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KV Economics of Climate Change
Alexander Jagl, Thomas Schinko, Gerald Senzenberger
Content
Characteristics
2. Ethical aspects
3. Evaluation over time
1.


Discounting
Risk & Uncertainty
4. Public policy
 Mitigation
 Adaptation
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1. Characteristics
Market failure
 Public good
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
Non rival
Non excludable
 Negative externality
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Costs of climate change not borne by emitter
Shifted to general public
No incentives for emitters to reduce GHG‘s
P < SCC
 Biggest market failure in history
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1. Characteristics
Externalities (1)
Source: Pindyck,
Rubinfeld (2001)
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1. Characteristics
Externalities (2)
Differences from common externalities:
 Global in causes and consequences
 Long term impacts
 Uncertainty
 Effects on global economy
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1. Characteristics
Optimal degree of abatement
Source: Stern (2007)
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1. Characteristics
Dynamic approach
Source:
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Stern (2007)
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2. Ethical aspects
Ethics and welfare
 Effects of climate change are:
 Global
 Intertemporal
 Inequitable
 Poor countries suffer the most BUT
 Rich countries are responsible for most GHG‘s
 At home & abroad
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2. Ethical aspects
GHG Emission - 2000
Source: worldmapper.org
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2. Ethical aspects
GHG by region & per capita
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Source: IPCC (2007)
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2. Ethical aspects
Global wealth distribution - 2015
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economics, ethics & climate change
Source: worldmapper.org
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2. Ethical aspects
GHG per unit GDP
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Source: IPCC (2007)
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2. Ethical aspects
Poor Vs Rich
 Rich responsible for most GHG‘S
 Developing countries are more vulnerable
 Strong dependence on agriculture
 Geography (mega deltas, sahel zone,…)
 Fewer resources for adaptation
 Lower health standards
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2. Ethical aspects
Ethical aspects of climate change
 Enhancement of basic social welfare function
 Millennium development goals
 questions of rights
 Sustainability
 Stewardship
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2. Ethical aspects
Social Welfare Function (1)
 Basic welfare economics (BWE)
 Focuses on consumption of goods and services
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
welfare from consumption
„utility – maximizing“
„more is better“ – approach
 only consequences of actions,
no room for ethical dimensions of processes
 Single decision maker – interaction between players
important
 GDP proper indicator for welfare?
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2. Ethical aspects
Social Welfare Function (2)
 enhancement of BWE
 Broader concept of goods and services
 Consumption includes
Consumption as used in BWE
+ Education
+ Health
+ Environment
= Social Welfare Function
 Expressed in terms of real income
 Major differences in willingness to pay across countries
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2. Ethical aspects
Footprint/HDI 2003
USA, Austria, Cuba
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Source: WWF (2003)
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2. Ethical aspects
UN Millenium Development Goals
 Provide basics for ethical questions
 Goal 7: ensure environmental sustainability
 Integrate the principles of sustainable development into
country policies and programs; reverse loss of
environmental resources
 Reduce by half the proportion of people without
sustainable access to safe drinking water
 Achieve significant improvement in lives of at least 100
million slum dwellers, by 2020
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2. Ethical aspects
Questions of rights
 Protection from harm done by others (e.g. property
rights,…)
 Polluter pays
 Moral & legal responsibility of OECD-countries
 How to define emission-rights?
 Equal amount of emission per capita?
Energy efficiency, comparative advantages…
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2. Ethical aspects
Sustainability
 „Future generations should have a right to a standard
of living no lower than the current one“
 Standard of living for future generations depends on a
collection of stocks
 Substitution only to certain degree
 stewardship,
„particular aspects of the world, which should
themselves be past on in a state at least as good as that
inherited from previous generation“
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2. Ethical aspects
Conclusion of questions of ethics
 Different notions of ethics emphasize different
aspects,
but
 Main focus similar:
 Consumption
 Education
 Health
 Environment
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3. Evaluation over time
Discounting (1)
 Why? – To find present value of future consumption
increment
 Marginal comparison approach
 Investment project with small variations around a particular
path
 E.g. new technique in electricity generation
W1…welfare along path with project
W2…welfare along path without project
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Δuh…change in welfare
for household
because of project
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3. Evaluation over time
Discounting (2)
 Climate change
 Not-marginal consequences
 Long-run & global effects
 Many different paths (scenarios)
 → marginal comparison approach can’t be applied!!!
