Climate change Flashcards
(13 cards)
What are the implications of climate change
Direct correlation to economic growth
1) economic activity = greenhouse gases = climate change
2)climate change = ecological change = economic consequences
The efforts to combat climate change include the direction of tech change, and consumption of goods and services/production .
What is the circular flow of global warming?
Economic growth leads to CO2 emission -> rising CO2 emissions lead to climate change ->ecological/economic consequences (lower farm yields, flooding) -> climate change policies reduce emissions.
Climate change impacts on the economy?
Lower crop yields
coastal flooding
Extreme weather events
ocean acidification
economic costs(productivity, capital depreication)
Why does climate change cause market failure?
Private costs differ from social costs of CO2 emissions = market FAILURE
Climate change is publicly bad
1) non rival(everyone losses)
2)non-excludable(cant opt out)
3)free rider(countries wait for others to act)
4)negative externalities
No government intervention means markets overproduce emissions and underinvest in clean alternatives. Tipping point may even be possible, where irreversible damage necessitates precautionary policy.
what are the policy design considerations?
People gain utility from consumption, but are subjected to resource constraints, i.e
“they max discounted sum of future utility”-(less value on future)
However, without reducing CO2 emissions, future consumption is negatively affected. This begs the ethical question
“How much should we value future generations welfare when consumers don’t drive utility from others welfare?”
Policy must decide how to balance welfare between regions
What is the social cost of carbon
Present value of future damages from an extra ton of CO2
Optimal policy should increase the private marginal cost of carbon emissions by the estimated social cost(severity of actions needed varies with social cost)
The takeaway is that accurately pricing CO2 through a carbon tax helps to correct the market failure
What are the policy implementations?
reduce emissions via:
1. carbon tax
2.tradeable pollution permits
3.regulation
4.innovation policy/subsides
How does the Carbon tax work?
CT discourages carbon-intensive production/assumption by
1)increasing cost of emissions, higher price of intensive good =lower demand
2) Altering relative prices will shift demand to relative substitutes.
3)affects production/consumption decisions, CT should equal social cost
4) An increasing CT is the most effective way to coordinate economic activity
what are the downfalls of a carbon tax?
Politically feasible CT may not be sufficient. Carbon taxes should be supplemented with other policies like:
- Clean energy standards
- Low or no-carbon transportation projects
- Government subsidies for market adoption
(Acemoglu,2016)
1. CT = reduce current emissions/direct change towards cleaner tech
2. Even with optimal tax, major role for research subsidies, not worth distorting initial production by implementing to many taxes
3. research subsidies redirect tech change
what is path dependency in innovation?
innovation policies are important given the role of path dependency in innovation.
Tech choices build upon past decisions, once a technology becomes dominant (fossil fuels), it is hard to transition away.
2 externalities, climate and path dependency, Requires 2 instruments, CT/innovation subsidies.
What is the role of innovation subsidies
overcoming path dependency and driving change requires governments to use:
1)innovation subsidies
2)industrial policy
to redirect innovation trajectories towards socially desirable outcomes. For example feed-in tarrfis in Germany and learning b doing.
Innovation subsidies help overcome path dependency and drive technological change by encouraging investment in clean technologies. Governments use subsidies and industrial policy to redirect innovation toward socially desirable outcomes, such as green energy. For example, Germany’s feed-in tariffs and learning-by-doing policies helped reduce the cost of solar power. Without early subsidies or carbon taxes, companies would struggle to reach cost-efficient production. As subsidies reduce costs, clean technologies become profitable and market-competitive. The key point is that early support accelerates technological maturity, enabling clean tech to succeed independently over time
what is the political economy
PE is a set of diverse stakeholders with varying incentives which creates challenges.
Free rider problem and pareto optimal allocation requires compensation for losers.
Nortrus climate club–> countries commit to minimum CT/impose tariffs on non-members, ensuring cooperation and avoid free-rider
what is the CBAM
EU carbon boarder adjustment mechanism.
Worlds first Carbon boarder tax, requires firms in bloc to pay tariffs on some carbon intensive imports, aims to level playing field by preventing shifting of dirty production(preventing carbon leakage)
While it does increase trading costs, the lure of retaining access to largest trading bloc could support adoption of carbon pricing.
