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10/23/2016
MET 5105
Economics Lecture 10
07 November 2016
Economics Definitions
• Adam Smith’s (1776) Wealth of Nations…
• Market: Arena where firms and individuals exchange goods and services (G&S)
• Supply: The ability to supply G&S as a function of price
• Demand: The desire for G&G as a function of price
• Free Market: Transactions are by mutual consent
Free Market: Transactions are by mutual consent
• Perfect Market: A free market with perfect competition and perfect information
• Controlled Market: Government manages important sectors of the economy
• Mixed Economy: Imperfect and partly controlled. Most 21st Century economies are mixed.
• How does this supply and demand stuff work, anyway?
Free-Market Supply and Demand
What a willing buyer will pay a willing seller
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What Happens if Demand Increases?
Price increases and quantity increases
What Happens if Supply Increases?
Price decreases and quantity increases
How Do Governments Affect Markets?
• Taxes, either on fuels or emissions
– Reduce quantity demanded or promote untaxed alternatives (e.g., Carbon Tax)
• Price caps or supports
– Often lead to shortages or surpluses
• Quotas or permits
– Lead to shortages or high prices
– Can be used to decrease use of an undesirable item • Cap and Trade imposes Quotas with marketable permits for GHG emissions
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Effect of a Tax on Producers
Increases price and decreases both quantity demanded and producer costs
Essence of Carbon Tax which would motivate conservation or switching to low‐emission fuels
Effect of a Price Cap on Producers
Decreases price and quantity produced while increasing quantity demanded, leading to shortages
Effect of a Production Quota on Producers
(Permit)
Increases price and decreases quantity produced, leading to windfall profits
Essence of Cap & Trade GHG emission mitigation strategies, sort of
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How Do Markets Fail?
• Divergent national interests—tariffs, subsidies, …
• Monopolies and cartels
• Overuse of free or public goods
• Asset bubbles. Boom & b bbl
&
collapse
• Incomplete information
• Capitalism works on a timescale of a few weeks to a few years. Climate change is multigenerational
Dorothea Lange: Migrant mother
How to Control Demand for Electricity?
• Rationing by blackouts and brownouts.
– Maintain service to hospitals, emergency services, etc. • Priority
Priority Pricing: Raise prices Pricing: Raise prices
during peak demand
• Can be a way to compensate for intermittency of renewable sources
How to Price Mitigation Costs?
• Ideally one would want spending on mitigation to equal the cost of remaining unmitigated AGW
• Optimization just as a market does
• Except that the people who pay and those who benefit are
pay and those who benefit are not the same
• This situation is an example of an Externality, in which the buyer or seller doesn’t bear the full cost. • Actually low GHG concentrations are Free Goods because there is no way to charge for their use
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More Definitions
• A good is Rivalous if one person’s consuming it denies it to another
– Ice cream cone
• A good is Excludable if it is possible to deny it to customers who don’t pay
– Film in an enclosed theater
Fil i
l d th t
• A Public Good is both non‐
rivalous and non‐excludable
– Outdoor fireworks display
• An individual who uses a good without paying is called a Free Rider
– Family watching publicly funded fireworks in a locale where they don’t pay taxes
The Tragedy of the Commons
SUMMARY
• Free (or mixed) markets allocate capital and distribute many goods and services efficiently
• They fail to deal with Climate Change because of: – National and corporate free riders
– Tragedy of the commons, since low GHG concentrations are public goods
• Projects to limit GHG emissions face challenges
Projects to limit GHG emissions face challenges
–
–
–
–
Established economic interests, often of cartels
Risk, and more importantly, uncertainty
Time value of money Decades to centuries timescale
• Governmental regulations seem to be the only way to overcome these challenges – Cap & Trade and Carbon Tax are two ways to motivate conservation and use of low‐emission fuels
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MET 5105
The Law Lecture 11
12 November 2016
Legal Routes to a Stable Climate (?)
• Tragically, IR transparency of the atmosphere is an economic common
– Or at least a non‐rivalous, non‐excludable public good
– Entities that refuse to regulate GHG emissions are g
free riders who enjoy economic advantages – Consequently one should not expect free markets to offer solutions • A Sovereign State is a political organization with independent political authority over land and the people living on it. How Do Sovereign States Interact?
