1 economics 331 1. finale on climate change policy today: endgame alternative perspectives...
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Economics 331
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Finale on climate change policy
Today:EndgameAlternative perspectives
• Environmentalist perspective• Conservative perspective• Reprise on learning• Tipping points and policy
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Endgame for course
1. Final exam (absence by Dean’s excuse only)ECON 331. Assigned to exam group 33Friday, May 6, 2011. 9:00 am – 11:00 am
2. Structure: probably three parts: will probably have choice.40 minutes for “prepared questions” (to be posted); 40 minutes
problems; 40 minutes more problems
3. I will post last year’s exams (but no answers)4. Review sessions: WN 1 next week; WN 1 week after; office
hours by Lint 5. Grades will be approximately based 20 percent on the
problems, 30 percent on the paper, 20 percent on the midterm, and 30 percent on the final, all with adjustments.
6. Paper due noon April 27 (hard copy outside my office; electronic copies to WN and LB)
7. Hard deadlines for seniors. No postponements for last-minute procrastinations.
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Strong --------- Stern ------------------A----B----C----------DICE------D-----------Lomberg--- Weak
policies $100 /tCO2 $10 - $20/tCO2 $1/tCO2 policies
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The spectrum of economic views on climate change
Stern: Stern Review, also summarized in his Ely lecture, American Economic Review.
Lomberg has organized the Copenhagen consensus of (largely) conservative thinkers to rank major issues.
A, B, C, D are other models
The Copenhagen Consensus: Priorities for Action
Economics 487b, Spring 20075
“In ordering the proposals, the panel was guided predominantly by consideration of economiccosts and benefits.” http://www.copenhagenconsensus.com
Environmentalist critique
Stern/Krugman critique* of the DICE model approach:
1. Uses too high a discount rate2. Ignores the uncertainty and the “fat tail” of low-
probability catastrophic outcomes3. Uses a temperature sensitivity coefficient of 3 °C
per CO2 doubling instead of more realistic 6 °C
Next slide shows the sensitivity of the emissions control rate if we introduce these sequentially. Which are most important?
*Stern Review : http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/sternreview_index.htm
Krugman, “Building a Green Economy,” NYT Magazine, 2010, http://www.nytimes.com/2010/04/11/magazine/11Economy-t.html 6
Emissions Controls for Environmentalist Assumptions
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0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2005 2025 2045 2065 2085 2105
Emis
sion
s co
ntro
l ra
te
Optimal: base assumptions
6 deg C
6 deg C and double damages
Base and low discounting
6 °C and low discounting
6 deg C, double damages, and low discounting
Reprise on learning
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Original example
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The state of the environmental world
Good outcome (low damage, many green technologies)
Poor outcome (catastrophic damage, no green technologies)
Climate
Strong policies (high carbon tax, cooperation, R&D) -1% -1%
policyWeak policies (no carbon tax, strife, corruption) 0% -50%
Probability 90% 10%
Learn then act:
E(U) = 0.9 x 0% + 0.1 x -1% = -0.1% Expectation of strong = 0.1
Act then learn:
Strong: E(U) = 0.9 x -1% + 0.1 x -1% = -1% Best policy: Expectation of strong = 1
Weak: E(U) = 0.9 x 0% + 0.1 x -50% = -5%
Therefore, learning leads to weaker policies. Precautionary motive holds.
Revised example with lower damage in bad state.
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The state of the environmental world
Good outcome (low damage, many green technologies)
Poor outcome (catastrophic damage, no green technologies)
Climate
Strong policies (high carbon tax, cooperation, R&D) -1% -1%
policyWeak policies (no carbon tax, strife, corruption) 0% -5%
Probability 90% 10%
Learn then act:
E(U) = 0.9 x 0% + 0.1 x -1% = -0.1% Expectation of strong = 0.1
Act then learn:Strong: E(U) = 0.9 x -1% + 0.1 x -1% = -1.0%
Weak: E(U) = 0.9 x 0% + 0.1 x -5% = -0.5% Best policy: Expectation of strong = 0
Therefore, learning leads to stronger policies. Precautionary motive DOES NOT hold.
Conclusion
Example shows how expected strength of policy can either go up or down with learning.
No general theorem about whether learning increases or decreases your abatement (or investments more generally)
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How can we treat tipping points and threshold effects?
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k
k***k**k*13
OOPS!!!!!!!
k
k***k**k*14
Note: Have new and different locally stable equilibrium
Non-linearities in the climate system
Most of the impacts literature examines gradual climate change, with roughly linear systems and impacts.
Scientists have been particularly concerned about discontinuities, abrupt climate change, tipping points, catastrophic impacts.
How can we deal with thresholds in our economic analysis? A very tough problem on the frontier.
Examples from climate system
Source: Lenton et al., “Tipping Elements,” PNAS, Feb 2008, 1786. 16
1717
TotalAbatement Cost
Temperature
Total Damage
0Temperature*
Optimum Without Thresholds
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TotalAbatement Cost
Temperature
Total Damage
0Temperature*
Optimum With Thresholds
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Marginal Abatement Cost
Temperature
Marginal Damage
0Temperature*
Optimum Without Thresholds
2020
Marginal Abatement Cost
Temperature
Marginal Damage
0Temperature*
Optimum With Thresholds ???!!!???
2121Temperature
Net income
0
Which is the real maximum?
Have multiple equilibrium for system and policy
• DICE type model.• Catastrophic damage at 3 °C = 50 % of output• Have abatement choice about whether to pass
the threshold as function of costs and benefits.• Abatement cost varies from 1% to 100% of
output.• Next slide shows whether optimally pass the
threshold as function of abatement cost.• Note that SOLVER can’t reliably get the right
answer near the cross-over because it is local optimizer!
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Solutions for temperature
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0
2
4
6
8
10
12
14
0 0.2 0.4 0.6 0.8 1 1.2
Max
imum
tem
pera
ture
(deg
C)
Mitigation cost intercept
Max T from upper end
Max T from lower end Cross catastrophic threshold
Avoid catastrophic threshold
Note: 1. Have algorithm problems because multiple local maxima. 2. Sharp discontinuity in solution around threshold.
Solutions for PV net income
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0
2000
4000
6000
8000
10000
12000
0 0.2 0.4 0.6 0.8 1 1.2
Pres
ent v
alue
net
out
put
Mitigation cost intercept
PV from upper end
PV from lower end
Cross catastrophic threshold
Avoid catastrophic threshold
Note: Solution is continuous for PV income (although bad)
Solutions for first-period control rate
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Note: Paradox that control rate goes UP around switch point. Why? First you speed up, then when you know you are going to miss your plane, slow down.
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0.100
0.200
0.300
0.400
0.500
0.600
0.700
0.800
0.900
0 0.2 0.4 0.6 0.8 1 1.2
Emis
sion
s con
trol
rate
firs
t per
iod
Mitigation cost intercept
Cross catastrophic threshold
Avoid catastrophic threshold
Note: had slightly wrong graph in class.
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Where do we go from here?
It is in YOUR hands…
Where do we go from here?
It is in YOUR hands…
Y