Economics of Climate Change

Week 13
https://www.youtube.com/watch?v=cIG7vt1ZPKE
https://www.youtube.com/watch?v=dq234w56n2o
https://
www.youtube.com/watch?v=BrT0pNiXYJo&list=PLAHQPLpUU4ckkiweoXb
Fc0_KtJugR51oj&index=5
After studying this unit, you will be able to:
Discuss the major cause of the global warming (GW) and climate change
(CC).
Identify the Green House Gases (GHGs) and their effects on climate.
Analyse the trend of changes in global temperatures in various periods
since 1880.
Explain the impact of climate change, costs of minimizing CC and GHGs
and market failure associated with GHGs emission.
Identify and explain the optimal level and policy options for controlling
GHGs emission.
Introduction
Global Warming (GW): The Earth’s average temperature is rising
progressively with consequences on the climate.
• Since the early 20th century the Earth’s surface temperature has
increased about 0.8 °C.
• Most of the increase has occurred after 1980.
In consequence, Global Climate is changing (Climate Change)
http://www.msn.com/en-us/news/world/60-then-andnow-photos-that-sh
ow-dramatic-changes-on-earth/ssAAbDCSD
Source: NOAA's National Climatic Data Center Source:
http://climatedesk.org/wp-content/uploads/2013/05/IPCC_200
1_TAR_Figure_2-CD.jpg
Introduction
Why does the climate change (CC)?
The more reliable explanation: According to IPCC (Intergovernmental
Panel on Climate Change), most of GW is caused by increasing the
concentration of greenhouse gases in the atmosphere.
Greenhouse gases (GHG) in appropriate concentrations allows the Earth’s
temperature to oscillate between -18°C and +15°C
Emissions of GHG from human activities increase the concentration of
these gases in the atmosphere.
Introduction
According to the IPCC:
“Each of the last three decades has been successively warmer at the
Earth’s surface than any preceding decade since 1850.
In the Northern Hemisphere, 1983–2012 was likely the warmest 30-year
period of the last 1400 years
(IPCC report for Policy makers, spm.3, 27/09/2013)
IPCC - The Intergovernmental Panel on Climate Change
Recommended Web-pages:
 Paris Agreement Dec 2015 (COP21):
http://unfccc.int/paris_agreement/items/9485.php
 Skeptical science: “Getting skeptical about global warming skepticism”
http://www.skepticalscience.com/solar-activity-sunspots-global-warmingintermediat
e.htm

 Intergovernmental Panel of Climate Change:

 (IPCC)
http://www.ipcc.ch/
 Environmental Defense Fund:
http://www.edf.org/
Introduction
Greenhouse effect: The atmosphere naturally traps solar radiation as
heat, which warm the atmosphere and allows life. This is possible due the
concentration of gasses as:
• Water vapor (H2O),
• Carbon Dioxide (CO2),
• Methane (CH4),
• Nitrous oxide (N2O), (don’t confuse with NO2) and – Ozone (O3).
They are called greenhouse gasses (GHG)
Image source: http://www.nps.gov/goga/naturescience/climate-change-causes.htm
Source: Kiehl, J.T.; Kevin E. Trenberth (1997). "Earth's annual global mean energy budget" . Bulletin of the American Meteorological Society 78 (2): 197–208.
http://web.archive.org/web/20060330013311/http://www.atmo.arizona.edu/students/courselinks/sprin 11
04/atmo451b/pdf/RadiationBudget.pdf
Forecasts of GHG concentrations and CC (climate change)
Predictions indicate considerable rising concentrations of GHG over the
next 100 years due to continued economic growth.
By 2100 is expected an increase between 2 and 5 °C .
Forecasts are based on simulation CC models.
CC models tend to over-predict the impact compared with historical data.

