Lecture 1

Question 1

The Economics of climate change can be divided into 3 eras. Name them

Answer 1

• Resource depletion era
• Environmental Public Goods Era
• Ecological scarcity Era

Question 2

Explain the Resource depletion era

Answer 2

(1950s-1970s)
Concern: Resource depletion
Focus: Land, Fossil fuels, Forests, minerals
Approach: Substitution, technological change
Key Work: Jevons, Neoclassical economics

Question 3

Explain the Environmental Public Goods Era

Answer 3

(1970s-2000)
Concern: Loss of environmental public goods
Focus: Valuing and pricing externalities
Approach: Public policy for nonmarketed goods
Key Work: Limits to Growth, Ecological economics

Question 4

Explain the Ecological Scarcity Era

Answer 4

(2000-Present)
Concern: Ecological collapse, planetary boundaries
Focus: Ecosystem services, biosphere resilience
Approach: Reducing human impact and scale
Key Work: Crutzen, Degrowth, Doughnut economics

Question 5

What is the “Marginal Revolution”

Answer 5

Transformative shift in economic theory during the late 19th century. Replaced the classical labour theory of the value with the idea that value is subjective and determined by individual’s preferences and marginal utility.

Question 6

Define marginal utility

Answer 6

The additional satisfaction from consuming one more unit of a good

Question 7

What are the Key aspects of marginal utility

Answer 7

Subjective Value: Focus on how individual perceptions, rather than objective production costs, determine value

Mathematics in Economics: Emphasized the use of mathematical methods for analyzing economic behaviour, leading to a more formal and quantitative approach

Question 8

What can be understood from “Relative Scarcity”?

Answer 8

Relative scarcity occurs when resources are limited relative to demand, but substitutes or alternatives may be available.

Question 9

What can be understood from “Absolute scarcity”?

Answer 9

Refers to an irreversible shortage of a resource with no substitutes, such as freshwater or arable land.

Question 10

Environmental Economics vs. Ecological Economics

Answer 10

Environmental Economics (Relative Scarcity):
Focus: Substitution of natural resources
Principle: Weak sustainability
Model: Cowboy Economy

Ecological Economics (Absolute scarcity)
Focus: Limited substitution
Principle: Strong Sustainability
Model: Spaceman economy

Question 11

Define Cowboy economy:

Answer 11

An economy based on limitless resource exploitation. Emphasized growth, consumption, and production without considering ecological limits.

Question 12

Define Spaceman Economy

Answer 12

Represents a sustainable economy where Earth is treated like a closed spaceship with finite resources.

Focuses on conservation, recycling, and maintaining ecological balance for long-term survival.

Question 13

Weak vs. Strong sustainability (definitions according to authors)

Brundtland et al.
Costanza and Daly

Answer 13

Brundtland et al.:
- Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs

Costanza and Daly:
- Weak sustainability: Maintaining the sum of human-made and natural capital

• Strong sustainability: Maintaining natural capital and human capital seperately.D

Question 14

Explain the Malthusian catastrophe:

Answer 14

Refers to a scenario where population growth outpaces the growth of resources.

Question 15

Name 3 key-critiques towards the Malthusian catastrophe:

Answer 15

• Global food production has increased faster than population growth.
• Correlation between GDP per capita and declining fertility rates demonstrate that economic development leads to lower population growth.
• Malthus’ predictions have been repeatedly proven inaccurate in modern contexts.

Question 16

Can Scarcity Drive Innovation and Growth?
- Solow critique of resource limits
- Market adaptation

Answer 16

Solow’s Critique:
- Limits to Growth ignored markets’ ability to adapt.

Key Ideas:
- Rising prices of scarce resources lead to:
1. Substitution with cheaper alternatives.
2. Reduced reliance on scarce resources.
3. Increased efficiency and productivity.

Conclusion:
Markets can adapt to scarcity, enabling sustained growth despite finite resources.

Question 17

There are two types of Feedback Loops. Name them

Answer 17

• Positive Feedback Loops (Reinforcing)
• Negative Feedback Loops (Balancing)

Question 18

Explain the Positive Feedback Loop with the example of the albedo effect.

Answer 18

Process:
- Global warming melts sea ice
- Reduces the albedo effect
- More heat absorption accelerates global warming, creating a reinforcing cycle.

Positive feedback loops amplify environmental problems, leading to worsening conditions.

Question 19

Explain the Negative Feedback Loop with the example of Relative resource scarcity.

Answer 19

Process:
- Relative resource scarcity leads to higher resource prices.
- Higher prices encourage markets to adjust by reducing resource consumption and innovating substitutes or more efficient use.
- These adjustments reduce scarcity, balancing the system.

