Download Harmonized Carbon Taxes What are

Economic Perspectives on Climate Change
William D. Nordhaus
Yale University
Lecture for the Yale Climate Institute
January 15, 2010
Slides are available nordhaus.econ.yale.edu .
1
Outline of lecture
1. Some historical background
2. What are economic integrated assessment models
(IAM)?
3. What are some insights from IAM?
4. What are the issues in implementing international
climate agreements?
2
CO2 concentrations at Mauna Loa
390
380
370
360
350
340
330
320
310
60
65
70
75
80
85
90
95
00
05
3
CO2 emissions US (millions tC/yr)
2,000
1,600
1,200
800
400
1930
1940
1950
1960
1970
1980
1990
2000
2010
4
Trend in CO2 emissions relative to GDP, US
.6
.5
.4
.3
.2
CO2-GDP ratio
Trend (-1.7 percent per year)
.1
1930
1940
1950
1960
1970
1980
1990
2000
2010
5
Instrumental record: global mean temperature index (°C)
Temperature anomaly (1895-1905 = 0)
1.0
0.8
GISS
Hadley
US NCDC
0.6
0.4
0.2
0.0
-0.2
-0.4
1850
1875
1900
1925
1950
1975
2000
6
IPCC AR4 Model Results: History and Projections
7
Projections and the paleoclimatic record
Temperature record and projections
to 2200, Vostok core, Antarctica
Temperature (2000 = 0)
8
4
0
-4
-8
-12
-400,000
-300,000
-200,000
-100,000
0
Years before present
8
The Contribution of Economics:
Integrated Assessment (IA) Models
What are IA models?
These are models that include the full range of cause
and effect in climate change (“end to end” modeling).
Major goals of IA models:
Project trends in consistent manner
Assess costs and benefits of climate policies
Estimate the carbon price and efficient emissions reductions
for different goals
9
Fossil fuel use
generates CO2
emissions
The emissionsclimate-impactspolicy nexus:
The
RICE-2009
model
Carbon cycle:
redistributes around
atmosphere, oceans, etc.
Climate system: change
in radiative warming, precip,
ocean currents, sea level rise,…
Impacts on ecosystems,
agriculture, diseases,
skiing, golfing, …
Measures to control
emissions (limits, taxes,
subsidies, …)
10
Now focus for a moment
on the details of:
Fossil fuel use
generates CO2
emissions
Some detail on how output and emissions are generated
Twelve regions (j = US, China, India, EU, Africa, ...)
j
t
1. Population exogenous : ΔL = L
j
j
G
t-1 t
j
2. Total factor productivity exogenous : ΔA t = A
j
3. Production is Cobb - Douglas in A, L, K : Yt
j
j
Ht
t-1
j j
= A t K t 


α
 j
L 
 t
1-α
4. CO emissions are function of output, intensity, and carbon price (p)
2
j
E
t
=
j j j
σ Y p 
t t t
λ
5. Carbon price is determined by Hotelling rents and carbon - pricing policy
6. National investment rate is endogenous and optimized per the Ramsey model,
over per capita consumption (c), and countries are combined using the "Negishi algorithm."
12  ∞
j
j
j

