Week 2 Flashcards
What sector is responsible for the most greenhouse gas emissions
Energy sector (industry, transport, and energy used in bulidings)
Top emitter of greenhouse gases
China, India and USA
Annual CO2 emissions
Shape increase in CO2 emissions after WWII from the burning of fossil fuels
Do international conferences & financial crisis help on climate change?
We could see annual CO2 emissions going down after financial crisis, where business and factories are not running as normal.
We cannot conclude that the internatioanl coferences do not affect emissions, because it might get worse if there was none.
Other reason for the increase in emissions despite having conferences are because countries like India and China also want to benefit from use of fosil fuels.
First conference: 1992 Rio De Janeiro (Earth Summit)
Different procedures designed to allow ecosystems to adapt naturally to cllimate change , to ensure food production is not threatened and to enable economic development to proceed in a sustainable manner
20221 Glasgow
First climate deal to explicity commit reducing the use of coal. It encourages more greenhouse gas emission cuts and promised more climate finance for developing countries
What can economists do to reduce emissions?
Cost benefit analysis of options to reduce emissions
Pro and Cons of the Instruments
- Taxes: increase prices of fossil fuels
- Tradeable rights: increase prices of fossil fuels
- Subsidies: decrease prices of renewable resources and innovation
- Regulation: Restrict emissions, international treaties
- Inform people: improve utility function
What is cost benefit analysis?
With cost benefit analysis, you add the environment effect to the normal private cost and benefits. “You value the unvalued”
Discounting
It adjust future costs and benefits to their present value, reflecting the time preference for receiving benefits earlier than later. It is critical aspect of CBA
Reasons to value environmental effect differently compared with private effects
- Substitution possibilities often zero (environmental goods have no substitutes thus making them have unique intrinsic value)
- Technical progress much less important: environmental assets cannot be made more efficient than the assets in energy sectors etc
- Income elasticity high and increasing (EKC hypothesis): as income rises, due to environmental assets being luxury goods, the demand and income increase disproportionately.
EKC suggests that environmental degradation initially increases with economic growth but later declines as income rise, society prioritize sustainbility
NPV = NB(private)/r + NB(environment)/(r-a)
different levels of a would change the NPV
if a>0, NPV decreases if NB(environment) is negative
NPV→−∞ (for negative Nbenvironment)
if a=r, there will be not environmental effect
Green lobby
refers to organizations, advocacy groups that work to influence governments, businesses, and public policies in favor of environmental protection and sustainability initiatives.
How does discount rate affect NPV
Low discount rate (0%-4%) - at lower discount rate, long term costs are given more weight than the short term benefit
High discount rate - at a high discount rate, long term costs are devalued faster than the private ones. Thus, increase in NPV
Parry paper
The IMF’s “inventorization” of energy prices involves evaluating whether current energy prices reflect their true costs from an economic perspective. This assessment focuses on identifying subsidies, both explicit and implicit, and determining if energy prices account for private costs, environmental damage, and societal costs.
Parry paper: what is the right price of energy
Right price = private + external costs + consumption tax
Parry paper: Types of subsidies:
Explicit: undercharging private costs
Implicit: undercharging environmental costs & foregone taxes
Parry paper: Determine price of CO2
To estimate the cost of CO2, we have to know the price of CO2
- External cost estimate: results are contentious
- Implicit prices in current policies, however price vary heavily and current policies are not enough
- wide range of prices needed to meet goals
Parry paper: How to calculate the external cost of CO2
= emission per fuel *
price
Parry paper: Estimate local pollution
Done by estimate of change in mortality:
- find the baseline rate of mortality
- emission of local air pollutants per fuel
- exposure of population to emissions
- change in mortality due to change in emissions
Done by transportation externalities
Parry paper: Why increasing price energy is difficult to achieve? and How do we solve it
Low income countries + household are not able to afford.
There should be supportive measures: public investment, income support and use of revenues to lower other taxes
Innovation paper: how do we reach low emissions of GHG
- Spreading use of electricity
- Increase deployment of low-carbon power generation
- Need low-carbon hydrogen (however the electrolyser needs a lot of energy)
- use new modern bioenergy
- New generation of major fuels
- Governments need to implement clean energy strategies
Guest lecture - EU emission trading system
Cannot emit CO2 without permit, and need to buy the permit
● When buying in a market, called ETS → permit has price tag
● Price tag fell down due to economic crisis → but reformed, and now it is higher
● Now 100 euro per ton of CO2
● Helped reduce CO2 emissions by 47% in 2005-2023
● Cap-and-trade system → cap on CO2, overtime is reduced until cap
becomes 0, thus price of ETS will increase
Guest lecture - what is the effective CO2 price dependant on
It depends on taxes + ETS
From economic perspective, energy taxes for households are too high & firms pay too little
◆ Policy needs to lower tax for households and raise for firms
Guest lecture - what perspective does pricing require
◆ 1. Calculate monetary impact of taxes & ETS allowances
◆ 2. Determine social cost of carbon (130 euros per tonne)
◆ 3. Gap between impact and SCC = carbon price deficit
Guest lecture - biomass as energy source
sustainable source but in reality there are emissions.
Carbon debt - burning down biomass generate emissions even tho it produces biomass fuel
Guest lecture - pros and cons Multilateral climate agreements
pros: global problem, common objectives to rule out freerideres, level playing field, inspire national policies, secure climate justice
cons: national interests diverge → cannot reach unanimity, focus on
voluntary action
