Transcript AOSS_480_L17_Policy_Uncertanity_Economics_20080311.ppt

Climate Change: The Move to Action
(AOSS 480 // NRE 501)
Richard B. Rood
734-647-3530
2525 Space Research Building (North Campus)
[email protected]
http://aoss.engin.umich.edu./people/rbrood
Winter 2008
March 11, 2008
Class News
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– AOSS 480 001 W08
• This is the official repository for lectures
• Email [email protected]
• Class Web Site and Wiki
–Climate Change: The Move to
Action
–Winter 2008 Term
Readings on Local Servers
• Assigned
– Stern Report: Executive Summary
– Nordhaus: Criticism of Stern Report
• Of Interest
– Tol and Yohe: Deconstruction of Stern Report
• Foundational References
– Stern Report: Primary Web Page
Lectures coming up
• http://www.snre.umich.edu/events
Outline of Lecture
• Review some basic ideas
• Science and Uncertainty
– Motivators, catalysts for policy
• Economics as a motivator?
– Exponential growth and discounts
• Stern Report
– Criticisms of Stern Report
• Markets as a Policy Vehicle
Review some basic ideas
• Energy-climate relation
– Big Items
• Coal-electricity
• Oil-transportation
• Local-global
– Energy security time scales are short
– Wealth strongly correlated with energy use
– Wealth protection and acquisition lend urgency to
energy security
• Coal comes forward
– Climate change (climate security?) less urgent
• Strategies to address energy security neutral or negative to
climate change
Review some basic ideas
• Need for a carbon policy
• Policy
– IPCC is the formal way science informs policy
• Climate Change Study Program
• National Academy of Sciences
– Global policy for mitigation
• UN Framework Convention on Climate Change
– “Dangerous” climate change
• Kyoto protocol
– Introduction on “market” mechanisms
• Little or no evidence of reduction of greenhouse gas emissions
– Regional versus global policy: Recognition of the granularity of the
problem
• Regional
• States
• Cities
Summary moment
• It is sensible to look at governance and policy to
address climate change
– It’s a “greater good” problem
– It relates to natural resources and waste from the use
of natural resources
– It impacts economic and national security
– There is precedence
• Given the relation to energy and wealth it is
natural to expect there will not to be a “one size
fits all solution” for climate change.
Energy and Climate Change
SURFACE WARMING
POPULATION
ENERGY CONSUMPTION
GREEN HOUSE GAS INCREASE
Science: Knowledge and Uncertainty
Knowledge from Predictions
Motivates
policy
Uncertainty of the Knowledge
that is Predicted
1) Uncertainty always exists
2) New uncertainties will be revealed
3) Uncertainty can always be used to
keep policy from converging
Policy
Science: Knowledge and Uncertainty
Knowledge from Predictions
Motivates
policy
Uncertainty of the Knowledge
that is Predicted
Policy
1) Uncertainty always exists
2) New uncertainties will be revealed
3) Uncertainty can always be used to keep
policy from converging
What we are doing now is, largely, viewed as successful. We are reluctant to
give up that which is successful. We are afraid that we will suffer loss.
A Premise
• Climate change problem cannot be solved
in isolation.
• Requires integration with all elements of
society.
– Requires identification of reasons to motivate
us to take action
• Apparent benefit
• Excess Risk
A Conclusion about Policy
• Policy cannot stand alone as our response to climate
change.
– Every person and every group of people will be impacted by
climate change, and therefore, by policy to address climate
change.
• In fact, some feel that they are more impacted by policy than by
climate change.
• Policy has to not only be effective, but it has to include
and balance the interests of all who have a stake.
• Policy represents our values – our societal belief system.
– It sets the bounds on behavior to benefit society
Motivators for Policy
• More is needed than scientific knowledge
to motivate the development of policy.
– A policy accelerator or catalyst is needed to
promote convergence on policy.
• Apparent benefit
• Excess risk
– What are important sources of benefit and
risk?
A SLIDE TO TAKE NOTES
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Change in leadership
Natural disasters- personal loss
Extreme weather-food production
Biodiversity Loss
Public Health /U.S.
Water Resources
Cost of Oil / Energy
Sea ice Decline
• Federal Reserve: Power to control economy
• EPA: Power to “control” environment?
• Urgency of Public Health
• Where does the wealth sit?
