Download Schelling quote

What I Aim To Teach
A taste of the economic approach to the
environment
Answers to questions about the syllabus
Reminders about economic approach
generally
• Role of models
• Externalities
• Positive vs. Normative
• Efficiency
Economics 155/Earth Systems 112
Environmental Economics and Policy
While you are waiting, ponder this:
How much pollution is too much?
(And we aren’t going to come close to filling these seats, so
please sit closer than you normally would)
“There is a discrepancy between the
approach of economists to environmental
protection and the approach of nearly
everybody else.”
Thomas Schelling
2005 Nobel Laureate in Economics
writing in 1983
“How do we make sure people are given the
right economic signals to do what we need
them to do.”
David H. Festa
Director for the Oceans Program,
Environmental Defense
"We now believe that [tradable permits] are
the most straightforward system of
reducing emissions and creating the
incentives necessary for massive
reductions."
Kert Davies
Research Director
Greenpeace USA
Policy Trend:
Increasing Attention to Incentive-Based Regulation
Command-and-Control Regulation:
•
•
performance standards (e.g., auto tailpipe emissions requirements)
technology mandates (e.g., required catalytic converters in autos)
Incentive-Based Regulation:
•
•
•
taxes on pollution emissions
subsidies (tax-breaks) for reductions in emissions
“Cap & Trade” tradable pollution permit systems (in place in Los
Angeles (among other cities) and internationally under Kyoto
Protocol
Trends in Environment?
Trends in Annual Temperature
1900-2000
Trends in the report of the
Intergovernmental Panel on Climate Change
•IPCC 1990: The observed increase [in temperatures] could be
largely due to natural variability; alternatively this variability and
other man-made factors could have offset a still larger man-made
greenhouse warming.
•IPCC 1995: The balance of evidence suggests a discernible human
influence on global climate.
•IPCC 2001: There is new and stronger evidence that most of the
warming observed over the last 50 years is due to human
activities.
IPCC 2007: Most of the observed increase in globally averaged
temperatures since the mid-20th century is very likely due to the
observed increase in anthropogenic greenhouse gas concentrations
Global Climate Change
Due to Greenhouse Gases
“The biggest market failure in the
history of the world”
~Nicholas Stern
Economist & Author of the Stern Review
Of the Economics of Climate Change
“Earth’s Climate Needs the Help of
Incentives"
“The market created this problem, and the
market is going to have to solve it”
~David Leonhardt
Economix columnist
New York Times
“Earth’s Climate Needs the Help of
Incentives"
“The market created this problem, and the
market is going to have to [be used to]
solve it”
~David Leonhardt
Economix columnist
New York Times
Policy Trend:
Increasing Attention to Incentive-Based Regulation
Command-and-Control Regulation:
•
•
performance standards (e.g., auto tailpipe emissions requirements)
technology mandates (e.g., required catalytic converters in autos)
Incentive-Based Regulation:
•
•
•
taxes on pollution emissions
subsidies (tax-breaks) for reductions in emissions
“Cap & Trade” tradable pollution permit systems (in place in Los
Angeles (among other cities) and internationally under Kyoto
Protocol
Automotive X-prize
Biofuels: Think Outside the Barrel
Vinod Khosla
Khosla Ventures
Aug. 2006
Not so Magic Answer: Ethanol
Cheaper Today in Denver (May ’06)!
Cheaper Today in Brazil!
Law of
Unintended Consequences
“Exploding U.S. Grain Demand for
Automotive Fuel Threatens World”
~Subject of recent email from Earth Policy
Institute
Syllabus: Course Goals
• understand sources of
environmental problems
• evaluate policies to ameliorate or
eliminate these problems
Syllabus: Themes
Balancing goals of cleaner environment
with other social goals
– What are the trade-offs? What is the
right balance?
– When is there no trade-off (win-win)?
Externalities as source of poor balance
– and key to solutions
Where I come from
Where I come from
Economics 155/Earth Systems 112
(Neoclassical)
Environmental Economics and Policy
Environmental Economics
vs. Ecological Economics
Ecological: more focus on the constraints
from natural systems
In Defense of Economic Models
In Defense of Economic Models
This is not San Francisco
In Defense of Economic Models
This is not the water cycle
In Defense of Economic Models
MB,
MC
SMC
PMC
MB
Q
This is not a market for a good with a
negative production externality
The Wǿrd
• Slides with blue background have
comments on what I’m doing on the board
Negative Production Externality
Q: Thinking back to Econ 1, how might we
decrease consumption of this good?
A: A tax!
Q: Would a tax make us better off?
A: Yes, by the amount of the what was
previously the deadweight loss triangle
Note: the tax corrects the market failure
Positive vs. Normative
Positive: what is or will be
• e.g. “Applying a tax will increase P and
decrease Q”
Normative: what ought to be
• e.g. “We should apply a tax in order to
decrease Q because it will make us better
off”
Synonyms For Being Better Off
•
•
•
•
Increase net benefits
Increase size of “economic pie”
Become more (allocatively) efficient
Increase efficiency
= achieve a (potential) Pareto
improvement
Pareto vs. Potential Pareto
Pareto improvement: make at least one person
better off without making anyone worse off
Pareto efficient: situation where can’t make any Pareto
improvements
Potential Pareto improvement: people made better
off could fully compensate those made worse off
(and still be better off)
Efficient: situation where can’t make any potential
Pareto improvements
Note: Our textbook, like many others, treats as equivalent
The Pie Metaphor
Efficiency
• When net benefits are maximized, you’ve
achieved the efficient outcome, or just
plain efficiency
• Maximize net benefits: MB=MC
– Book (p.26): First equimarginal principle aka
Efficiency equimarginal principle
• Static efficiency: single time period
• Dynamic efficiency: across time periods
Dynamic efficiency
So, a change that helps current generation
but harms future generation
could be dynamically efficient
if current generation could fully compensate future
generation (and still be better off)
Q: How could current compensate future?
A: By investing some of current benefits and
earning a compounded return
This is the justification for discounting
Discounting:
Determining present value
Compound interest will determine future
value
Discounting is compounding in reverse
If a project’s net present value of benefits
and costs is positive, then the project will
improve efficiency
Our Future (as a class)
Next time: Valuing the Environment
• Ch. 3
• Additional Readings