Climate Policy Michael Springborn Department of Environmental Science & Policy [image: USGCRP, 2010]
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Transcript of Climate Policy Michael Springborn Department of Environmental Science & Policy [image: USGCRP, 2010]
Climate Policy
Michael Springborn
Department of Environmental
Science & Policy
[image: USGCRP, 2010]
Climate policy questions and lenses
• How aggressively and in what way should society take action to reduce damages from climate change? – balance between expected
impacts/costs and policy
response options and their costs
• Mitigation versus adaptation • Economics/policy science/
ethics/climate science – game theory, theories on the use
of science in policy and analysis
of public attitudes.
• International/national/state
The paleoclimatic record suggests anticipated GHG concentrations are quite unusual
[Dieter et al. 2008]
Predicted outcomes are uncertain:the recent mismatch between increasing GHG concentrations and flat temperature is a puzzle
“The world added roughly 100 billion tonnes of carbon to the atmosphere between 2000 and 2010. That is about a quarter of all the CO₂ put there by humanity since 1750.”
James Hansen (NASA): “the five-year mean global temperature has been flat for a decade”
[The Economist, 2013]
Temperature is relative to the 1901-1960 average.(USGCRP 2013, p. 20)
• A2 scenario: high population growth, low economic growth, slower technology improvements and diffusion, and other factors that contribute to high emissions and lower adaptive capacity
• B1 scenario: lower population growth, higher economic development, a shift to low-emitting efficient energy technologies that are diffused rapidly around the world through free trade, and other conditions that reduce the rate and magnitude of changes in climate averages and extremes as well as increased capacity for adaptation.
Projected US temperature changes are substantial even for optimistic emissions scenarios
From…
U.S. Global Change Research Program:
National Climate Assessment and Development Advisory Committee Draft Climate Assessment Report(2013).
The intensity of CO2/GDP is falling…but not fast enough to offset increases in GDP and population
[Nordhaus, 2012]
Anthropogenic climate change represents the “biggest market failure the world has ever seen” -- Nicholas Stern.
Market failure specifies the root of the problem
EPA (2010)
“greatest good for the greatest number”
results when the actions of an agent (individual or firm) have an uncompensated effect on the wellbeing of other agents.
Climate change externalities
• (External) cost (damage) from a unit of emissions associated with a given unit of economic activity is not paid for by those producing or consuming the good.– Emissions inefficiently high
• Innovators of new technologies (of any kind which addresses the GHG problem) may not receive all of the benefits from their inventions– Innovation is ineffeciently low
Stern, 2013
Each externality associated with climate change motivates consideration of particular policy instruments.
What is the social cost of carbon (SCC) and why are we calculating it?
U.S. Interagency Working Group on the SCC:
The SCC is “an estimate of the monetized damages associated with an incremental increase of carbon emissions in a given year”
[US IWGSCC, 2010]
Integrated assessment models are used to construct and analyze forecasts of the coupled economic-climatic system over centuries
[Nordhaus, 2012]
Economists have generally arrived at a consensus on the bottom-line:
• “Virtually every activity directly or indirectly involves combustion of fossil fuels, producing emissions of carbon dioxide into the atmosphere.
• Single bottom line for policy: “correct this market failure by ensuring that: – all people, everywhere, and for the indefinite future
are confronted with a market price for the use of carbon that reflects the social costs of their activities.”
Nordhaus et al. (2008)
Setting stringency: The policy ramp vs. the big bang
• Climate “policy ramp”– Efficient GHG control policy: “modest rates of
emissions reductions in the near term, followed by sharp reductions in the medium and long term.” (Nordhaus, 2007)• If implemented via a tax: ~$30/ton of CO2 initially, rising
gradually to $200/ton towards 2100 (Krugman, 2010)
• The “big bang”** (**Paul Krugman’s term)
– Immediate and aggressive GHG control– Stern Review (2006): high profile challenge to the
ramp
Stringency of the policy ramp vs. big bang
Nordhaus (2007)
Stern: big-bangNordhaus: policy ramp
Regardless of whether the policy involves a tax or cap and trade, policy stringency can be expressed in terms of a carbon price
The Ramp• The climate-policy ramp (gradualist approach)
– Based on output of “integrated assessment models” (IAM)• DICE: Dynamic Integrated Model of Climate and
the Economy (Nordhaus and colleagues)• Mathematical model of economic growth
accounting for the effects of global warming.– Dynamic economics: choices over consumption, working
(labor), production, investment– Geophysical dynamics: emissionsgreenhouse gas
stock climate change
• Estimated reduction in gross world product:– 4.5o F 2%. -- 9.0o F 5% (Krugman, 2010)
Economic logic of the ramp• Given that “capital is productive and damages are far in
the future … the highest-return investments today are primarily in tangible, technological, and human capital.” (Nordhaus, 2007)
– Capital• Human capital: stock of skills and abilities of the
labor force• Technological capital: the tangible means of
production (machines, tools, facilities, equipment, infrastructure, etc)
– Decision: • At each moment in time we can choose whether to
“invest” any given dollar in – capital (human, technological, etc) or in – costly actions to reduce GHG emissions.
