Download Environmental and Resource Economics, lecture 1

ERE11: International
Environmental Problems
• International externalities
– Optimisation analysis
– Game-theory analysis
• Acid rain
• Depletion of the ozone layer
• Climate change
Last week
• Instruments of Environmental Policy
• Criteria, incl. cost-effectiveness
• Instruments
– Institutional
– Command and control
– Market based
• A comparison
International Externalities
• International externalities are the
unintended and uncompensated by-product
of one country‘s consumption or production
on another country‘s welfare
• Natural and environmental resources do
not respect administrative borders, so
exploitation of shared (water) and mobile
(fish) resources as well as persistent
emissions (water, air) lead to international
externalities; so do resources such as
biodiversity
Pollution flows over national
boundaries
No spillover
Unidirectional
spillover
Country X
Country Y
UX=UX (MX)
UY=UY (MY)
Country X
UX=UX (MX)
Reciprocal
spillovers
Country Y
UY=UY (MX, MY)
Country X
Country Y
UX=UX (MX, MY)
UY=UY (MX, MY)
Non-Cooperative Solution
• For all countries, optimal emissions are such that
the marginal benefits of emitting equal the
marginal costs to the country itself
• Objective function
maxUi  Ui (Mi )
• Necessary conditions
dUi
0
dMi
• So, even in the cases with spillover effects, this
will be ignored and does not influence the choice
of emission level
Cooperative Solution
• For all countries, optimal emissions are such that
the marginal benefits of emitting equal sum of the
marginal costs to all countries
• In our example:
maxU  UX  UY
• Unidirectional solution
UX  UX (MX ); UY  UY (MX , MY )
dUX dUY
U