• War, trade, …
• International agreements
– Treaty: An official written agreement binding states to certain actions (general term)
– Convention: Outlines broad objectives
– Protocol: Specific steps to implement a convention
– Governed by the Vienna Convention on the Law on Treaties of 1969. – US courts often modify interpretation of treaties, contrary to the Vienna Convention
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Examples:
• Law of the Sea Convention Treaty: Governs territorial waters, 250 mi exclusive economic zones, right of “innocent” passage, …
– Drafted 1973‐1982, came into force in 1994 when 60th
state ratified it
• Montreal Protocol on Substances That Deplete the Ozone Layer (1987)
Ozone Layer (1987)
– Restricts manufacture of Chlorofluorocarbons (CFCs, Freon) that deplete the ozone layer
– Ratified in 1989 by 11 states that make the most CFCs
– Big success, despite weak enforcement – Temporarily replaces CFCs with Hydrochloroflourocarbons, – Which are, in turn, currently being phased out Global Climate Change
• 1988: UN established Intergovernmental Panel on Climate Change (IPCC) to asses causes and effects of climate change
– Assessment Reports: 1st (1990), 2nd (1995),3rd (2001), 4th (2007), 5th (2014)
• United Nations Convention on Climate Change (Rio e Janeiro 1992)
Janeiro, 1992)
– Requires action to control GHG emissions
• Divides states into
– Developing: No immediate restrictions on emissions
– Annex I: Limit emission to 1990 levels
– Annex II: 1990 emission levls and provide funds and technologies to Developing States
• Ratified by all states except Andorra, Vatican, Iraq, & Somalia
Kyoto Protocol
• Drafted in 1997. • Came into force in 2005 after ratification by 55 states
– US signed, but has not ratified
• Provisions:
– Programs to mitigate and adapt to climate change
– Annex 1 parties provide detailed GHG emission inventories (current and in baseline 1990)
(current and in baseline 1990)
– Annex 1 parties limit emissions to specified fraction of 1990 values
– Annex 1 parties may trade emission credits
– Annex 1 parties may gain emission credits through green development
– 1st Conference of Parties to set enforcement mechanisms
– Subsequent Conferences review emission targets
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Kyoto Protocol Issues
• No limits on developing nations
• Cap & Trade
– Subject to corruption
– Creates marketable assets from nothing

• 1990 baseline gives advantages to former Soviet‐
advantages to former Soviet
Block states
• Weak enfrocement
• Unlikely to replicate Montreal success because of much
greater costs
• PARIS Climate Change Conference – 30 Nov‐11Dec 2015
– Negotiate binding GHG limits
– Warming < 2C
Kyoto Emissions Trading
Sellers
Buyers
Roles of Regional Governments and
Nongovernmental Organizations
• US has not ratified the Kyoto Protocol, but…
• States and localities have implemented some of its provisions
– California, New England, Western States, to an California, New England, Western States, to an
extent Miami Dade …
• Corporations advertise their planet friendly activities … Greenwashing
• Political, social and market (i.e. boycott) can be important
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• Tragedy of Commons dominates GHG emissions
• Can be limited by international treaties
• Law of the Sea and Montreal Protocol on O3 depletion are examples
• Kyoto Protocol –
–
–
–
SUMMARY
Entered force in 2005
Exempts Developing nations Annex I states commit to reductions relative to 1990
Annex II also provide technology and funds to developing countries
– Allows emission credit trading and creation among Annex I states
• Local governments and NGOs are bringing about some Kyoto compliance • Corporations my voluntarily limit emissions, but there is a lot of Greenwashing, fake or token GHG mitigation
• Paris Agreement, Takes effect 04NOV16, <2C Warming
Public Awareness of Climate Change
• Climate change does not resonate with human thought processes
• Long time scale
Long time scale
• Diffuse impacts
• Concrete costs of mitigation
• Preconceived ideas
• US “Frontier Ethic”
Changes With Time and Geography
Public view of AGW seriousness
Newspaper coverage of climate change worldwide
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Reasons for Optimism
• More widespread knowledge and concern about AGW
– The Day After Tomorrow was a delusional film
• Human population growth abates (a very big deal!)
• Rising levels of education worldwide
• Science and engineering advance
– A non‐emitting source of cheap electricity would make these problems go away
• Although it may not seem so, the world is more peaceful‐‐‐but that could change
Reasons to be Less Optimistic
• Vocal AGW deniers’ intellectual dishonesty
• Confirmation bias on the part of AGW enthusiasts – Exaggerate speed and immediate severity of effects
• False dichotomy of (real) prosperity or AGW mitigation • Possibility of climate tipping points
ibili
f li
i i
i
• Possibility of aggravating geophysical events: Meteor impact, solar coronal mass ejection, low‐
latitude Plinian eruption …
• Possibility of aggravating human events: War, economic collapse, genocide …
In fast-breaking new
developments…
• Paris Agreement – Under UN Framework Convention on Climate Change (UNFCCC)
– Adopted by 195 countries 12 December 2015
– 191 Members have adopted it, and 85 have signed
– Takes effect on 4 November 2016
• Hold AGW to < 2oC above pre‐industrial levels
• Implemented through “ambitious” Nationally Determined Contributions (NDCs).
• “Global Stocktake” every 5 years to assess implementation. – First in 2023
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SUMMARY
• Worldwide people are more aware of AGW issues
• Reasons for optimism
– Awareness
– Contained population growth
Contained population growth
– Education
– Scientific and engineering advance
• Other not‐so‐positive possibilities
– Debate that does not promote rational solutions
– Possibility of nasty geophysical or human surprises
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