Download Slide 1

Economics 331
1
Finale on climate change policy
Today:
Endgame
Alternative perspectives
• Environmentalist perspective
• Conservative perspective
• Reprise on learning
• Tipping points and policy
2
Endgame for course
1. Final exam (absence by Dean’s excuse only)
ECON 331. Assigned to exam group 33
Friday, May 6, 2011. 9:00 am – 11:00 am
2. Structure: probably three parts: will probably have choice.
40 minutes for “prepared questions” (to be posted); 40 minutes problems;
40 minutes more problems
3. I will post last year’s exams (but no answers)
4. Review sessions: WN 1 next week; WN 1 week after; office hours by
Lint
5. Grades will be approximately based 20 percent on the problems, 30
percent on the paper, 20 percent on the midterm, and 30 percent on
the final, all with adjustments.
6. Paper due noon April 27 (hard copy outside my office; electronic
copies to WN and LB)
7. Hard deadlines for seniors. No postponements for last-minute
procrastinations.
3
The spectrum of economic views on climate change
Strong --------- Stern ------------------A----B----C----------DICE------D-----------Lomberg--- Weak
policies
$100 /tCO2
$10 - $20/tCO2
$1/tCO2
policies
Stern: Stern Review, also summarized in his Ely lecture, American
Economic Review.
Lomberg has organized the Copenhagen consensus of (largely)
conservative thinkers to rank major issues.
A, B, C, D are other models
4
The Copenhagen Consensus: Priorities for Action
“In ordering the
proposals, the panel was
guided predominantly
by consideration of
economic
costs and benefits.”
http://www.copenhage
nconsensus.com
Economics 487b, Spring 2007
5
Environmentalist critique
Stern/Krugman critique* of the DICE model approach:
1. Uses too high a discount rate
2. Ignores the uncertainty and the “fat tail” of lowprobability catastrophic outcomes
3. Uses a temperature sensitivity coefficient of 3 °C per
CO2 doubling instead of more realistic 6 °C
Next slide shows the sensitivity of the emissions control
rate if we introduce these sequentially. Which are most
important?
*Stern Review : http://webarchive.nationalarchives.gov.uk/+/http://www.hmtreasury.gov.uk/sternreview_index.htm
Krugman, “Building a Green Economy,” NYT Magazine, 2010,
http://www.nytimes.com/2010/04/11/magazine/11Economy-t.html
6
Emissions Controls for Environmentalist Assumptions
1.0
Emissions control rate
0.9
0.8
Optimal: base assumptions
0.7
6 deg C
0.6
6 deg C and double damages
0.5
Base and low discounting
0.4
6 °C and low discounting
0.3
6 deg C, double damages, and
low discounting
0.2
0.1
0.0
2005
2025
2045
2065
2085
2105
7
Reprise on learning
8
Original example
The state of the environmental world
Good outcome (low
damage, many green
technologies)
Climate
policy
Poor outcome
(catastrophic damage,
no green technologies)
Strong policies (high
carbon tax, cooperation,
R&D)
-1%
-1%
Weak policies (no carbon
tax, strife, corruption)
0%
-50%
90%
10%
Probability
Learn then act:
E(U) = 0.9 x 0% + 0.1 x -1% = -0.1%
Expectation of strong = 0.1
Act then learn:
Strong: E(U) = 0.9 x -1% + 0.1 x -1% = -1%
Best policy: Expectation of strong = 1
Weak: E(U) = 0.9 x 0% + 0.1 x -50% = -5%
Therefore, learning leads to weaker policies. Precautionary motive holds.
9
Revised example with lower damage in bad state.
The state of the environmental world
Good outcome (low
damage, many green
technologies)
Climate
policy
Poor outcome
(catastrophic damage, no
green technologies)
Strong policies (high
carbon tax, cooperation,
R&D)
-1%
-1%
Weak policies (no carbon
tax, strife, corruption)
0%
-5%
90%
10%
Probability
Learn then act:
E(U) = 0.9 x 0% + 0.1 x -1% = -0.1%
Expectation of strong = 0.1
Act then learn:
Strong: E(U) = 0.9 x -1% + 0.1 x -1% = -1.0%
Weak: E(U) = 0.9 x 0% + 0.1 x -5% = -0.5%
Best policy: Expectation of strong = 0
Therefore, learning leads to stronger policies. Precautionary motive DOES NOT hold.
10
Conclusion
Example shows how expected strength of policy can either
go up or down with learning.
No general theorem about whether learning increases or
decreases your abatement (or investments more
generally)
11
How can we treat tipping points
and threshold effects?
12
OOPS!!!!!!!
k
13
k*
k**
k***
Note: Have new and
different locally stable
equilibrium
14
k*
k**
k
k***
Non-linearities in the climate system
Most of the impacts literature examines gradual climate
change, with roughly linear systems and impacts.
Scientists have been particularly concerned about
discontinuities, abrupt climate change, tipping points,
catastrophic impacts.
How can we deal with thresholds in our economic
analysis? A very tough problem on the frontier.
Examples from climate system
16
Source: Lenton et al., “Tipping Elements,” PNAS, Feb 2008, 1786.
Optimum Without Thresholds
Total
Damage
Total
Abatement
Cost
0
Temperature*
Temperature
17
17
Optimum With Thresholds
Total
Damage
Total
Abatement
Cost
0
Temperature*
Temperature
18
18
Optimum Without Thresholds
Marginal
Abatement
Cost
0
Marginal Damage
Temperature*
Temperature
19
19
Optimum With Thresholds ???!!!???
Marginal
Abatement
Cost
0
Marginal Damage
Temperature*
Temperature
20
20
Net income
0
Which is the real maximum?
Temperature
21
21
Have multiple equilibrium for system and policy
• DICE type model.
• Catastrophic damage at 3 °C = 50 % of output
• Have abatement choice about whether to pass the
threshold as function of costs and benefits.
• Abatement cost varies from 1% to 100% of output.
• Next slide shows whether optimally pass the threshold
as function of abatement cost.
• Note that SOLVER can’t reliably get the right answer
near the cross-over because it is local optimizer!
22
Solutions for temperature
14
Maximum temperature (deg C)
12
Max T from upper end
Cross catastrophic
threshold
Max T from lower end
10
8
6
4
2
Avoid catastrophic
threshold
0
0
0.2
0.4
0.6
0.8
1
1.2
Mitigation
cost intercept
Note: 1. Have algorithm problems
because
multiple local maxima.
2. Sharp discontinuity in solution around threshold.
23
Solutions for PV net income
12000
Avoid catastrophic
threshold
Present value net output
10000
8000
6000
Cross catastrophic
threshold
4000
PV from upper end
PV from lower end
2000
0
0
0.2
0.4
0.6
0.8
1
Mitigation cost intercept
24
Note: Solution is continuous for PV income (although bad)
1.2
Solutions for first-period control rate
0.900
Emissions control rate first period
0.800
Avoid catastrophic
threshold
0.700
0.600
0.500
Note: had
slightly wrong
graph in class.
0.400
0.300
Cross catastrophic
threshold
0.200
0.100
0
0.2
0.4
0.6
0.8
1
1.2
Mitigation cost intercept
Note: Paradox that control rate goes UP around switch point. Why? First you
speed
up, then when you know you are going to miss your plane, slow down.
25
Where do we go from here?
It is in YOUR hands…
26