Climate Science-Policy Relation
CLIMATE SCIENCE
UNCERTAINTY
PROMOTES / CONVERGENCE
OPPOSES / DIVERGENCE
KNOWLEDGE
POLICY
From last lecture
• We saw from last lecture the development
of regional, state, and local policy
Scales of Policy: U.S.
–Pew: State-based Initiatives (Update, 2007)
Motivations for State Activity
• Economics
– States (and cities) are very aggressive at
promoting policy that they perceive as offering
economic advantage.
– Branding: To attract, for instance, the “creative
class”
• Belief and Culture
– Reflection of political constituencies
The role of economics
• An assertion: When thinking about climate
change we first think of policy. When we
think about how to promote policy where
do our thoughts first land?
– Conservation?
– Public Health?
– Economics?
– other
The convergence to economics
• Conservation, public health, etc., touch
economy.
• Hence it is sensible to place attention on
the economics of climate change.
– Production, Distribution, and Consumption of
goods and services
– Macroeconomics is generally the summation
of the economy of states, regions, countries,
world.
• Measured broadly by gross domestic product
Where we sit at a national level
SEC. 16__. SENSE OF THE SENATE ON CLIMATE CHANGE. (2005)
(a) Findings.—Congress finds that—
1) greenhouse gases accumulating in the atmosphere are causing average
temperatures to rise at a rate outside the range of natural variability and are
posing a substantial risk of rising sea-levels, altered patterns of atmospheric
and oceanic circulation, and increased frequency and severity of floods and
droughts;
2) there is a growing scientific consensus that human activity is a substantial
cause of greenhouse gas accumulation in the atmosphere; and
3) mandatory steps will be required to slow or stop the growth of greenhouse
gas emissions into the atmosphere.
(b) Sense of the Senate.—It is the sense of the Senate that Congress should
enact a comprehensive and effective national program of mandatory,
market-based limits and incentives on emissions of greenhouse gases that
slow, stop, and reverse the growth of such emissions at a rate and in a
manner that—
1) will not significantly harm the United States economy; and
2) will encourage comparable action by other nations that are major trading
partners and key contributors to global emissions.
Economy
• We have built economy into our response
to climate change.
• States cite economic incentives as a
reason for developing policy.
Exponential Growth
Exponential Growth
300
Dollars
250
1 percent
200
2 percent
150
3 percent
100
5 percent
50
0
1
3
5
7
9
11
13
15
17
19
21
Years
U.S. views 2-3% Growth / year as a Stable Economy
Consider this gross domestic product (GDP)
Exponential Discount
Exponential Discount
120
Dollars
100
(1) percent
80
(2) percent
60
(3) percent
40
(5) percent
20
0
1
3
5
7
9
11
13
15
17
19
21
Years
This is how we discount the value of investments into the future.
Exponential Discount
Exponential Discount
120
Dollars
100
(1) percent
80
(2) percent
60
(3) percent
40
(5) percent
20
0
1
3
5
7
9
11
13
15
17
19
21
Years
This is how we discount the value of investments into the future.
How to value future return on investment versus near-term focus on investment.
Exponential Discount
Exponential Growth
300
250
Dollars
Exponential Discount
120
Dollars
100
80
60
40
2 percent
150
3 percent
100
(1) percent
50
(2) percent
0
(3) percent
1 percent
200
5 percent
1
3
5
(5) percent
20
7
9
11
Years
0
1
3
5
7
9
11
13
15
17
19
21
Years
Economic growth versus discount
In general. must also account for inflation or deflation
13
15
17
19
21
Exponential Discount
Exponential Growth
300
250
Dollars
Exponential Discount
120
Dollars
100
80
60
40
20
3 percent
100
50
(2) percent
0
(5) percent
2 percent
150
(1) percent
(3) percent
1 percent
200
5 percent
1
3
5
7
9
11
13
15
17
19
21
Years
0
1
3
5
7
9
11
13
15
17
19
21
Years
Real growth of wealth must address the loss of wealth through inflation, taxes, discounting.
Global economic analysis
– Stern Report: Primary Web Page
– Stern Report: Executive Summary
– Nordhaus: Criticism of Stern Report
– Tol and Yohe: Deconstruction of Stern Report
Stern Report
• Considered a radical revision of climate change
economics.
– If we don’t act now it will cost between 5% and 20%
of gross domestic product (an aggregate measure of
economy.)
• Stands in contrast to many studies that usually
come to numbers of closer to 1%
– The idea that initiation of a policy with a slow growth
rate will have little impact on the economy or
environment in the beginning, but will ultimately
become important when the nature of expenditures is
more clear.