Forecasts of GHG concentrations and CC
For understanding CC is key important to gather evidence on scientific
and socioeconomic information.
• Climate sensitivity to GHG
• CC damage and cost abatement functions
• Determinants of economic growth
• Rates of energy efficiency improvements and – Development of
alternative energy sources.
• Development of alternative energy sources.
Damage /Costs from climate change
Physical and economic impacts on:
– Agriculture and forestry:
• Changes in yields
• Increase of risks and lower levels of investment
• Changes in the environmental feasibility for production
• Costs of adaptation (technology and changes toward new feasible
crops)
Damage /Costs from climate change
• Rich agricultural lower lands will be lost due to rise of sea level
• Loses due to catastrophic events (due to heavy rains, floods, wind)
• Lower availability of water supply for crops (due to droughts)
• Biodiversity losses
Damage /Costs from climate change
Physical and economic impacts on:
– Aquatic and Coastal Ecosystems
• Losses of aquatic biodiversity, e.g., Coral reefs
• Lower availability of fish
• Rise of sea level,
• Loss of poles' ice
– Mountains
• Loss of glaciers and water reservoirs
• Changes in the hydrological cycle
• Changes in biodiversity due to micro-climate changes
Damage /Costs from climate change
Physical and economic impacts on:
– Human infrastructure
• Economic losses due to catastrophic events, e.g., due to Floods,
– Human health
• Incidence of new diseases, e.g., malaria
• Lack of water supply
• Human adaptation to new environmental conditions
• Human loses due to extreme and catastrophic events
Cost of minimizing CC and GHG abatement
There is a trade-off between economic growth and level of emissions,
therefore:
• Minimizing emissions constrain the economic growth.
• The fact that developed countries reached their level of development
without any environmental constrain becomes very controversial.
• Abating GHG should be focused on developed nations
Cost of minimizing CC and GHG abatement
Abating GHG limit the chance of developing countries to reach the
development.
Abatement costs are increasing.
Most of calculations on GHGs increase have been made on the base of
General Equilibrium Models
It is difficult to asses future costs
Market failures associated with GHG emissions
Atmosphere is an open-access-resource, a public good (non-rival and non-
excludable).
Consumption of energy involves burning fuels that produce air pollution.
• And therefore a negative externality

How to internalize such externalities?

• “Insurance markets” (proposed)
• Taxes
• Tradable Mechanisms
Optimal control of GHGs
The standard model in which Marginal costs of abatement and marginal
social costs of pollution equals ignores 3 crucial factors in relation to CC.
• DYNAMICS
• GLOBAL DAMAGES
• UNCERTAINTY
Optimal control of GHGs
Dynamics involves time. William Nordhaus (1992) using estimates of costs
and benefits of abatement developed a dynamic optimization model that
calculates the path for GHG emissions through time which maximizes the
present value of per capita consumption.
• Emissions per year
• Stock of cumulated emissions
– Result is an Optimal path of emissions
 (for further information read the paper: Nordhaus, WD. 1992. An optimal transition path for
controlling greenhouse gases. Science 258:1315–1319)
Optimal control of GHGs
Uncertainty: Relative to the uncertainty on the possible future states of
the world (scenarios) of the involved variables:
• Population growth
• Productivity growth
• Effect of climate from CO2
• Damages from CC
• Costs or reducing emissions
• Growth of CO2 – output ratio
• Social time preference (discount rate)
Policy Options
 GHGs abatement costs are considered lower than the costs of CC
 The GHGs abatement can be achieved by the commitment of many countries
 GHGs abatement challenges the possibility of poor countries to reach the development
 Benefits from abatement are unevenly distributed among countries
 Some countries are more responsible from anthropogenic effects (USA, China, EU) than others
 Question on whether or not to wait until developing countries reached a level of
development to start abating
 Costs of reduction are also unevenly distributed (developed countries with the higher
abatement costs)
Policy Options
Incentives for abatement:
– Carbon Tax
• Australia (first country that implemented it)
• Europe (potential to implement it), already implemented partially by
taxing fuels

Tradable permit scheme: may benefit countries with higher ?? costs of

abatement
• Market based mechanisms (more flexible)
• IPCC and Kyoto Protocol: CDMs
• Voluntary markets
Policy Options
–The more favored would be the developing countries with lower
abatement costs.

• Until now, Kyoto protocol has failed to be implemented and be

effective (period 2008-2012)
Policy Options
Tradable permit mechanism has been undermined by:
Higher transaction costs
The lack of a marketplace to trade the carbon credits
The lack of an international agency
There is a failure in the market to abate GHGs because countries tend to
free-ride