The Economics of Climate Change: An Economic Critique of Kyoto, and an Alternative Proposal
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Transcript of The Economics of Climate Change: An Economic Critique of Kyoto, and an Alternative Proposal
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The Economics of Climate Change:An Economic Critique of Kyoto, and an Alternative Proposal
Dr. Arne KildegaardUniversity of Minnesota, Morris
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Directions to Morris…
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Greenhouse Gases (GHGs) and the atmosphere
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CO2 Emissions and Concentrations
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CO2 Emissions
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CO2 Concentrations and Temperature
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Temperature Change
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The Industrial Revolution: A Revolution in Energy Usage
Before After
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Revolution in Energy Use (cont’d.)
Exploitation of carbon-based fossil fuels Consequent CO2 emissions
Deforestation (elimination of carbon sinks) Consequent elimination of carbon sinks
Inevitably, higher atmospheric concentrations
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Other GHGs
Methane
Nitrous Oxide
Hydroflourocarbons (HFCs)
Perflourocarbons (PFCs)
Sulphur hexaflouride
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Consequences: a non-exhaustive list(from the UNIPCC)
Rising sea levels Island nations and coastal cities
Freshwater resources (desertification) Human health
Vector-borne diseases (e.g. malaria)
Agriculture Cereal production to fall 20% by some GE analyses Redistribution from tropics to temperate zones
Species and habitat
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Can’t we all just get along…?
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UN Framework Convention on Climate Control (UNCCC)
Rio Conference
COPs (Council of Parties) Rounds
“Targets and Timetables” (COP1)
Kyoto Protocol (COP3, December, 1997)
Subsequent modifications (COP4-10)
U.S. Repudiation (March, 2001)
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Key Features of Kyoto, as Amended
Targets and Timetables 93% of 1990 emissions by 2008-2012
Binding restrictions on “Annex” B countries only 38 countries + EU
Tradeable Discharge Permits (TDP) Scheme To minimize total cost of compliance
Treaty Enters into force when countries comprising 55% of Annex B emissions ratify
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Problems with Kyoto
Economic rationality?
InitialEmissions
$
Abatement
Marginal Damage Cost
Marginal Abatement Cost
E*
Emissions
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Problems with Kyoto, cont’d.
Financial Transfers and political sustainability
Wilcoxen & McKibben estimate U.S. permit purchases @ $27-$54 billion
Financial Tranfers and economic instability
Dutch Disease
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Problems with Kyoto, cont’d.
Who will monitor compliance?
Governments must bear the domestic economic and political costs of monitoring, while whatever benefit is shared internationally.
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Problems with Kyoto, cont’d.
Which regulatory instrument? It matters…
TDPs vs. “Green Taxes”
InitialEmissions
$
Abatement
Marginal Abatement Cost
# Permits
Emissions
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Problems with Kyoto, cont’d.
Which regulatory instrument? It matters…
TDPs vs. “Green Taxes”
InitialEmissions
$
Abatement
Marginal Abatement Cost
Unit emisions tax rate
Emissions
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TDPs under uncertainty regarding abatement costs (MAC steeper than MDC)
MAC (perceived)
MAC (actual)
DeadweightLoss
EmissionsPermits
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Green taxes under uncertainty regarding abatement costs (MAC steeper than MDC)
MAC (perceived)
MAC (actual)
DeadweightLoss
EmissionsPermits
MDC
Tax rate
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Choice of Instruments Under Uncertainty
When MDC “steeper” than MAC
TDPs dominate tax schemes
When MAC “steeper” than MDC
Taxes dominate TDP schemes
But: “free permits” are politically much more attractive than taxed emissions
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Choice of Instrument: A Hybrid Approach
At the margin, a tax is better
Why not grant permits for the first n units of emissions, and sell permits at a fixed price thereafter?
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Choice of Instruments: A Hybrid Approach
MAC (perceived)
MAC (actual)
Emissions
MDC
Tax rate
Cost of Compliance
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Choice of Instruments: A Hybrid Approach
MAC (perceived)
MAC (actual)
MDC
Tax rate
Permits granted
Cost of compliance
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Hybrid Approach: Advantages
Appropriate instrument, given uncertainties of cost and relative slopes
Avoids financial transfers between countries
Appropriate incentives to monitor Tax revenues for government Firms police each other
Flexible As more scientific information becomes available, countries can
change tax level appropriately
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References
McKibben and Wilcoxen (2002): “The Role of Economics in Climate Change,” Journal of Economic Perspectives, V.16, No.2, Spring.
United Nations Framework Convention on Climate Change Secretariat (2003): “Caring for Climate: A Guide to the Climate Change Convention and the Kyoto Protocol.”
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Discussion…?