Stern Report included very small discount rate.
Exponential Discount
120
Dollars
100
(1) percent
80
(2) percent
60
(3) percent
40
(5) percent
20
0
1
3
5
7
9
11
13
15
17
19
21
Years
The discount rate of Stern Report is very small.
(Represents high valuation of ethical issues. Assumptions
about value of environment.)
(represented qualitatively by the red line)
Impact of low discount rate
• Amplifies the impacts of the decisions we
make today.
– Note: Even a 1% discount rate over 100 years
generally leads to the conclusion that what we
do today does not matter to the economy.
• Also brings attention to our poor explicit
valuation of the environment.
Stern Review: Criticisms
• Document is fundamentally political: An
advocacy document.
• Not up to the standards of academic
economic analysis
• Not based on empirical observations of the
economy
– Observed discount rates
– Observed behavior
Strengths of Stern Review
• Explicitly linked economic goals and
environmental goals
– Considered a major flaw of the Kyoto Protocol
• (Recall: Kyoto did include market mechanisms)
• Showed explicitly the necessity of having
the cost of carbon dioxide, the cost of
greenhouse gases, the valuation of the
environment in environmental policy.
Return to the interface with policy
Climate Science-Policy Relation
CLIMATE SCIENCE
UNCERTAINTY
PROMOTES / CONVERGENCE
OPPOSES / DIVERGENCE
KNOWLEDGE
POLICY
Economics-Policy Relation
ECONOMIC ANALYSIS
UNCERTAINTY
KNOWLEDGE
POLICY
PROMOTES / CONVERGENCE
Economic analysis is not the
compelling catalyst to converge the
development of policy – at least on
the global scale.
OPPOSES / DIVERGENCE
Different story on the local scale.
The economics argument
• Comes to the conclusion that we must
provide valuation to the environment, the
cost of energy, the disposal of our waste.
– Usually collapses to the argument of a market
versus a taxation problem.
– Economic efficiency.
The possibility of addressing the climate change challenge
• One strategy is to integrate into our
thinking, our culture, our behavior the
value of the climate and the consequences
of our decisions, and in particular, what is
the cost of our energy and our water, and
what happens with our waste.
The possibility of addressing the climate change challenge
• What does bring us all together?
• How do we ascribe value and valuation?
– Our beliefs and belief systems link us strongly.
• And stand at the foundation of our disagreements.
– Our economies link us strongly.
– Others ???
Economies, markets
• A leading policy mechanism is the carbon
market. This would be a way to allow valuation
of our climate and the treatment of our waste.
– Markets are a way to provide an interface between all
of the interested parties.
• Requires participation in the market.
• Requires a functioning market.
– The most likely way to touch most elements of
society?
– How to develop a market?
F1A
F2A
F iA
FUEL SOURCES
F2c
F1c
GDP
F ic
SHARES OF
POLLUTANT CREDITS
ENERGY
PRODUCTION
.
ABATEMENT
A1
POLLUTANT
COST GAP
Elements of environmental pollutant market
A2
Ai
F1A
F2A
F iA
FUEL SOURCES
F2c
F1c
GDP
ENERGY
PRODUCTION
Common Unit
of Transference
Cost  $
.
ABATEMENT
A1
POLLUTANT
F ic
A2
Ai
COST GAP
Elements of environmental pollutant market
SHARES OF
POLLUTANT CREDITS
F1A
F2A
F iA
FUEL SOURCES
F2c
F1c
GDP
ENERGY
PRODUCTION
[CO2 ]
 PCO2  LCO2
t
.
ABATEMENT
A1
POLLUTANT
F ic
A2
Ai
COST GAP
Elements of environmental pollutant market
SHARES OF
POLLUTANT CREDITS
F1A
F2A
F iA
FUEL SOURCES
F2c
F1c
GDP
ENERGY
PRODUCTION
Pacala and Socolow
.
ABATEMENT
A1
POLLUTANT
F ic
A2
Ai
COST GAP
Elements of environmental pollutant market
SHARES OF
POLLUTANT CREDITS
Markets
• It is not clear to me that the ingredients
exist for a market. There are too few
options.
– Abatement?
– Cost differential for fuel?
– Valuation of efficiency?
– The requirement of economic growth?
– ...
Next Lecture
• Justin Felt: Carbon Market