Topic 8 : Climate Change Economics and Policy Flashcards
What is a pigouvian tax ?
A period unit tax used to correct the inefficiency due to negative externality. It internalizes the externality cost. A taxthat private individuals or businesses must pay for engaging in activities that create adverse side effects for society. Adverse side effects are those costs that are not included as a part of the product’s market price.
E.g environmental pollution, or strains on public healthcare from the sale of tobacco products.
If you’re using single use plastic bags you are polluting, there extra cost will be added to pay for the adverse side affects to society.
What is an externality ?
A cost or benefit caused by a producer that is not financially incurred or received by that producer. An externality can be both positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole.
What can negative externalities cause and how ?
Negative externalities result in market failure because the equilibrium price produced does not reflect the actual cost to society. Example societal cost
What can ordinary fiscal taxes cause ?
Dead weight losses
How do Pigouvian taxes differ from fiscal taxes ?
Pigouvian taxes differ from regular fiscal taxes because they are intended to offset the societal cost.
What does the pigouvian theory state ?
The Pigouvian tax theory states that the cost of the tax should be equal to the difference between the social marginal cost (SMC) and the private marginal cost (PMC) at the socially efficient allocation level
What is a cap and trade (emissions trading) ?
Government regulatory program designed to limit, or cap, the total level of emissions of certain chemicals, particularly carbon dioxide, as a result of industrial activity.
Proponents of cap and trade argue that it is a palatable alternative to acarbon tax. Both measures are attempts to reduce environmental damage without causing undue economic hardship to the industry
What are the big four factors of climate change that make a wicked problem?
Uniquely global, uniquely long term, uniquely irreversible and uniquely uncertain
What is a carbon tax ?
A carbon tax allows firms to produce whatever quantity of carbon emissions they want but puts a price on them. Firms are likely to reduce their emissions, however this depends on the size of the tax.
Pigouvian theory states that ….
The cost of the tax = SMC-PMC @ socially efficient allocation level.
What is a cap and trade system/emissions trading ?
Allows the market to determine the price of emissions. Under this system the government caps the total amount of carbon emissions for the country and corporations are free to buy and sell unused permits. Manufacturers with low emission-reduction costs are likely to sell their permits to manufacturers with higher costs. Sometimes referred to as ‘ free market environmentalism’.
How can the optimal level of emissions be measured ?
MACC
Very difficult to measure as there are so many unknowns and uncertainties.
1. How much do we actually emit in emissions?
2. What is the link between atmospheric concentrations and emissions ?
3. Link between concentrations and temperatures ?
4. Link between emissions and physical climate damages ?
5. How will society respond ?
What is a deadweight loss ?
Deadweight loss can be stated as the loss of total welfare or the social surplus due to reasons like taxes or subsidies, price ceilings or floors, externalities and monopoly pricing. It is the excess burden created due to loss of benefit to the participants in trade which are individuals as consumers, producers or the government.
What is the Marginal Abatement Cost Curve ?
In theory this could be used to determine when the marginal damage cost is equal to marginal abatement cost. The marginal damage shows pollution as a function of emissions of a specific pollutant.
