Climate & society - economics
HC 1
The problem and environmental policy
Climate change is a classic externality
- Global scope: total global emission causes global impacts
- Long term: time horizons often exceed a generation
- Uncertainty and risk: scientific, political and economical
- Non-marginal effects: thresholds and accelerators
Stock: amount of emissions
CP is the central planner/social optimum
T is the threshold
P is the private market outcome
Environmental policy
- Property rights
o The right to pollute/use
The state of nature
The rule of law
o Coase theorem
When property rights are defined, tradable, enforceable and transaction
costs are low, then the market will ensure that the efficient level of
pollution/use is reached
It does not matter to whom the rights are given, because they will be sold
amongst the parties
- Polluters/users pay principle
o The rights to pollute/use
Governments
Moral sentiments
o Pigouvian Taxes
In the presence of externalities markets fail and prices do not reflect societal
costs so a tax could be levied such that the efficient level of pollution/use will
be reached
For both property rights and polluters/users pay principle
1
, Alternative instruments
- Cap and trade
o Government decides on a limit and issue rights to emit, that can be traded
o Who sets cap where? not a limit for the whole world
o Cap is too high in Europe due to economy did not grow as well as thought
- Enforce standards
o Lobby sensitive
- Command and control
o Force by law
o Bureaucratic, lose flexibility
- Blame and shame
o Erratic and crude instrument
Basics of SCBA and discounting
SBCA: Social cost benefit analysis
Six steps
1. Problem analysis and solutions
I. Evaluate all relevant alternatives
2. Analysis of all effects
I. Consider a world with and without X
II. List all differences and categorize
I. Direct/indirect market effects and externalities
3. Quantification of all effects
I. Express all in quantified units
4. Valuation of all effects
I. Choose and express all Q in numeraire
II. Market value and consumer surplus
III. Non-market goods and externalities
I. Revealed/stated preferences or benefit transfer
5. Aggregation of all effects
I. Add up all costs and benefits (to what level?)
II. Social welfare function
I. Discounting the future
II. Weighing heterogeneous agents
6. Sensitivity analysis
I. Identify what variables drive your conclusion most
II. How uncertain are they?
I. Not sensitive, very certain ignore
II. Not sensitive, very uncertain ignore
2
HC 1
The problem and environmental policy
Climate change is a classic externality
- Global scope: total global emission causes global impacts
- Long term: time horizons often exceed a generation
- Uncertainty and risk: scientific, political and economical
- Non-marginal effects: thresholds and accelerators
Stock: amount of emissions
CP is the central planner/social optimum
T is the threshold
P is the private market outcome
Environmental policy
- Property rights
o The right to pollute/use
The state of nature
The rule of law
o Coase theorem
When property rights are defined, tradable, enforceable and transaction
costs are low, then the market will ensure that the efficient level of
pollution/use is reached
It does not matter to whom the rights are given, because they will be sold
amongst the parties
- Polluters/users pay principle
o The rights to pollute/use
Governments
Moral sentiments
o Pigouvian Taxes
In the presence of externalities markets fail and prices do not reflect societal
costs so a tax could be levied such that the efficient level of pollution/use will
be reached
For both property rights and polluters/users pay principle
1
, Alternative instruments
- Cap and trade
o Government decides on a limit and issue rights to emit, that can be traded
o Who sets cap where? not a limit for the whole world
o Cap is too high in Europe due to economy did not grow as well as thought
- Enforce standards
o Lobby sensitive
- Command and control
o Force by law
o Bureaucratic, lose flexibility
- Blame and shame
o Erratic and crude instrument
Basics of SCBA and discounting
SBCA: Social cost benefit analysis
Six steps
1. Problem analysis and solutions
I. Evaluate all relevant alternatives
2. Analysis of all effects
I. Consider a world with and without X
II. List all differences and categorize
I. Direct/indirect market effects and externalities
3. Quantification of all effects
I. Express all in quantified units
4. Valuation of all effects
I. Choose and express all Q in numeraire
II. Market value and consumer surplus
III. Non-market goods and externalities
I. Revealed/stated preferences or benefit transfer
5. Aggregation of all effects
I. Add up all costs and benefits (to what level?)
II. Social welfare function
I. Discounting the future
II. Weighing heterogeneous agents
6. Sensitivity analysis
I. Identify what variables drive your conclusion most
II. How uncertain are they?
I. Not sensitive, very certain ignore
II. Not sensitive, very uncertain ignore
2