 Evaluation of W for each path
 Discounting marginal changes along different paths but
no marginal comparison between paths!
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3. Evaluation over time
Discounting (3)
ρ…discount rate
μ…elasticity of marginal utility of consumption
ċ/c…growth rate of consumption (along path)
δ…pure time discount rate
 Consumption today valued higher than tomorrow‘s
→ consumption discount rate
 Pure time preference → utility discount rate
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Source: Stern (2007)
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3. Evaluation over time
Discounting (4)
 Conclusions
 Single constant discount rate for different paths is
unacceptable
 High discount rates
→ low value for future generations
→ climate change seen as minor problem
 Stern report
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“growing consumption is a reason for discounting”
→ standard consumption discount rates
“if you care little about future generations you will care little
about climate change”
→ Lower pure time discount rate than most other studies
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3. Evaluation over time
Risk and Uncertainty
 High in case of climate change
 Uncertainty is no alibi for inaction
 Potential losses > costs of avoidance
 Without actions against climate change:
large impacts relative to global economy – not-marginal
impacts
 Risk aversion leads to
„precautionary principle“
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3. Evaluation over time
Different paths
Source: Stern (2007)
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4. Public policy
Public mitigation policy
 Externality requires a price for emissions
 Pigou tax based on marginal damages
 R&D – barriers for innovations
 Property rights (public good character of knowledge)
 Asymmetric information
 Uncertainty about future carbon prices
 Moral hazard
 Grandfathering
 Price dynamics of fossils
 Standards and regulations
 Energy efficiency
 Landlord-tenant relations in property
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4. Public policy
International action
 Climate change is global problem
 Climate & Mitigation is a public good
 Sustain international collective necessary
 Free Riding problem!!!
 Adaptation provides local benefits -> private returns
but prevented by market failures:
 Imperfect information on future impacts &
positive externalities
 Ethics of adaptation: support for developing countries
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4. Public policy
Individual decision
 Intergenerational
 Moral obligation for future generation
 No children, less pollution
 Lower impacts on our generation
 Utility maximizing
 Higher consumption without mitigation & adaptation
 Can less carbon related consumption be more
maximizing?
 Solidarity
 To whom? Children, other countries? Why?
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Thank you for your attention!
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Question 1
 What incentives do the individuals have to support
mitigation, when non mitigation strategies would lead
to a higher income during his/her lifetime and the
effect of climate change w or w/o mitigation during his
lifetime will be non relevant?
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Question 2
 After recognizing the failure of the use of renewable
standard crops e.g. as biofuels, technology efficiency
improvements and demand reduction are the most
promising existing options of mitigation. Demand
reductions mean less industrial work. Do we have to
change the meaning of life from hard work to low
consumption spare time activities, like sports?
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Question 3
 One notion of ethics postulates equal share of CO2
emissions for everyone. Instead of taxing the
governments which would lead to further debt
explosions and demand shocks, shall we tax the
individuals? Each relevant output/product including
transport and distribution should be CO2 taxed.
Governments can make their decisions of climate
regulations without being in the stranglehold of the
finance ministers and large companies. Collected taxes
above the certain average shall be given to the people
who consumed less than they are allowed too.
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Question 4
 Global decisions need global deciders. Nations will
always decide how they can profit the most, like the
USA has acted so far.
How can the United Nations become more powerful?
Shall a public consensus give complete leadership on
global problems to them?
Or is a new global institution necessary, e.g. an
„United peoples organisation“?
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Question 5
 Bread is better than nothing. Nothing is better than a juicy
steak. Therefore bread is better than a juicy steak. We can´t
go on like this on a global way and for sure our lifestyle
cannot be reached by 5 billion other people without severe
negative effects? What are possibilities fur a sustainable
and fair future, while preventing developing countries from
making the same mistakes as the OECD?
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Question 6
 What are the Stern Review‘s main arguments against
excessive discounting in the case of climate change
and how is it‘s aproach different from other studies?
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Question 7
 Some would argue, that the negative effects of climate
change are quite uncertain to happen and therefore
stringent climate policies are unnecessary. How can
this somehow rational sounding argument be
disproved by concentrating on costs, consequences &
risks of action / inaction against climate change?
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Question 8
 What are policy options to tackle the market failure
climate change and what kind of barriers exist for
options like R&D and energy efficiency?
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