Negative feedback loops help stabalize systems by mitigating overuse or depletion.

Question 20

What was the wager between Simon and Ehrlich? And how did it turn out?

Answer 20

Business prof. Julain Simon and biology prof. Paul Ehrlich bet on whether the prices for materials would decrease (Simon) or increase (Ehrlich) In a decade time.

Ehrlich lost, as prices for materials decreased over the decade.

After his loss, Ehrlich offered a counter-bet including Higher temperature, less extant species, smaller fish stocks, higher atmospheric concetrations of CO2 and NOx in a decade time.

Simon declined this counter-bet.

Question 21

What is Doughnut Economics?
- Framework for sustainable development
- Social foundation and ecological ceiling

Answer 21

• Doughnut Economics is a framework for achieving sustainable and just development
• Doughnut represents two boundaries.
  1. Social Foundation (Inner ring):
  Minimum standards for human well-being (e.g., food, water, health, education, gender equality).

2. Ecological Ceiling (Outer Ring):
   Limits to environmental degredation (e.g., climate change, biodiversity loss, pollution

Goal: Ensure humanity lives within the “safe and just space” Between the social foundation and the ecological ceiling

Question 22

What are the implications of the doughnut economics?

Answer 22

• Avoid shortfalls (falling below social needs)
• Prevent overshoot (exceeding environmental limits)
• Foster regenerative and distributive economies.

Question 23

Should Economic growth be a policy objective?

Answer 23

Environmental economics and ecological economics hold opposing views on desirability of economic growth as a policy objective.

In the cowboy economy (Environmental Economics), consumption is regarded as a good thing and production likewise; and the success of the economy is measured by the amount of the throughput.

In the spaceman economy (ecological economics), throughput is no means a desideratum, and is indeed to be regarded as something to be minimized. The essential measure of the success of the economy is not production and consumption, but the nature, extend, quality and complexity of the total capital stock, including in this state of the human bodies and minds included in the system.

Question 24

Name 3 keypoints of the cowboy economy.

Answer 24

• Economic growth is seen as desirable and central to policy objectives.
• Success is measured by throughput (e.g., GDP)
• Continued growth can address societal needs to improve well being.

Question 25

Name 3 keypoints to the spaceman economy.

Answer 25

- Economic growth is not a desirable policy objective if it maximized throughput and depleted resources - Instead, the focus is on minimizing throughput and preserving the quality and complexity of natural, social, and human capital. - Success is redefined to include sustainability, equity, and the health of ecosystems, rather than merely maximizing GDP.

Question 26

What's the Environmental Kuznets curve?

Answer 26

The EKC is a hypothesis suggesting that the relationship between environmental degradation and economic growth follows an inverted U-Shape. 3 parts: - As economies grow and industrialize, environmental degradation tends to increase due to greater resource consumption and lack of environmental regulations. - At a certain level of income per capita, public awareness, technological advancements, and stronger environmental policies lead to a reduction in environmental harm. - Beyond the turning point, economic growth is associated with improved environmental quality, as cleaner technologies and sustainable practices are adopted.

Question 27

What are the main criticism points of the EKC hypothesis?

Answer 27

- Not all pollutants are alike - Trade and 'leakage' (about 30% of biodiversity footprints are tied to international trade.) - EKC gathers various influences together under the header of effects of economic growth.

Question 28

What's the IPAT-Identity?

Answer 28

IPAT: Impact = People * Affluence * Technology

Question 29

Does technological advancement reduce environmental impact according to the IPAT identity?

Answer 29

The IPAT identity shows that impact depends on population, affluence, and technology. Technological advancements can reduce impact by improving efficiency. Energy use is defined as E = Activity x Intensity, and savings come from reducing intensity.

Question 30

What's Jevon's paradox?

Answer 30

Phenomenon where improvements in the efficiency of a resource use lead to an overall increase in resource consumption rather than a decrease. This occurs because greater efficiency often reduces the cost of using the resource, which can lead to increased demand.

Question 31

Give an example of Jevon's paradox (using energy efficiency)

Answer 31

A more fuel-efficient car reduces the cost per mile driven, which might encourage people to drive more, potentially increasing total fuel consumption.

Question 32

What are the main factors that cause efficiency improvements to raise consumption of resources?

Answer 32

1. Increased profitability 2. Inventions and new uses 3. Consumer behaviour.

Question 33

Define Absolute decoupling:

Answer 33

Absolute decoupling refers to economic growth without an increase in resource use or emissions

Question 34

Define Relative decoupling

Answer 34

Relative decoupling is when the growth of environmental impacts slows down relative to economic growth, but total impacts still increase.

