Adventures in Energy Economics

Adventures in Energy Economics

Robert P. MurphyMises AcademyJuly 16, 2013

Robert P. MurphyMises AcademyJuly 16, 2013

Lecture 3: The Economics of Climate Change, Part I

Lecture 3: The Economics of Climate Change, Part I

Economics of Climate Change, I

Economics of Climate Change, I

I. Review: Rothbard

A. Overview of Law

B. Applied to Pollution

II. Review: Free-Market Environmentalism

A. Endangered Species

B. Overfishing”Tragedy of the Commons”

III. Economics of Climate Change

A. IPCC

B. ECS

C. Integrated Assessment Models (IAMs)

D. “Social Cost of Carbon”

E. Regulations vs. “Market Solution”

F. Carbon Tax vs. Cap-and-Trade

I. Rothbardian ViewI. Rothbardian View

A. Overview of LawA. Overview of Law

Normative (not Positive)

Physical Invasion (not “harm”)

Strict Liability (not “reasonable person” standard)

B. Applied to PollutionB. Applied to Pollution

Actual victims (not D.A.) must bring suit.

Privity (in auto example)

Utilitarian considerations can’t trump justice

II. Free-Market Environmentalism

II. Free-Market Environmentalism

A. Endangered SpeciesA. Endangered Species

versus

B. Overfishing:“Tragedy of the Commons”

B. Overfishing:“Tragedy of the Commons”

Garret Hardin1915-2003

III. Economics of Climate Change (Mainstream View)

III. Economics of Climate Change (Mainstream View)

A. Intergovernmental Panel on Climate Change (IPCC)

A. Intergovernmental Panel on Climate Change (IPCC)

B. Equilibrium Climate Sensitivity (ECS)

B. Equilibrium Climate Sensitivity (ECS)

In climate models, the equilibrium (after all feedbacks) increase in global mean near-surface air temperature from a doubling of carbon dioxide atmospheric concentrations.

IPCC AR4 estimated ECS in range of 2 – 4.5 degrees Celsius, with a best estimate of 3 degrees.

C. Integrated Assessment Models (IAMs)

C. Integrated Assessment Models (IAMs)

D. “Social Cost of Carbon” (SCC)D. “Social Cost of Carbon” (SCC)

SCC Heavily Dependent on Discount Rate

SCC Heavily Dependent on Discount Rate

SOURCE: White House Working Group on SCC, May 2013 update

Because Early Benefits and Distant Harms!

Because Early Benefits and Distant Harms!

SOURCE: White House Working Group on SCC, 2010

E. Regulation vs. “Market Solution”

E. Regulation vs. “Market Solution”

f. Carbon Tax vs. Cap-and-Tradef. Carbon Tax vs. Cap-and-Trade

If government had perfect knowledge of “abatement costs” (marginal compliance cost of restricting an additional ton of emissions) and schedule of social cost of carbon (marginal benefits of avoided future climate change damages) then two approaches would be equivalent.

But with uncertainty, government might err and one approach will be preferable (minimize deadweight loss due to mistake) depending on cost curves.

Carbon Tax better if abatement costs steeper than climate change

damages

Carbon Tax better if abatement costs steeper than climate change

damages

Emission Reductions

Cap-and-Trade better if abatement costs Shallower than

climate change damages

Cap-and-Trade better if abatement costs Shallower than

climate change damages

Emission Reductions