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Chapter 9 The Economics of Climate Change Chapter Summary This chapter provided a comprehensive treatment of climate change from an economic perspective. The discussion in the chapter covers the following: (1) The scientific consensus on the causes and consequences of global warming (GW). It also highlights some of the key elements of the criticisms against this consensus scientific view. (2) The basic theoretical framework that economists use to gain insights into the costs and benefits of actions taken to slow future GW trends. (3) Three competing worldviews about GW and its future economic and ecological impacts. The empirical studies that have been used to support each one of these three views are also presented. (4) The various attempt that the world governments have made through international treaties (mainly sponsored by the United Nations) to limit global emissions of greenhouse gases (GHGs). (5) The challenges and opportunities of using transferrable credit emission as a policy instrument to reduce GHGs emissions. Review and Discussion Questions 1. Part III of the textbook (p. 175) started with the claim that the problems associated with climate change, loss of biodiversity and stratospheric ozone layer depletion represents a ‘new’ scarcity reality. In what important ways are these emerging environmental concerns different from the so-called old environmental problems, such as water pollution arising from agricultural runoff or local and regional air pollution associated with auto emissions? Discuss. Please try to be specific. 2. Carefully delineate the difference between the following pair of concepts: Weather and climate Global warming and climate change 3. Some of the greenhouse gases that are well known for their high thermal warming potential (TWP) are entirely manufactured by humans. Are you surprised to learn this? What does this tell us about technology and humanity, in general? Discuss. 4. The following two features set carbon dioxide (CO2) apart from the other greenhouse gases: (i) it is by far the most abundant, and (ii) it is very long-lived in the atmosphere, lasting as long as a century or more. Thus, to slow future global warming the focus should squarely be on the controlling of the emission of CO2. Do you agree with this conclusion? Why or why not? 5. When it comes to global warming, the best we can hope to do is to slow the future trend of warming. In other words, global warming has become irreversible, that is, we can never stop future global warming. Comment on the validity of this observation. 6. As discussed in Section 2 of Chapter 9, the scientific consensus on the causes of climate change appears to gravitate towards human factors, most notably the increase use of fossil fuels since the beginning of the industrial revolution. Are you satisfied by the available scientific evidence to support this claim? Why or why not? 7. It is one thing to come up with a scientific consensus on the association of increased concentrations of GHGs in the atmosphere and their contribution to recent global warming, but it an entirely different matter to be able to predict with a reasonable degree of certainty the © 2014 Ahmed Hussen 8. 9. 10. 11. 12. 13. 14. future trends of global average temperatures. In other words, projecting future climate change is an extremely difficult task. Why? Explain. Global warming is not just about the increase in the average surface temperature of the earth. It also implies that there will be variations of temperature and weather patterns on a regional basis. In fact, some have used global ‘weirding’ instead of warming to indicate that one outcome of GW is the unpredictable and often intense (hence damaging) regional weather patterns. How would one explain this phenomenon? Speculate. An economist with some level of frustration proclaimed this accusative remark about climatologists, or the science of climate change in general: from a policy perspective, it will not be useful for scientists to tell us that high concentration of CO2 will cause increases in the average global temperature. What will be helpful is to know, with some degree of certainty, the differences in the projected average global temperatures when alternative scenarios of carbon emission policy strategies are under considerations. Is this a justifiable plea for economists who are burdened with the task of assessing the damage costs of global warming to make? Explain. Exhibit 9.1, page 185, in your textbook discusses the main sources for the scientific controversies of climate change. What do you make of those scientists who are highly skeptical about the consensus positions on scientific evidence for the causes and consequences of global warming? Do you see any merit in their skepticism? Explain. A distinguished British economist, Sir Nicholas Stern (2007) proclaimed that climate change confronts economists with “the biggest case of market failure.” What were his justifications for this claim? Be specific. First, carefully read Section 9.3, pp.186–191, that views the concern from the perspective of a resource allocation problem. More specifically, the problem is viewed as involving trade-offs between two social costs: namely, greenhouse abatement and greenhouse damage costs. To view the problem this way amounts to a theoretical ploy of meaningless practical value given the insurmountable difficulties associated with obtaining realistic estimates of these two costs. Would you support this view? Why or why not? Explain. A well know Yale University economist, Nordhaus (1990) considered the effort to quantify damage costs as “terra incognita of the social and economic impacts of climate change.” What does this mean? Do you support Nordaus’s view on this particular issue? Explain. In Section 9.4, pp. 191–198, the economic debates on what to do to slow global warming is presented from three different approaches; namely, the ‘business as usual approach’, the ‘gradualist approach’, and the ‘precautionary approach’. It was observed that the proponents of the business as usual approach completely ignore the damage costs. The only thing considered in this case is the impact of the money diverted to programs designed to slow global warming (i.e. global warming abatement expenditure) on the rate of growth of the economy. On the other hand, the proponents of the precautionary approach tend to put a heavy weight on the damage costs. This is done by a deliberate choice to use a very low discount rate and an increase in the average global temperature that ranges between 3 to 4 degrees centigrade within the next fifty years. The effect of this will be to make the possibility of irreversible environmental damages a point of important focus. Someone suggested that given the above two polar extremes perspectives, the more balanced approach when it comes to dealing with global warming concerns should be to follow the guidance given by the gradualist approach. Do you agree with this suggestion? Make sure to © 2014 Ahmed Hussen explain the basic assumptions under which the model of the gradualists’ approach has been constructed. Are there risks associated with following this approach? What are they? 15. Read carefully Section 9.5 of your textbook (pp. 198–202) before making any effort to respond to this question. Since the signing of the 1992 Framework Convention on Climate Change (FCCC) at the Earth Summit in Rio de Janeiro, many international climate negotiations have come and gone. What exactly these United Nations lead negotiations have actually accomplished is still an open question. Some would argue that the main contribution of the FCCC and the Kyoto Protocol over the past decade has been the persistence with which its governing body, the Conference of the Parties (COP), has been able to engage the world community in dialogues that have been carefully crafted to confront what seems to be the biggest challenges of the twenty-first century. What is really lacking is the will of the world leaders to act. Others have taken the position that the accomplishments of the FCCC since the signing of the Kyoto Protocol in 1997 have been disappointingly dismal. While the urgency of the problem may require bold, immediate and substantive action in the reductions of global GHG emissions, the UN-led climate change conferences, despite their ambitious goals, have yet to yield a breakthrough in the climate change negotiation. Given this reality, it seems rather extraordinarily unfortunate that it took fifteen years to arrive at no substantive and effectively binding agreements in climate negotiations. Take a side, and provide argument for your chosen position. Depending on the position you have taken in this debate, what factors do you think contributed to the slow or even, as some claim, lack of any progress in climate change negotiations? Be specific. 16. Explain how the so-called ‘flexible mechanisms’ to control GHG emissions, such as the transfer Emissions Reduction Units (ERUs)and the Clean Development Mechanism (CDM), are supposed to work. While these mechanisms can be cost-effective, is it realistic to assume that they are workable? Explain. 17. Given the choice between two policy instruments, that is, carbon tax or emissions trading, which one do you thing will be most effective if and when they are used to control the total greenhouse emissions target (caps) at the minimum cost? Choose one and make the case for your support. © 2014 Ahmed Hussen