The Big Bang & the Stern Review (SR)• 2006: UK government releases a report: The Economics of Climate
Change: The Stern Review, lead by Sir Nicholas Stern (Nobel Laureate)
• SR estimates of costs of global warming are substantially higher than earlier estimates – Used similar data and methodology (IAM) – Review summary:
• Unabated, climate change could result in an annual 5-20% decline in global output by 2100.
– Comparison: US great depression – 1929-1930 real GDP fell by 9%• Costs to mitigate are around 1% of GDP• Policies for strong GHG reductions should be implemented
immediately.
• Why did the SR come to such a starkly different conclusion than the ramp?– Discounting (lower discount rate)– Damages (higher damages)
• Ramsey optimal growth model: – central framework for thinking about dynamic investment decisions– organizing principle for setting long-run discount rates
• The Ramsey equation holds in the welfare optimum
• r = ρ + ƞ * g
Discounting – Ramsey equationre
al re
turn
on
capi
tal/
cons
umpt
ion
disc
. rat
e
socia
l rat
e of
tim
e pr
efer
ence
/
utilit
y di
scou
nt ra
te
elas
ticity
of m
argi
nal u
tility
of c
onsu
mpt
ion
grow
th ra
te o
f con
sum
ptio
n
high ƞ
low ƞ
c: consumption
Utility(c)
%chg %chg
%chg U
x cc
ct ct+1
growth, gƞ: specifies how quickly marginal utility falls as consumption rises.
Specifying a social discount rate for long-run climate policy analysis often employs the Ramsey framework
Ramsey (1928) optimal growth model: Economy operates as if a “representative agent” selects consumption and savings to max PV of the stream of utility from consumption over time.
One implication of the Ramsey model is the following equation:
• r = ρ + ƞg• r: return to capital (real, long-run)• ρ: pure rate of time preference
“time discount rate”, due to “impatience”• ƞ: elasticity of marginal utility w.r.t. consumption • g: average growth in consumption per capita
Two different perspectives on parameterizing the Ramsey discounting equation lead to very different results.
ρ: pure rate of time preference;ƞ: elasticity of marginal utility w.r.t. consumption; g: average growth in consumption per capita
1. Descriptive approach/Nordhaus & the DICE model• Use economic data to estimate parameters:• Nordhaus (2008):
• r = ρ + ƞg = 0.04 (average over the next century (Nordhaus, 2008, 10))– 5.5% over first 50 years (61).
• Economic growth and population growth will slow, rate will fall over time.
2. Prescriptive approach/Stern & the Stern Review (2006)• Argument: No ethical reason to discount future generations due to a
pure rate of time preference except for the possibility that we might not be here at all (ρ reflects only ann. prob. of extinction). 1.3% growth assumed.
• r = ρ + ƞg = 0.001 + 1*0.013 = 0.014
0 20 40 60 80 100 120 140 160 180 2000
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
t
Stern, r = 1.4%
Nordhaus, r=4.5%
Comparison of the discount rate
The level at any given time t represents the weight given to consumption arriving at year t.
Discount weight under various assumptionsD
isco
unt
wei
ght
Damages
SR used a level of GHG damage at the high end of the expected range.
• The ratio of aggregate damages to the size of the economy ($D/$GDP) 100 years from now
• commonly assumed: 1-4%. (Weitzman, 2007)• SR: >= 5%
Nordhaus (2008, p. 51)
Some conclusions
• Weitzman (2007): `On the political side … my most-charitable interpretation of (the Stern Review’s) urgent tone is that the report is …– an essay in persuasion… – that is more about gut instincts regarding the horrors
of uncertain rare disasters whose probabilities we do not know…
– than it is about (conventional) economic analysis.• SR might be right (“act now”) for the wrong
reasons (due to bad model parameters instead of a careful analysis of uncertainty).’
The role of uncertainty in climate change policy—Weitzman (2009)
• What happens to expected utility-based BCA for fat-tailed disasters? – Can “turn thin-tail-based climate-change
policy on it’s head” (p. 2). • Concretely: a fat-tailed distribution over a
climate sensitivity parameter (S) which maps CO2 changes into temperature changes.
• Can drive applications of EU theory more than discounting (p. 5).
Economists often favor market-based instruments (MBI)
• Advantages of MBI’s over C&C (Stavins, 1998): – Cost effectiveness (least cost)
• Flexibility (within and between polluters)• Encourage behavior change through market
signals rather than with explicit behavioral requirements.
• Key attribute: MBI’s take advantage of private information that polluters have
– RE: means and procedures they could use to reduce pollution
– Stronger incentives for technological innovation
Carbon tax versus cap and trade: can accomplish essentially the same thing but with minor differences
Cap and Trade Carbon Tax
Known:
Unknown:
Pollution level
Price per unit of pollution
Price per unit of pollution
Pollution level
Revenue:Permit auction: government
Free allocation: industryGovernment
Key design components for a cap and trade policy include:(1) cap, (2) scope, (3) allocation, (4) cost containment, & (5) offsets
[Newell, 2012]
cap
scope
Carbon offsets
• Carbon offsets: a tradable credit for reducing carbon emissions by some amount (e.g. ton) generated outside a regulated system, recognized within a regulated system (e.g. a cap-and-trade regime) as a substitute for holding and using an emissions permit.
