Terms And Concepts Flashcards
What is the optimal amount of abatement for a single firm?
Where MB(Q) = MC(Q)
What 3 things affect the amount of benefits garnered from abatement
1) Adaptation
2) Time Horizon
3) Location
Why does location matter?
Marginal damages vary across space. Thus, it makes sense to abate more in urban areas than in rural areas because there are more people and more pollution in urban areas
How do we regulate pollution
1) standards
2) taxes
3) cap and trade
Coase theorem
If there are property rights for pollution, the market should provide mitigation efficiently
What is a public good and why is it important in the context of this class?
A public good is a commodity or service made available for consumption for all members of the public. A public good is important to this class because the externality created by it is why markets fail to mitigate pollution efficiently
Why regulate instead of let the market mitigate pollution
Because pollution is a public good there is a market failure that creates a non-internalized externality where individuals will offer to pay lower than what the price of pollution is worth to them because there are no property rights associated with pollution. This creates problems such as the free rider problem
What is the Lindhal Solution?
EPA gets the demand for pollution of each individual and sums them to create an aggregate demand and equates it with the aggregate supply of pollution. IRS bills each individual for their own demand function. People game this approach and understate the price of pollution mitigation
What goes into an Integrated Assessment Model (IAM)
Emission model,
air pollution model,
population distribution and exposure model,
Dose response: health, agriculture, timber etc.
valuation
What is the goal of an integrated assessment model (IAM)
IAM’s aim to put a dollar amount in the damages from pollution
Standard vs Taxes
Choose standards that limit pollution to the optimal level. Choose a tax that sets the price of pollution to the optimal level. Optimal taxes and optimal standards appear to have this same effect. Taxes are more cost effective than standards because MC’s are equal for different quantities whereas for standards they are not.
What is the goal of standards, taxes, or cap and trade
To minimize costs while maximizing benefits by setting the marginal costs for all firms equal to each other
Cap and Trade
Uses market mechanisms to make standards more cost effective given an aggregate emission target. Allows firms to trade pollution permits in order to pollute more for a given price. Equates the marginal costs across all firms but not necessarily efficient if MC not = MD
SO2 Cap and Trade Program
damages fell substantially in rural areas from increased mitigation but damages in urban areas rose because urban firms traded permits with rural firms to pollute more. Inefficient because the damages from pollution vary across locations
How to combat marginal damages varying by location?
Higher taxes on pollution in urban centres vs rural areas
Stricter standards in urban centres
Trading of pollution permits in a cap and trade system should be done by a weighted average of marginal damages not tonnage (more efficient)
What is the Efficient cap and trade weight?
Marginal damages. Trade marginal damages from an emission in one place with the equivalent marginal damage in another.
What are non point sources of emissions
Small but numerous emission sources such as cars or farm run-off. Non point sources cost just as much to regulate but regulation is infeasible because of the substantial amount of sources of emissions
What is Indirect taxation and how does it work?
Regulate non point sources by taxing the inputs to emissions rather than the emissions themselves, such as taxing gas rather than NOX from cars. Not efficient because there is no incentive to mitigate pollution they just buy less
Stock pollutants vs flow pollutants
Stock pollutants (CH4, CO2, Plutonium) persist in the environment whereas flow pollutants are short lived (short half-life vs long half-life). Thus the damage of stock pollutants accumulates over time whereas the damage of flow pollutants just depends on the emissions each year.
What is the optimal solution for a stock pollutants
PV of marginal damages:
Marginal damages / (discount rate + decay rate)
How to measure the costs of stock pollutants
Marginal cost = present value of marginal damage
Why do we look at pollution dynamically?
The concentration of stock pollutants in the atmosphere changes over time, preferences over time for or against pollution change depending on how much we value the future, innovation helps reduce mitigation costs and flatten the MC curve, humans and environment adapt to changing conditions over time.
Why does the cost of mitigation depend on targets
If a specific temperature is targeted for a certain year, the sooner that year is or the lower that temperature is, the higher the mitigation cost will be, even though all temperature targets eventually lead to zero carbon emissions.
Where does mitigation happen vs where should mitigation happen
Most mitigation happens in richer OECD countries that have steadily decreased their share of emissions, whereas emission mitigation SHOULD happen in poorer countries that still rely on dirty forms of energy such as coal. the issue becomes that mitigation is expensive and most poorer countries in lower latitudes cannot afford to mitigate and cannot afford the loss in GDP to not continue using dirty sources of energy.
Examples of economic affects of climate change
Agriculture (supply)
Costal centres affected by ocean rising
Energy (supply and demand)
Water (supply and demand)
Forestry (supply)
Infrastructure (maintenance cost)
Non-market effects of climate change
Health effects: heat, cold, stress, pollution
Ecosystem changes: biomes move, productivity changes, species die
Increase in extreme events and catastrophes
Is mitigation fair?
Climate damage proportionally higher in low latitude countries who are generally poorer, some higher latitude countries would prefer higher temperatures while low latitude ones may prefer lower temperatures. Either way, mitigation costs will fall most heavily on the poor.
How should we combat for uncertainty when mitigating
Always use the expected value of damages from pollution, that way if a mistake is made estimating the costs of mitigation there will be less welfare loss than guessing wrong either high or low
What role does learning play?
Learning what damage is going to happen allows us to adjust our mitigation strategy to limit welfare losses
What is geoengineering?
Lifts aerosols such as SO2 into the atmosphere to block the strongest sun rays and gradually lower the demperature as the SO2 disperses towards the poles
Benefits vs Costs of Geoengineering
Costs much lower than traditional mitigation methods and could lower temperature back to 1900 levels. Reduction in light may reduce plant growth, crop yields, and damage ecosystems as well as precipitation patterns and sulphate concentrations building up near the poles which damage plants, animals, and humans
Hotelling’s rule for non-renewables
Maximize the present value of the resource price by discounting the prices for all future periods by a discount rate.
P0=P1^-rt
What is the price ceiling for a non renewable resource?
The price ceiling is the price at which demand for a non-renewable resource goes to 0, usually resulting from availability of cheaper, less harmful alternatives such as solar or hydro electric power.
What if there is an extraction cost for a non-renewable resource
Hotelling still applies but there is a cost subtraction on the present value of future prices, thus any resource where the cost of extraction is greater than the price, should not be extracted. This will also lead to a longer time horizon.
P0 = (P-C)^-rt
