Pricing Climate Change

And the Climate Policy Goal Encore Fall 2016 Class 4

Encore Fall 16 1

The Global Warming Problem:

An Economist’s View

It’s a price problem: a significant cost is not included in market prices

Corollary: problem solved if market prices include the cost

The “goal”

Outcome produced by economy in which prices do include the cost

Climate mitigation is a product – like men’s shirts

Possible responses of a climate hawk

Climate mitigation is not like men’s shirts

It’s like men’s shirts but the cost to be include is very large

Encore Fall 16 2

Estimated Prices

Encore Fall 16 3

Cost of additional ton = Benefit of one-ton reduction

Costs and Benefit of Reductions

Encore Fall 16 4

No regrets

actions

SCC

Net Benefit

SCC and Reducing Emissions

Cost/ton Benefit/ton

Econ 101: Supply and Demand

Supply Demand

Encore Fall 16 5

Comparison

Parallels

Cost = Supply curve

Benefit = SCC = Demand curve

Net benefit = Benefit – cost

Maximum benefit at intersection of benefit and cost

Differences

Slope of the SS & demand curve: factual assumption

Determinants of the SCC/demand curve

Encore Fall 16 6

“Who are those guys?” – The

Three Models

DICE: Developed 1990 by William Nordhaus of Yale

University

PAGE: Developed 1991 by Chris Hope of Cambridge

University

FUND: Developed early 1990s by Richard Tol of

Universities of Sussex and Amsterdam

Encore Fall 16 7

Encore Fall 16 8

BUT . . . .

Do we consider cost in determining what/how much to do?

What is the cost?

It isn’t zero

It isn’t infinite

What non-zero finite amount?

How to answer?

Gut feeling

Analysis

Samuel Gompers approach: The answer (whatever it is) is greater than what is now politically feasible

Encore Fall 16 9

Some Issues

The price of time

The price of risk

Geographical scope

Non-market goods

Encore Fall 16 10

The price of time: the discount rate

Because damages continue far into future, discount rate has large

impact on present value.

Value in 2016 of $1 billion in 2100

At 1% discount rate: $645 million

At 3% discount rate: $272 million

At 5% discount rate: $117 million

Encore Fall 16 11

-

1,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

7,000,000,000

8,000,000,000

0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

Discount Rate

Discounting $1 Trillion from 3000 AD

Encore Fall 16 12

0.5% $ 7,389,162,739

1.0% $ 55,945,891

1.5% $ 433,925

2.0% $ 3,447

2.5% $ 28

3.0% $ 0.233437643

3.5% $ 0.001989279

4.0% $ 0.000017346

4.5% $ 0.000000155

Discounting $1 Trillion from 3000 AD

Encore Fall 16 13

Obligation to the (fairly) far future

Is there one?

Can it be given analytical content: what/how much should we do?

How would a moral and well-educated man in 1032 AD define his obligations

to us?

Encore Fall 16 14

For extended discussion of discounting and the “wealthy

Bangladeshi” issue:

Weisbach and Sunstein, Climate Change and Discounting: A

Guide for the Perplexed,

http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?art

icle=3018&context=journal_articles

Encore Fall 16 15

Representing Uncertainty

Median and average: no information

Confidence level – for example, 90% probability that value is between X and Y

Probability density function (PDF)

Presents most information

Output is no better than input

Encore Fall 16 16

0

1

2

3

4

5

6

7

2 3 4 5 6 7 8 9 10 11 12

Dic

e T

ota

l

Number of Alternatives

Representing Uncertainty: Probability Density Function for (Honest) Pair of Dice

8.3%

Encore Fall 16 17

Equilibrium temperature increase with

doubling of CO2 concentration

Encore Fall 16 18

Encore Fall 16 19

How to Analyze

Like a friendly neighborhood poker game

Assign dollar value to damages from 6o world

Multiply by probability of reaching median of 3.4o x probability of 6o

Invoke precautionary principle: Avoid 6o world at all costs

Intermediate position? Analytically determinable?

Encore Fall 16 20

For discussion of risk:

Climate Shock

Ghosn and King, Thinking About Climate Risk: The Worst

Cases Matter, http://www.business-

standard.com/article/opinion/arunabha-ghosh-david-king-

climate-risks-the-worst-cases-matter-115072001245_1.html

Wagner, Statistics 101: Climate policy = risk management

http://blogs.edf.org/climate411/2015/09/10/statistics-101-

climate-policy-risk-management/

Encore Fall 16 21

What kinds of things should SCC include?

Marketed goods and services – including labor

Economically valuable non-market goods and services

Non-economic but valued goods and services

Values not based on human valuations

Encore Fall 16 22

One of these things is not like the others

Possible to assign a monetary value to first three

Example for third category: Use survey to determine value people place on

continued existence of polar bears

Seemingly not possible for the fourth category: example does not estimate

the intrinsic value of polar bears but the value that humans place on them.

Consider it decisions without inclusion in SCC? Considering multiple non-

commensurate values

Encore Fall 16 23

US or Global: PM May’s Speech

Encore Fall 16 24

But we also value something else: the spirit of citizenship.

