Transcript ppt
Policy ramp versus big bang: optimal global mitigation policy
Economic consensus: 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)
Discounting – Ramsey equation
• 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 Utility(c) low
ƞ
•
r
=
ρ
+
ƞ *
%chg %chg c
g
%chg c
c t c t+1
– –
ρ:
rate at which utility from consumption is discounted
ƞ:
How quickly marginal utility falls as consumption rises.
high
ƞ
c: consumption
Discounting
• SR approach—prescriptive/normative –
r
=
ρ
+
ƞg
= 0.1% + 1*1.3% = 1.4%.
•
ρ:
favors a “low” social rate of time preference generations is that – Prob. of extinction: 0.1%/year
=
0.1% – Argument: the only ethical reason to discount future
they might not be there at all
(e.g. cataclysmic comet) [consistent with Frank Ramsey] •
g:
growth rate of consumption ~ 1.3%; •
ƞ:
elasticity of marginal utility of consumption = 1 – (intergenerational) inequality aversion: lower • Nordhaus approach--descriptive/positive •
ρ =
1.5% (assumed, Nordhaus 2008, p. 51) •
ƞ = 2
(calibrated, given
r, ρ
and
g
) – (intergenerational) inequality aversion: higher •
r =
6.5% in 2015, falls over time to 4.5% in 2095 as
g
falls (in DICE 2007, Arrow et al. 2012)
Comparison of the discount rate
Discount weight under various assumptions 1 0.9
Stern, r = 1.4% Nordhaus, r=4.5% 0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0 0 20 40 60 80 The level at any given time represents the weight given to consumption arriving at year 100 t 120 140 160 180 200
t t
.
Damages
Nordhaus (2008, p. 51) 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%
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 CO 2 changes.
changes into temperature • Can drive applications of EU theory more than discounting (p. 5).