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Sun
Earths Atmospheric Gases
Nitrogen (N2)
Non-
Greenhouse
Gases
Oxygen (O2)
99%
Water (H2O)
Greenhouse
Carbon Dioxide (CO2) Gases
1%
Methane (CH4)
Carbon dioxide stays in the atmosphere for approximately 100 years, methane
lasts about 12 years. Other greenhouse gases last even longer.
Warming triggers more warming
As these gases continue to raise surface temperatures, they trigger the release of
even greater quantities of carbon dioxide and GHG, further increasing
temperatures.
A feedback mechanism ensues
How to evaluate effect of GHG emissions and
global warming?
A lot of uncertainties
Involves time lag
Does not depend origin of emission
Difference from other externalities
Stern, Nicholas. "The Economics of Climate Change." American Economic
Review 98.2 (2008): 1-37. https://www.aeaweb.org/articles?id=10.1257/aer.98.2.1
(a) it is global in its origins and impacts;
(b) some of the effects are very long term and governed by a flow-stock process;
(c) there is a great deal of uncertainty in most steps of the scientific chain;
(d) the effects are potentially very large and many may be irreversible.
Thus, it follows that the economic analysis must place at its core:
(i) the economics of risk and uncertainty;
(ii) the links between economics and ethics (there are major potential policy trade-
offs both within and between generations)
-as well as notions of responsibilities and rights in relation to others and the
environment;
(iii) the role of international economic policy.
Choice of stabilization target and policy
Target has strong implications for the permissible flow of emissions,
and thus for emissions reductions targets
reduction targets shape the pricing and technology policies.
Price or quantity regulation?
A policy that tries to start with a price for marginal GHG damages has two
major problems:
(a) the price estimate is highly sensitive to ethical and structural assumptions on the
future;
(b) there is a risk of major losses from higher stocks than anticipated, since the damages
rise steeply with stocks and many are irreversible.
Stern target: aggregate GHG stabilization targets of below 550 parts
per million (ppm) carbon dioxide equivalent (C02e)
Estimated probabilities for
eventual temperature increases
(which take time to be
established) relative to
preindustrial times (around 1850),
were the world to stabilize at the
given concentration of GHGs in
the atmosphere measured in ppm
(particles per million) C02e
Source: http://nyti.ms/1KYBr1c
Uncertainty Costs of Reduction: Tax vs QR Suppose regulator made an error and MC is actually higher?
Tax or QR?
($)
MC2
Cost
Pollution
Reduction DWL Tax DWL QR
MC1
P* t Impose tax t
SMB = MD
PMC
Q1=0 Q2 Q*
Max Pollution Reduction
Pollution Reduction Quantity
Max Pollution 0 Pollution
Uncertainty Costs of Reduction: Tax Suppose regulator made an error and MC is actually higher?
Tax or QR?
($)
MC2
Cost
Pollution Reduction
DWL Tax DWL QR
MC1
P* t Impose tax t
SMB = MD
PMC
Q1=0 Q2 Q*
Max Pollution Reduction
Pollution Reduction Quantity
Max Pollution 0 Pollution
Kyoto 1997: 35 industrialized nations (but not US) agreed to
reduce their emissions of greenhouse gases to 5% below
(depends on country) 1990 levels by the year 2012
Industrialized countries are allowed to trade emissions rights
among themselves, as long as the total emissions goals are
6.4 billion metric tons
met [=quantity regulation with trading permits] CO2/yr
Developing countries are not in the treaty
Disagreement between rich and developing countries on who
should bear the cost of curbing greenhouse gas emissions
In the US, Obama has directed EPA to regulate CO2 emission
[carbon tax or cap-and-trade requires congress law]