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ECON4925 Resource economics, Autumn 2009 Lecture 4: Fossil fuels and climate change Reading list: Non-optimal policies: section 2.5 in http://www.norden.org/sv/publikationer/publikationer/tn2009-550 Sinn. Read sec 1, 2, 3 till footnote 17, and 5 setting 0 . In (18) there should be a parenthesis around i . Hoel 2008 Optimal climate policy: Perman sec 6.9 Hoel and Kverndokk (HK); you may skip section 4. Outline of lecture: Brief introduction about climate change (Sinn sec 1 and 2; Perman sec 6.9) How expectations about the future may affect present emissions (Sinn sec 5 and Hoel) Optimal climate policy with simplest extraction cost function. As above but with more general extraction cost function (Hoel and Kverndokk). Brief introduction about climate change Measurements Emissions (flow): 1 tonne C = 3,67 tonnes CO2 Concentration in atmosphere (stock): 1 Gt (=109 tonnes) C = 0,47 ppm (parts per million) Climate change The stock of greenhouse gases in the atmosphere affects climate (with a lag) Greenhouse gases consist of a) CO2 from fossil fuel use b) Other CO2 (mostly deforestation) c) Other greenhouse gases Shall only consider (a) Emissions of CO2 give an increase of the concentration of CO2 in the atmosphere. This concentration gradually declines as CO2 is absorbed in the ocean and other carbon sinks A very rough description of the carbon cycle: - 25% of carbon emissions remain in the atmosphere “for ever” - 75% of carbon emissions depreciate at a rate of 1-1.5% a year 2 If a total amount of 4(S*-S(0) ) is extracted we thus get a development of carbon in the atmosphere as below, with A representing slow extraction and B representing fast extraction: Notation and assumptions (almost identical to HK): Resource extraction and substitute production x is resource extraction A is accumulated resource extraction: A x c(A) is unit cost of extraction (simplest case c(A) zero up to A , then “infinitely high”) y is production of perfect substitute with unit cost b ( c in HK) S is the stock of carbon in the atmosphere (beyond the pre-industrial level of 280 ppm CO2) Greenhouse gas accumulation Emissions measured so they are equal to resource extraction: S x S (i.e. a simplification) Costs and benefits u(x+y) is utility (in terms of numeraire good) of use of resource and substitute D(S) is a climate damage function.