Attributes for carbon offset effectiveness
Offset issues: is the offset…• Real: has the unit of emissions actually been avoided and not just
claimed?
• Additional: was the unit avoided due to the offset policy or would it have been avoided regardless of the offset mechanism? (Was this criteria satisfied in the “Cheat Neutral” ‘example’?)
• Permanent: is the unit avoided permanently or only temporarily (e.g. will a planted tree just be burned in 10 years)?
• Verifiable: can we ensure that each attribute above is actually attained so that stakeholders in the over-arching climate policy can ensure that the policy is not being undermined?
Offsets present substantial measurement challenges
grey
additional (action taken for payment)
permanent
verifiable?
[Beede and Powers, 2013]
Problems with additionality have been substantial.
http://tocsin.ordecsys.com/ (2009)
[Fig.: Newell et al. 2012; Data: Fenhann (2012)]
Measurement uncertainty doesn’t have to preclude mitigation projects
confidencededuction
E(y): expected level
yc: credited level
f(y):probability
density
confidence
y: true level of mitigation
Verifiability of offsets:• Certainty? No.• Meeting or exceeding stated/credited levels with a specified level of confidence.
Managing carbon stocks as a global open access resource:
game theory and the prospects for international cooperation
Mitigation goals will be difficult/impossible to achieve for rich countries acting alone
[Nordhaus, 2010]
Game theory can provide traction on the “Tragedy” as a strategic action problem
“Adam Smith was wrong.”
Game theory & international environmental agreements (IEAs)
Game theory: the study of multi-agent decision problems where the payoffs to actions depend on the actions of others.
A simplified story of the transboundary/international pollution problem:• Two countries, A & B, contribute to emissions of a transboundary pollutant.
– Currently, neither A nor B is addressing the pollution issue but both are considering doing so
• Discrete strategies: each country will choose either to contribute or shirk (not contribute)
• Non-cooperative game theory: A & B will not negotiate but rather simply choose (irreversibly) a strategy.
• Each behaves individually rationally• Information is complete: payoffs are fixed and common knowledge • Static, one-shot game: the actions of A & B are selected once, simultaneously, and
are permanent. • Any “agreement” to take action must be self-enforcing—there is no higher authority
to impose constraints.
Finus, M. (2001)
The cost/benefit structure Assumptions:• Costs:
• effective action: 4 total • If one country takes effective action (“contributes”) its
costs are 4. • If both “contribute” then each faces a cost of 2.
• no action: zero cost
• Benefits • effective action: 3 each
• Both countries receive benefits of 3 regardless of whether the effective action is due to the efforts of one or both countries
• no effective action by either: 0 each
**This example based on Keohane and Olmstead (2007, p. 79)
(1,1) (-1,3)
(3,-1) (0,0)
Contribute
Contr.
Shirk
Shirk
Country B
Cou
ntry
A
The payoff matrix: for each possible outcome, the net benefits to each country are give by: (NBA, NBB)
Assumptions:• Costs:
• effective action: 4 total • If one country takes
effective action (“contributes”) its costs are 4.
• If both “contribute” then each faces a cost of 2.
• no action: zero cost
• Benefits • effective action: 3 each
• Both countries receive benefits of 3 regardless of whether the effective action is due to the efforts of one or both countries
• no effective action by either: 0 each
Note: payoffs to A depend on the choice of B and vice versa.
Prediction of the equilibrium• Any “agreement” to take action must be self-enforcing
• Each player’s predicted strategy must be that player’s best response to the anticipated strategy of the other player. C: contributeS: shirk
• The strategy of player i, given by si, is chosen from the set {C,S}
• The strategies {s*A, s*
B} are a “Nash equilibrium” (NE) if, for each player, s*
i is player i‘s best response to the strategy specified for the other player. (There is no incentive to deviate.)
Gibbons (1992)
Nash equilibriumSolution process: check whether each possible outcome satisfies the
NE condition:1. For each player and for each strategy, determine the other player’s best
response (and underline that payoff)• Consider B’s best response:
If A contr. should B shirk or contr.?
If A shirks should B shirk or contr.?• Consider A’s best response:
If B contr. should A shirk or contr.?
If B shirks should A shirk or contr.?
(1,1) (-1,3)
(3,-1) (0,0)
Contribute
Con
tr.
Shirk
Shi
rk
Country B
Cou
ntry
A
2. The pair of strategies {s*A, s*
B} is a NE if each players’ strategy is a best response to the other’s (i.e. if both payoffs are underlined).
Is the predicted outcome Pareto inferior (i.e. can one agent be made better off without making any other agent worse off)?
Model extensions:
• To capture the wide variety of IEAs requires model extensions:– N>2 countries– Coordination– Dynamic/repeated games (finite, infinite)– Continuous strategy space– Negotiation models– Coalition models
See Finus (2001)
U.S. politics and climate change policy
The last real opportunity for comprehensive U.S. climate policy was the Waxman-Markey climate bill of 2009-2010.
[Newell, 2012]