09 - Climate Economics

Question 1

Excludability | What are….

1. Exclusive Goods?
2. Non-Exclusive Goods?

Answer 1

1. private goods (e.g. cow owned by farmer, spoon of ice cream)
2. or even worse: non excludable goods; are called “common pool goods/ resources” (e.g. buffalos, fish in sea)

Question 2

Markets tend to fail when goods are….. since….

Answer 2

• not exclusive
• consumption of the good is not prohibited/ priced

Question 3

What is a negative externality?

Answer 3

• everyone consuming sth of a common pool good harms everyone else by taking away consumption possibilities (e.g. a buffalo shot by you cannot be shot by your friend anymore)

Question 4

What are tragedy of the commons? Resulting from the negative externality thing

Answer 4

• everyone is aware of this and tries to consume as much and early as possible (i.e. shot the buffalo before your neighbor does)

Question 5

Free rider problem?

Answer 5

everyone has only weak incentives to produce/ save a common pool good bc this will be consumption for everyone else (i.e. when you grow buffalos they can be shot by your neighbor and that does not pay off)

Question 6

How can we create incentives to reduce CO2 emissions? (politically)

1.
2.
3.

Answer 6

• Quantity restrictions (e.g. company X is only allowed to emit 5 tons of CO2 this year)
• pollution taxation (for each ton of CO2 company X emits it needs to pay 20 EUR)
• emission trading scheme (for each ton CO2 company X emits this year it needs to have bought a certificate allowing this)

Question 7

Advantages of a tax compared to a quantity restriction?

Plus:
1.
2.

Disadv:
1.
2.

Answer 7

Advantages of Tax:
- emissions avoided where cheapest to do so (efficient)
- incentive to reduce emissions further

Disadvantages over Quantity restriction:
- need to know demand curve
- risk of ending up with wrong quantity

Question 8

A Tax can be set such that….

Answer 8

…. optimum level of emissions is realized (as with quantity restriction)

Question 9

What are advantages of an emission trading scheme with CO2 certificates compared to a Tax

Plus:
1.
2.
3.

Disadv:
1.

Answer 9

Advantages:
- dont need to know the demand curve
- no risk of reaching optimum
- maximum level of efficiency since now certificates as exclusive good are tradable across emitting companies

Disadvantages:
- dont know the price for a ton ex ante

Question 10

Why do climate economics need to be solved at a global level?

1.
2.
3.

Answer 10

• its a global issue
• unilateral climate actions can lead to competitive disadvantages for the own industry
• perverse incentive may arise if doing it alone

Question 11

Unilateral Climate Policies can create perverse incentives |
Whats the free rider issue?

Furhter, suppose that as a result from national policies, Germany burns less oil. This will put pressure on….

Answer 11

• free riders issue: when one country invests in the common pool good “healthy planet earth”, other countries have an incentives to do less/ free-ride
• the world market prices for oil to drop; which creates incentives for other countries to burn even more oil than before

Question 12

Many economists suggest an emission trading scheme covering as many countries and sectors as possible since this….

1.
2.
3.

Answer 12

• reliably guarantees fixed maximum emission levels
• maximizes efficiency, i.e. minimizes costs for society
• allows markets themselves to identify the best technologies/ solutions for reaching the goals set