0
MX dMX dMX
• Reciprocal solution
dUX dUY
U


0
MX dMX dMX
dUY
U

0
MY dMY
UX  UX (MX , MY ); UY  UY (MX , MY )
dUX dUY
U


0
MY dMY dMY
Unidirectional externality
MU XX
MU XY
•
UY  UY (MX , MY )
MU XX
Non-cooperative
Cooperative
dUX
0
dMX
dUX
dU
 Y
dMX
dMX
MU XY
*
M X*
Mˆ X
MX
Emissions
Insights
• A non-cooperative solution ignores
externalities, and is therefore not optimal
• A cooperative solution is in the best
interest of all together, although not
necessarily in the interest of each
individual
• Under some conditions, a cooperative
solution generates enough surplus to
compensate the losers of cooperation – but
it is the losers of pollution that pay
Game Theory
• To analyse choices where
– the outcome of a decision by one player
depends on the decisions of the other players
– decisions of others are not known in advance
• The pay-off to doing pollution control or
not depends on one‘s own choice and that
of others
• Tool to explain characteristics of effective
international environmental agreements
Prisoner‘s Dilemma
Pay-offs (net benefits):
x
Pollute (x)
Abate (x)
Pollute (y)
0,0
5,-2
Abate (y)
-2,5
3,3
y
• Emission reduction costs 7 units for the one abating
• Emission reduction creates a benefit of 5 units for each
Achieving Cooperation
• How to achieve at least partial
cooperation?
• Self-enforcing agreements
– No signatory can gain by unilaterally
withdrawing from the agreement
– No non-signatory can gain by unilaterally
acceding to the agreement
• The role of commitment
• Side-payments and other benefits of
cooperation
– E.g. trade linkages
Trade and the environment
• Prospects for international environmental
cooperation might be increased by trade linkages
• International trade brings welfare to all countries
• However, if countries do not internalise their
environmental externalities, trade may hurt
welfare
• Indeed, lax environmental regulation can be a
competitive advantage
• This is frequently quoted as a reason to restrict
international trade, but improved environmental
policy would be a better
Stability of Cooperative
Solutions
• Bargaining solutions are more difficult to
achieve when
–
–
–
–
A high number of parties is affected
Bargaining power is unevenly divided
Gains and losses from cooperation differ widely
Property rights are non-existent/not well
defined
– Bargaining is about public goods
– Costs of bargaining are relatively large
– Uncertainty about costs and benefits is larger
Acid Rain
• Acidification became apparent in Europe in the
1960s and led to research on causes, consequences
and remedies
• Sources are sulphur dioxide and nitrous oxide
– SO2: Fossil-fuel combustion, in power plants and vehicles
– NOX: From transport and via ammonia from agriculture
• Once in the atmosphere pollutants travel long
distances (1000m) before being deposited after a
couple of days
• Acid rain can be dry and wet
– dry deposition: direct uptake by vegetation
– wet deposition: acidic substances in rain drops
Consequences
• Increased acidity of lakes
– aluminium poisoning, salt and oxygen
starvation
• Increased acidity of soils and air
– Forest damage, through roots and leaves
• Human health, through acidic air and
water
• Damages to some stone, metal, glass
• Loss of visibility
Acid Rain Policy in Europe
• In Europe, acid deposition is falling
• What are the factors influencing the abatement
effort
• Emission problems are relatively concentrated
– Vehicles also contributed to urban air pollution
– Power plants typically operated by semi-governments
• There was strong public demand, and a not
excessively expensive technical fix
• Coal, the dirtiest fuel, was becoming less and less
competitive
• Eastern European industry collapsed
• The EU acted as an international political
institution
Ozone Depletion
• Ozone is formed by ultraviolet light, destructed
by oxides of chlorine, nitrogen and hydrogen
• Ozone concentrations are highly variable
• Anthropogenic emissions of CFCs have increased
the decay rate of ozone, leading to the ozone hole
– CFCs are extremely stable and travel around for years
– They climb higher and higher until the sun is strong
enough to break down the molecules
• CFCs originate from equipment
– aerosol propellants, cushioning foams, cleaning materials,
and refrigerative material
1978-1987
Consequences
and Countermeasures
• The increase of UV radiation leads to
– Skin cancer (40 million cases, 1 million deaths)
– Affects immune systems; causes blindness
– Genetic damages
– Damage to marine plankton
• CFC’s are industrial products that can be
replaced by other substances that fulfill
the same role
– HFC’s are slightly worse and slightly more
expensive
Ozone Policy
• Vienna, 1985: Threat recognised;
agreement on information sharing
• Montreal, 1988: 24 mainly OECD countries
agree to phase out production and
consumption of CFCs
• London, 1990: 59 nations agree to
accelerate and extend the Montreal
Protocol
• Jan 2001: Consumption and production of
CFCs is forbidden in the OECD and in most
developing countries
• Main instrument: Substitution
Ozone Policy (2)
• Why this success? After all, the ozone
hole is a stronger externality than acid
rain, and a global deal was reached
• Strong public demand
• Availability of a cheap, technological fix
• Developing countries bribed with money,
technology, WTO access
• Illegal trade and waste remains a problem
Climate Change
• Fossil fuel combustion and cement
production emit carbon dioxide
• Coal mining, agriculture and organic waste
lead to methane emissions
• Agriculture, fossil fuel combustion and
nylon production lead to nitrous oxide
emissions
• A range of other activities lead to
emissions of other greenhouse gases
• These emissions change the radiative
balance of the atmosphere, and thus
climate
The Greenhouse Effect
Solar
radiation
passes
through
the clear
atmosphere
Most
radiation is
absorbed by
the earth‘s
surface and
warms it
Some solar
radiation is
reflected by
the earth and
the
atmosphere
Some of the infrared radiation
passes through the atmosphere, and
some is absorbed and re-emitted in
all directions by greenhouse gas
molecules. The effect of this is to
warm the earth‘s surface and the
lower atmosphere
Infrared radiation
is emitted from the
earth‘s surface
Anthropogenic emission of greenhouse gases broken down by sector for the year 2000 (EDGAR 3.2)
Climate Change (2)
• Climate change affects everything that
depends on climate
–
–
–
–
–
–
–
–
–
Sea level
Unmanaged ecosystems
Agriculture
Water resources
Energy consumption and production
Human health
Infrastructure
Tourism
And so on
Climate Change (3)
• Some of the impacts are negative, others
are positive
• In general, poorer, hotter countries are
more vulnerable than richer, cooler
countries
• A few degrees of warming would mean
positive, monetary impacts but negative
impacts for the majority of people
• More than a few degrees of warming would
imply net negative impacts
Climate Change (4)
• Greenhouse gas emission reduction is
complicated, as we are dealing with a wide
range of activities of almost everybody
• However, energy and transport are the
prime emitters
• Accelerating energy-saving and a gradual
shift to carbon-free energy sources (solar,
wind, hydro, nuclear, biomass) would be
fairly cheap
• More ambitious, rapid emission reduction
could be very costly
Climate Change Policy
• To date, climate policy is mostly talking
• The Rio 1992 convention set-up a
framework treaty
• Kyoto 1997 filled in a lot of details but left
many crucial elements undefined
• At the moment, the international
negotiations are stuck, and national policies
are waiting for the world
• What‘s the difference with ozone hole and
acid rain?
Climate v Ozone, Acid
•
•
•
•
More countries
More sectors
No cheap technological fix in sight
Significant number of people remains
unconvinced
• Issue is more complex, and scientific
uncertainty and illiteracy are greater
• So far, international climate policy has
confirmed economic theory ...