Week 7 - Climate change Flashcards
Tragedy of the commons
Shared-resource systems where individual users behave contrary to the common good of all users by depleting or spoiling the resource
Climate change
The long-term shifts in weather & temperature patterns
Free-rider problem in the provision of public goods
Each individual has a DOMINANT STRATEGY to not contribute anything (Prisoner’s dilemma in game theory)
This is because climate / emissions reductions are a global public good: individually no country has incentives to act, although collectively we’d all be better off if each country did
Club
Theory of clubs
A voluntary group deriving mutual benefits from sharing the costs of producing an activity that has public-good characteristics
When countries are incentivised to reduce emissions by forming a club, they are likely to raise the cost of polluting in the signatory countries → creates BAD INCENTIVES for producers because they could just OUTSOURCE their pollution to diff. countries.
^linked to Pollution haven hypothesis
- But repercussions: if country w/ stricter regulations doesn’t produce domestically, likely to increase IMPORTS and GDP falls
→ this creates disincentives especially in developing countries - Higher production costs also discourage foreign direct investment (FDI) into countries w/ stricter environmental regulations
Pollution haven hypothesis
Free trade will cause polluting industries to concentrate in countries w/ weak environmental regulations
2 main solutions to the Free-rider problem
- Voluntary cooperation
i) countries to negotiate/punish free-riders (also ref. to international environmental agreements, IEAs)
ii) individuals can find ways to reduce their impact on the environment - Government intervention
eg. carbon tax (prices of relevant goods become higher and demand lowers), R&D subsidies (eg. research for renewable energy, away from nuclear power)
Social cost of carbon
*translate cost of abating carbon emissions -> optimal CARBON TAX (basically a Pigouvian tax)
Translating the estimates of total damages (based on their impact on future economic outcomes) into the marginal cost of abating carbon today
2 inter-temporal uncertainties regarding climate damages
Climate damages will increase over time, so we will need to think about their PRESENT VALUE and DISCOUNTING them, which depends on…
- How rich the future will be
- if we think the future will be richer, we think it will be easier for them to act on climate change than us -> thus higher discount rate
- How much we value the future today (time preference)
Discount rate formula for climate change
- Estimates for the social cost of carbon are very sensitive to
the rate of time preference δ, even a marginal change deeply affects our models
ρ = δ + ηg(Ct)
Delta - pure time preference
eta - elasticity of how much happier ppl will be given additional income
g(Ct) - growth in consumption tmr (how much we forecast GDP to increase over time)
Game theoretic approach - Scott Barrett’s models suggest that COORDINATION requires a __ and a __
Require a push & a pull.
Pull - countries must believe that they will be better off if they coordinate
Push - countries must be aware that they will be worse off if they do not coordinate
Just transition
The Paris Agreement + UN framework argue that the climate transition must be just - it must be inclusive of all stakeholders & the employment and social costs of the transition should be shared by all (easier said than done)
^b/c damages and costs of mitigating climate change are not uniformly distributed across the world. Developing countries are seeing more extreme events than developed ones
Market failure
If the market is left on its own and the outcome is Pareto inefficient
4 ways economists can contribute to the climate change debate
- Estimate the ECONOMIC DAMAGES of higher temperatures & sea levels rising
- Estimate the COSTS of ABATING emissions…
- …and translate those estimates into an OPTIMAL CARBON TAX (a Pigouvian tax) that makes economic agents internalise the global warming externality
- and study the impact of imposing a carbon tax - Test BEHAVIOURAL INTERVENTIONS aimed at reducing individual emissions & STUDY ppl’s PREFERENCES
Martin Weitzman, along with many other climate researchers, pointed out that there is high uncertainty over the impact of climate change and we cannot rule out tipping points.
Are governments more or less likely to intervene?
FAT TAILS, if believed, are likely to make the governments perceive a HIGHER EXPECTED COST of INACTION, as they raise the EXPECTED DAMAGES of climate change, and hence promote more immediate and more drastic action.