Question 35

Has absolute decoupling occurred at a global scale already?

Answer 35

Data from Hickel and Kallis suggest that absolute decoupling has not occurred at the global scale. Emissions continue to grow despite advancements in efficiency or technology.

Question 36

What's a sign of Recoupling/ Re-materialization?

Answer 36

Instead of reducing resource intensity, some regions show "recoupling", where resource use or emissions increase along with economic growth.

Question 37

Is Absolute Decoupling happening at a sufficient rate?

Answer 37

Absolute decoupling is too slow currently. Efforts to achieve absolute decoupling are progressing too slowly to meet the Paris Agreement's goals of Limiting global warming to below 2C.

Question 38

Do any scenarios meet the Paris Goals?

Answer 38

- Rebound effects, such as increased energy use following efficiency improvements, undermine progress. - Current models and policies do not align with the required scale of emissions reductions to meet the Paris climate targets.

Question 39

Define Degrowth

Answer 39

Degrowth is a planned reduction in economic activity and resource use to achieve sustainability and well-being within ecological limits.

Question 40

Define Exnovation

Answer 40

Exnovation is the intentional phasing out of harmful or unsustainable technologies and practices.

Question 41

What is the relationship between the carbon budget and fossil fuel reserves in limiting global warming to 1.5-2C?

Answer 41

To meet climate targets: - One third of oil, half of gas, and over 80% of coal reserves must remain unused by 2050 - The carbon budget for a 66% chance of limiting warming to 1.5C is 420 GT CO2 and for a 50% chance of 2C is 1100 GT CO2 - Fossil reserves alone contain 2900 GT CO2 vastly exceeding the safe carbon budget.

Question 42

What are the components of a climate policy mix?

Answer 42

1. Soft paternalism: Information campaigns, nudging 2. Carbon pricing: Pigouvian subsidies or taxation, cap-and-trade emission trading markets 3. Command-and-control: Bans, standards, legal liability

Question 43

Definition of Pigouvian tax

Answer 43

A Pigouvian tax is a tax imposed on activities that generate negative externalities, such as pollution.

Question 44

Definition of Pigouvian subsidy

Answer 44

Subsidy provided to activities that generate positive externalities, such as renewable energy production

Question 45

Define Carbon pricing

Answer 45

Carbon pricing is a policy tool that charges emitters for the carbon dioxide they release, typically through carbon taxes or emissions trading systems, to incentivize reducing greenhouse gas emissions.

Question 46

How does carbon pricing promote innovation?

Answer 46

By creating opportunities to increase profitability or save money through the reduction of Greenhouse Gas emissions, carbon pricing also promotes innovation and incentivizes the generation of new ideas and solutions.

Question 47

Explain Cap-and-trade

Answer 47

Cap-and-trade is a market based system where government sets a limit on total emissions and allocates or sells permits to polluters, allowing them to emit a specific amount. Companies can trade these permits, creating incentives to reduce emissions cost-effectively.

Question 48

What are the key differences between Pigouvian taxes and cap-and-trade systems?

Answer 48

1. Uncertainty: - Pigouvian Tax: Uncertainty in emissions levels. - Cap-and-Trade: Uncertainty in prices 2. Regional policy: - Cap-and-trade complicates stricter policy implementation at the regional level.

Question 49

Define and explain the Social cost of carbon

Answer 49

Social cost of carbon (SCC): The discounted value of worldwide damages from the future global climate change associated with an additional ton of current emissions. SCC takes a weak sustainability perspective by trading-offs abatement benefits (of avoided environmental damages) with abatement cost (of lost consumption.)

Question 50

Define the Discount rate

Answer 50

The rate used to determine the present value of future costs and benefits, reflecting how much we value future outcomes compared to today.

Question 51

Name two reasons for discounting

Answer 51

- Investment-based: If ROI are positive, one needs less than 1$ now to have &$ in the future - Consumption based: If future generations are wealthier, 1$ now gives more utility than 1$ in the future

Question 52

How is discounting calculated?

Answer 52

Numerical example discounting with rate (δ) at 3% - €100 now = €103 in 1 year, €100 in 1 year = €97,08 now - €100 in 10 years = €74,41 now, €100 in 100 years = €5,20 now - €x in t year = € (1+δ)x in t+1 year, €y in t year = € y/(1+δ) in t‐1 year

Question 53

Explain the St. Peterburg paradox

Answer 53

Suppose the following game: - Tails: Game Over - Heads: 1st 2€, 2nd 4€ 3rd 8€, etc. What are you willing to pay for this game? What is the expected value of participating? Expected value of this game is infinite, meaning a rational person should be theoretically be willing to pay any amount to play. However, in practice, most people are unwilling to pay even modest sums like 10$ or 20$, showing a mismatch between theoretical value and real-world behaviour.

