8. Lecture 5 - Climate Change Economics

Question 1

What is the major difference between the Nordhaus and Stern analyses of climate change?

Answer 1

The discount rate

Question 2

What is the main advantage of a system of tradable permits relative to a carbon tax?

Answer 2

The level of total emissions is known with certainty.

Question 3

True or false: using a higher discount rate results in a higher value of the social costs of carbon.

Answer 3

False.

Using a higher discount rate results in a lower value of the social costs of carbon.

Question 4

What are “global commons”?

Answer 4

Global common property resources such as the atmosphere and the oceans.

Question 5

What is a cumulative pollutant?

Answer 5

Also called stock pollutant: a pollutant that does not dissipate or degrade significantly over time and can accumulate in the environment, such as carbon dioxide and chlorofluorocarbons.

Question 6

What are avoided costs?

Answer 6

Costs that can be avoided through environmental preservation or improvement.

Question 7

What is a discount rate?

Answer 7

The annual rate at which future benefits or costs are discounted relative to current benefits or costs.

Question 8

What are “backstop energy technologies”?

Answer 8

Technologies such as solar and wind that can replace current energy sources, especially fossil fuels.

Question 9

What is the difference between a CBA and a cost-effectiveness analysis?

Answer 9

A cost-benefit analysis (CBA) analyses monetary costs and benefits, while a cost-effectiveness analysis is a tool to determine the least-cost approach for achieving a given goal.

Question 10

Define “social cost of carbon”.

Answer 10

An estimate of the financial cost of carbon emissions per unit, including both present and future costs.

Question 11

True or false: if price elasticity demanded is -0.25, this means that a 10% increase in the price will result in a decrease in demand of -2.5%.

Answer 11

True.

Question 12

What is “revenue-neutral tax shift”?

Answer 12

Policies that are designed to balance tax increases on certain products or activities with a reduction in other taxes, such as a reduction in income taxes that offsets a carbon-based tax.

Question 13

Name 2 similarities between carbon taxes and cap and trade.

Answer 13

• Both may result in the same level of price increases to final consumers
• Both create an incentive for technological innovation
• Both can raise the same amount of government revenue
• Both can be implemented upstream in production proccesses

Question 14

Name 3 differences between carbon taxes and cap and trade

Answer 14

• A carbon tax will automatically further reduce carbon emissions
• A carbon tax can probably be implemented more quickly because it is well understood
• A carbon tax provides greater price predictability because a cap-and-trade system might cause price volatility
• Cap-and-trade avoid the negative connotations of a “tax”
• Distributing permits for free in the early stages of a cap-and-trade system can make it more politcally acceptable
• In cap-and-trade, the emissions are known with certainty
• In a carbon tax system, achieving a specific emissions target may require numerous adjustments

Question 15

What is “technology transfer”?

Answer 15

The process of sharing technological information or equipment, particularly among countries.

Question 16

What is “climate stabilization wedge”?

Answer 16

A concept in which specific mitigation actions are presented to reduce projected global greenhouse gas emissions by one gigaton each (one gigaton reduction equals one wedge).

Question 17

What is “carbon intensity”?

Answer 17

A measure of carbon emissions per unit of GDP.

Question 18

What is a regressive tax?

Answer 18

A tax in which the rate of taxation, as a percentage of income, decreases with increasing income levels.

Question 19

What is a distributionally neutral tax shift?

Answer 19

A change in the pattern of taxes that leaves the distribution of income unchanged.

Question 20

What is the GDR approach?

Answer 20

Greenhouse Development Rights: an approach for assigning the responsibility for past greenhouse gas emissions and the capability to respond to climate change.

Question 21

Name 2 economic characteristics of climate change.

Answer 21

• It affects a global public good; the atmosphere
• There are global externalities
• Accumulating pollutants
• Uncertain catastrophic consequences

Question 22

What are the three main cost categories associated with climate change?

Answer 22

1. Costs of consequences of climate change on current and future generations
2. Costs of mitigation of climate change
3. Costs of adaptation to climate change

Question 23

True or false: if SCC value is higher than cost mitigation, it makes sense to reduce CO2 emissions.

Answer 23

True.

Question 24

Name 2 arguments to use a high discount rate

Answer 24

1. Society is impatient
2. Returns of emission abatement should be as high as other market investment returns
3. A low discount rate implies unrealistically high optimal current savings

Question 25

Name 2 arguments to use a low discount rate

Answer 25

1. Society is immortal and not impatient
2. Sustainability implies low discounting
3. High market returns reflect risks, short horizons, market imperfections, and pollution
4. Environmental values become scarcer, and grow negatively
5. Future economic growth is uncertain, as is the discount rate
6. Inter-generational equity

Question 26

Which two types of models do IAMs combine?

Answer 26

Integrated Assessment Models combine climate change and socio-economic models.

Question 27

What is meant with egalitarianism?

Answer 27

All people should have the same.

Question 28

What is meant with prioritarianism?

Answer 28

People worse off should gain the most.

Question 29

What is meant with sufficientarianism?

Answer 29

All people should be above a certain threshold.

Question 30

What is meant with limitarianism?

Answer 30

All people are below certain treshold.