings, which rise at 5%/year (real) Banking - Buy permits one year and then you can use them later - Cannot borrow (buy permit in a later year for past emissions) Offsets Green fund Free allocations - Made this policy more political palatable - Protects industries from having big disadvantage - Free allocations getting slowly phased out - Hand out wealth to big industries Linkage with California - Large methane-intensive economy, using a foreign currency - International agreement across countries

Answer 96

Tax assessed on retail sale of all fossil fuels (including gasoline, diesel, jet fuel, natural gas, propane, coal and home heating fuel, which together account for 70% of B.C.'s GHG emissions 1/3 of carbon tax revenue will be returned to businesses and 2/3 to individuals to ensure each gets back their share of carbon taxes paid (revenue neutral) The proposed tax rates increase over 4 years, based on the dollars per tonne of CO2 emissions, as set out below: - July 1, 2008 - 10$ per ton of CO2e emissions - July 1, 2012 - 30$ per ton of CO2e emissions - Stalled in 2012 - Came back in 2019 - Keep growing until it hits 50$ per ton

Answer 97

Wasn't ever the highest carbon tax in the world, but it brought in the most consistent and comprehensive one The province's tax reductions for businesses and families, with dividends for low-income families, set a new standard It was effective in decreasing emissions No negative impact on the economy

Answer 98

$20/tCO2e in 2019 → $50/tCO2e in 2022 Least cooperative provinces will have a carbon price implemented by the federal government Hybrid system - There is a tax on all emissions - Tradeable component within each large industry - Rewards the strong performers at the cost of the weaker performers

Answer 99

All revenue returned to the provinces - By cheques - Wealthy households buy more carbon-intensive goods, pay higher taxes