Question 54

What are some explenations for the St. Peterburg paradox,

Answer 54

Diminishing marginal utility, loss aversion, subjective probability weighting

Question 55

What is the descriptive approach to discount rates?

Answer 55

Uses a low-risk interest rate that reflects public preferences. Advantages: - Democratic - reflects public preferences. - Consistent with cost-benefit analyses in other domains Disadvantages: - Assigns near-zero weight to impacts in the distant future. - Individual time trade-offs may not align with collective trade-offs - Market imperfections complicate time preference interference. - Future generations are not involved in current financial markets.

Question 56

What is the prescriptive approach to discount rates?

Answer 56

Advocates for (near) zero discount rates to account for future generations Solow: 'We ought to act as if the social rate of time preference were zero' Ramsey: 'Later enjoyments shouldn't be discounted compared to earlier ones, as discounting is ethically indefensible.'

Question 57

What are the challenges with zero discount rates?

Answer 57

- A pure time preference rate (p = 0) creates technical problems for the intertemporal optimality criterion. - Without a positive discount factor (p > 0), the integral over infinite horizons won’t converge for all interest paths.

Question 58

How did Ramsey address the issue with zero discount rates?

Answer 58

Introduced the concept of a 'bliss' level of consumption. Marginal utility falls to zero at this level. Instead of maximizing the integral, minimized the excess of bliss utility over attained utility.

Question 59

What are the challenges to the cost-benefit approach?

Answer 59

- Sensitivity to discounting - Weak sustainability lens and use ad-hoc damage functions - Climate sensitivity, tipping points, and tail risks - Challenges to express ecological loss in monetary equivalents - Models often assume increasing consumption paths, which seem inconsistent with the Paris Agreement

Question 60

What are the four steps to set up target-consistent carbon pricing?

Answer 60

1. Formulate a target 2. Select emission pathways consistent with the target 3. Estimate carbon price corridors consistent with emission pathways in the near term. 4. Update periodically

Question 61

What are the disadvantages of target-consistent carbon pricing?

Answer 61

- Does not account for benefits - Open to poliical manipulation - Domestically inward-looking, which complicates international cooperation.

Question 62

What are the advantages of target-consistent carbon pricing?

Answer 62

- Aligned with policy objectives - Near-term focus - Responsive to context - Price corridors facilitate international cooperation.

Question 63

Define the energy efficiency gap puzzle

Answer 63

The energy efficiency gap puzzle refers to the phenomenon where cost-effective energy efficiency measures are not implemented due to barriers like imperfect information, limited access to capital, and principal agent problems.

Question 64

What are the explanations for the energy efficiency gap puzzle?

Answer 64

- Imperfect information and inertia - Limited access to risky capital - Principal-agent problems

Question 65

What does the energy efficiency gap illustrate about efficient transition?

Answer 65

It illustrates that efficient transition requires policies complementary to carbon pricing.

Question 66

What are the reasons against heavy reliance on the Marginal abatement cost curve?

Answer 66

- Does not account for other externalities - Tends to focus on technical solutions - Cost estimates ignore different scopes for learning

Question 67

How do price corridors facilitate cooperation in carbon pricing?

Answer 67

Uniformly mixing, one carbon price: All countries should contribute to climate mitigation efforts. Emerging countries, especially those with high emitters like China, India or Brazil, should stop hiding behind their poor. One Price fits all? Lower income countries may choose lower carbon prices because: They have less ambitious objectives for emission reductions. They require lower carbon prices to achieve a given level of emissions reductions.

Question 68

Why might "One price fits all" not be feasible for carbon pricing according to Stiglitz and Stern?

Answer 68

- Trade-offs between development and emission reductions justify slower, more moderate emission reductions in low-income countries. - Reducing emissions in low-income countries can have higher economic and welfare costs compared to higher-income countries.

Question 69

Why can similar emission reductions be achieved with lower carbon prices in low income countries?

Answer 69

- Availability of cheaper emission reduction options - Higher price elasticity of emissions in low-income countries - A given carbon price equates to a higher local price in poorer countries de to higher Purchasing Power Parity exchange rates compared to market exchange rates.

Question 70

What are other considerations for carbon pricing

Answer 70

- Multiple equilibria: Can motivate differentiated carbon pricing. - Distributional concerns: Impacts on different income groups - Social norms: A tax might alter behavior