max
W =    φ t U(c t ,L t )R(t) 
j

c
j=1  t=1
t


7. Current version is solved on Excel - Solver, with approximately 155 lines per country.
The Impacts of Climate Change
The Copenhagen Accord, which recognized “the scientific
view that the increase in global temperature should be
below 2 degrees Celsius.”
Is this firmly based in “scientific” estimates of the impacts
of climate change?
Facts on the ground:
–
Estimating impacts has been the most difficult part of all
climate science: house-to-house combat for analysts.
–
Very scant empirical support for the 2 degree target
13
What will be the impacts by sector?
Impact of
Industy
Adaptation
policies
Climate-change
impacts
Energy-intensive Large near term
Moderate
medium term
Moderate long
term
"Natureintensive"
Small
Moderate
medium term
Large long term
Other
Small
Small
Small
Climate policies
14
Aggregate damage estimates from different studies
Damages as percent of output
6
5
4
3
2
1
0
-1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-2
-3
Global mean temperature increase (°C)
Source: Richard Tol, Jour. Econ. Persp., 2009
15
Policy Scenarios for Analysis
1. Baseline. No emissions controls.
2. Economic cost-benefit “optimum.” Emissions and carbon
prices to maximize discounted economic welfare.
3. Limit to 2 °C. Climatic constraints with global
temperature increase limited to 2 °C above 1900
4. Copenhagen, all countries. Uses US emissions targets
joined by other rich countries, with developing
countries entering after 1 -3 decades.
5. Copenhagen, rich only. Uses US emissions reductions
joined by other rich countries, with developing
countries staying out.
16
Rate of growth of CO2-GDP ratio:
history and Congressional proposals
Growth (percent per year)
0
-1
Congressional
proposals
-2
-3
-4
-5
-6
-7
50
60
70
80
90
00
10
20
30
40
50
Baseline projections: IPCC Scenarios and RICE-2009
RICE-2009
Model with
no policy
measures
18
Temperature profiles: RICE -2009
6.0
Temperature
Global mean temperature (degrees C)
Optimal
Baseline
5.0
Lim T<2
Copen trade
Copen rich
4.0
3.0
2.0
1.0
0.0
2005
2025
2045
2065
2085
2105
2125
2145
2165
2185
2205
Available at
http://www.econ.yale.edu/~nordhaus/homepage/RICEModelDiscussionasofSeptember30.htm
19
What do carbon prices mean in practice?
Carbon tax,
2010
Minimal
“Optimal”
Climate constrained
(ΔT < 2 °C)
Increase, price of energy, US
[$/tC]
Gasoline
All energy
expenditures
$10
35
50
1.0%
3.3%
4.8%
1.5%
5.4%
7.7%
20
Carbon prices for major scenarios
500
450
Global carbon price
Optimal
Carbon price (2005 $ per ton C)
400
Lim T<2
350
Copen All Trade
Copen rich only
300
250
200
150
100
50
0
2005
2025
2045
2065
2085
2105
21
Carbon prices for major scenarios
100
Optimal
Carbon price (2005 $ per ton C)
90
Lim T<2
80
Copen all
70
Actual
equivalent
global carbon
price = $4 /
tC
Copen rich only
60
50
40
30
20
10
0
2005
2015
2025
2035
22
Carbon price (2
40
Carbon prices for major scenarios
30
20
Actual
equivalent
global carbon
price = $4/tC
10
0
2005
201
23
Net benefit through 2050 (billions)
-50
Russia
Japan
EU
Africa
Middle East
India
China
Other
OHI
Latin America
-150
Eurasia
-100
US
Net impacts by region to 2050 of Copenhagen proposal
100
50
0
-200
-250
-300
-350
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Final Question:
How Should Policies Be Implemented
25
Major Policy Approaches for Global Warming
• Internationally harmonized carbon tax – economist’s
ideal.
• Universal cap and trade – close second if well designed,
but Kyoto Protocol is not doing well.
____________________________________________
• Regulatory substitutes (CAFE standards, ban on light
bulbs, …) – very inefficient approaches
• Voluntary measures (carbon offsets) are difficult to
calculate and verify and probably a useless diversion.
26
Harmonized Carbon Taxes
What are “harmonized carbon taxes”?
• Raise prices of GHGs proportional to carbon content
• All countries would levy a comparable tax
• Countries would retain all revenues (this is not an
international transfer program)
Hybrid plans:
• Auction permits
• Floor and cap on auction prices
27
Cap and trade v. Carbon taxes
The problems with cap-and-trade systems for climate
change, particularly in the international arena, are
insufficiently appreciated. Some concerns:
Quantity limits are troublesome in a world of differential
economic growth and uncertain technological change
because of the difficulty of resetting country limits.
28
Quantity-type regimes show extremely volatile prices
12.0
Price (May 1994=1)
8.0
Price oil
Price SO2 allowances
S&P 500
4.0
2.8
2.0
1.6
1.2
0.8
0.4
94 95 96 97 98 99 00 01 02 03 04 05
Source: Nordhaus, Various.
29
Financial volatility under quantityand price-type monetary regimes
20
Federal funds rate
Three-month Treasury bill rate
16
12
Period of price-type
monetary policy
8
4
0
Period of
quantitative
monetary
policy
80
81
82
00
01
02
03
04
05
06
07
08
30
Volatility in EU CO2 trading system:
This volatility is inherent in such a system because of priceinelasticity of supply and demand
Source: Metcalf, Carbon Taxes, Hamilton Project.
31
It is important for governments to capture the revenues
(either through 100% auctions or taxes):
– raise revenues for distributional policies
– reduce the efficiency losses from taxation.
32
Cap and trade systems are not attractive regimes for
countries to join.
Fraction of Global Emissions Covered by KP
With US
Without US
Enthusiasts
100%
80%
60%
40%
20%
0%
1990
2002
33
Corruption
Quantity-type systems with international trading are much
more susceptible to corruption than price-type regimes.
International cap-and-trade plans are a three-sided game.
There are strong incentives for a corrupt domestic
government to collude with corrupt polluting firms to
underestimate domestic emissions and hide from
international monitors.
34
The problem of offsets
Offsets have been part of all plans.
Clean Development Mechanism (CDM) in the Kyoto Protocol
has been major source of “accounting emissions” and has very
questionable additionality.
For example, in EU-ETS, there have been virtually no internal
emissions reductions. The Clean Development Mechanism in
EU has 280 million tons of offsets compared to 130 million
tons of emissions reductions for current phase.
Another set of defective financial instruments like credit default
swaps?
35
The Perils of the Current Regime
• The international cap-and-trade program is a radical and
unproven approach, whereas taxes are well understood
and have been used in every country of the world.
• To bet the world’s climate system and global
environment on this untested approach which such clear
structural flaws would appear a reckless gamble.
36
Final thoughts
“Mankind in spite of itself is
conducting a great geophysical
experiment, unprecedented in
human history.”
Roger Ravelle (1957)
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