That spirit that means you respect the bonds and obligations that

make our society work. That means a commitment to the men and

women who live around you, who work for you, who buy the goods

and services you sell.

That spirit that means recognising the social contract that says you

train up local young people before you take on cheap labour from

overseas.

. . . .

But today, too many people in positions of power behave as though

they have more in common with international elites than with the

people down the road, the people they employ, the people they

pass in the street.

But if you believe you’re a citizen of the world, you’re a citizen of

nowhere. You don’t understand what the very word ‘citizenship’

means.

US or Global: What’s the Standard

Consider only direct climate impact on US

Also consider:

Collateral impact via global economy or national security

Effect of US actions on actions of other countries: leverage

Global impact

Encore Fall 16 25

The Two Degree Goal

(And the 1.5 Degree Aspiration)

Encore Fall 16 26

Reverse engineering goal’s implications

Encore Fall 16 27

Policy

Change

Change In

Net Emissions

Change In CO2

Concentration

Change In

Equilibrium

Temperature

Climate

Sensitivity

Climate

Goal

Quantifying and Using Climate Sensitivity

Increase in equilibrium temperature from doubling CO2: ∆T2x

∆T = ∆T2x * (LN(Concentrationnew/Concentrationold)/LN(2)

Example

∆T2x = 3.0o

CO2 old = 280

CO2 new = 400

Increase in equilibrium T: 3.0o * .36/.69 = 1.53o

Encore Fall 16 28

The Carbon Budget

Long atmospheric residence time of CO2

Timing of emissions has little effect on long-run atmospheric

concentration or final equilibrium temperature

Carbon budget: Cumulative emissions consistent with certain

probability of staying within 2o limit

Encore Fall 16 29

Four paths for a carbon budget

Encore Fall 16 30

The carbon budget and the price of delay

All paths start at the same point

Total emissions are equal to the area under each path and is the same for all four trajectories.

The three trajectories that delay the start of reductions compensate by more rapid reductions

The last trajectory, requires an almost instantaneous reduction to zero; any further delay could not be offset without negative net emissions.

Encore Fall 16 31

Implications of the Carbon Budget

2o budget: around 900 additional gigatons

Exceeded by fossil fuel reserves

To meet target, some reserves must be left in the ground

Encore Fall 16 32

Encore Fall 16 33

Assume

Fossil fuel reserves and fossil fuel-using capital stock mostly owned by

profit-seeking organizations

No order will directly bar extraction or use. Reality—

CPP effectively bars new coal plants

Fracking regulations may effectively bar exploitation of some natural gas resources

Implication: extraction or use must become unprofitable

Encore Fall 16 34

Effect of delay and rate of decrease

Encore Fall 16 35

Effect of temperature goal and delay

Encore Fall 16 36

Or Plan B

Solar Radiation Management (SRM)

Negative emissions

Reduce the burden

Wind, solar, nuclear

Fossil fuel plants plus CCS or CCU

Go negative

Air capture

Replace fossil fuels with biomass/biofuels in large fixed facilities and capture emissions

(BECCS)

Encore Fall 16 37

SRM

Advantages

Relatively cheap

Fairly simple technology

Fast-acting

Disadvantages

Restoring previous average temperature does not restore previous climate

Does not affect ocean acidification

It’s relatively cheap and fairly simple: reverses mitigation problem

Encore Fall 16 38

A temporary, moderate and responsive SRM

39 Encore Fall 16

Negative emissions

CO2 absorbed by natural sinks and anthropogenic carbon capture

must exceed emissions

Wind, solar, nuclear, fossil fuel CCS can reduce size of problem but

cannot go negative

Encore Fall 16 40

Point Capture

Fossil fuel CCS

Can reduce net emissions into atmosphere: compare with cost/ton of reducing gross

emissions

Cannot achieve negative emissions

Bioenergy carbon capture and storage (BECCS)

Potentially can achieve negative emissions with centralized biogenic

energy

(Point source gross emissions without CCS + additional gross emissions

from CCS + emissions from growing, harvesting and transporting energy

crop) – (capture at point of combustion + capture by growing crop)

41 Encore Fall 16

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Encore Fall 16 43

Negative Emissions: Air capture

Advantages

Scalable

Can offset non-point source emissions

No location constraints – co-locate with effective storage or CO2 market

Issues

Technical feasibility

Cost

44 Encore Fall 16

Encore Fall 16 45

Air Capture as Backstop Technology

Point capture-reducions air capture

Trajectory 1

Trajectory 2

46 Encore Fall 16

47

Reduce Harm

Adaptation:

Reduce harm from warming

Situational

Mitigation:

Reduce warming

Solar Radiation Management

(SRM)

Small scale: white roofs

Large scale:

Sulfate aerosols

Reduce GHG concentration

Encore Fall 16

48

Reduce GHG concentration

Reduce emissions

Reduce energy intensity:

energy per $

Reduce carbon intensity: CO2

per energy

Increase uptake

Point-source capture

Open air capture

Reduce Net Emission

Encore Fall 16

Why CO2? Because it stays up so long

49

No interannual change Atmosphere biosphere

Very short term ~50% absorbed by ocean

Thousand years ~80% absorbed by ocean

Millions of years Volcanoes vs carbon burial

Encore Fall 16