Session 1 Flashcards
What is the Greehouse Effect?
- Due to the difference in frequencies in ingoing and outgoing radiation, more outgoing radiation is absorbed and re-emitted by greenhouse gases
- natural phenomenon, but man-made CO2 emissions have increased drastically & amplify effect
What are consequences of climate change?
- rising sea levels
- extreme weather conditions
- acidification of seawater due to higher absorption of CO2
- crop failures
What is the social cost of carbon (SCC)?
- puts price tag on climate change (gathers all discounted costs of emissions)
- V is sum of all future discounted damages
- records change in net present value of all future damages from releasing extra tonne of carbon today
- damages D are approximated by temperature change and capital stock
What is difficult about SCC estimates?
- do not include certain damages (ocean acidification), large scale earth system feedback effects (arctic ice loss, melting permafrost, forest dieback, changing ocean circulation) not included all in one model, significant damage categories hard to monetize (eg species and wildlife loss)
- discount rate crucial
- > existing SCC estimates remain conservative and highly uncertain
What is the policy & ecomic view on SCC?
policy: SCC should be larger than marginal abatement costs
economic: trade off between benefits and costs
What are standard assumptions under which markets perform optimally?
- Markets exist for all goods and services produced and consumend
- All markets are perfectly competitive
- All transactors have perfect information
- Private property rights are fully assigned in all resources and commodities
- No externalities exist
- All goods and services are private goods, there are no public goods
- All utility and production functions are well behaved
- All agents are maximizers
What are implications of the standard assumptions in which markets perform optimally for climate change?
- Market: a marketplace has to exist (no or little transaction costs)
- Property rights: clearly, there is no/limited meaning to trade without property rights
- Externalities exist in most markets, emissions exist
- Air quality is clearly a public good
- > Can markets alone decrease CO2 emissions?
What characterizes public goods?
They are non-rivalrous (one agent’s consumption is not at the expense of others consumption) & non-excludable (agents cannot be prevented from consuming, matter of law/conventions)
Why is climate a public good?
non-excludable
in general no rivalry (but e.g. air in highly polluted cities -> open access resource)
What is problematic about individual pro climate investments?
- benefit everyone, benefit for individual often smaller then costs
- > unless everyone buys together, no incentive for individuals to buy
What are externalities?
external effects from consumption or production on unrelated party
in case of negative externalities: marginal benefits of one party are marginal costs of other party
Can in general an optimal allocation with externalities be implemented?
No, because party affected by externality has no influence on creation of externality.
What is the Coase Theorem and how does it solve the problem with markets and externalities?
If property rights are assigned, optimal allocation can be implemented independently of who gets the property rights.
Person A consumes a cigarette every morning on his balcony
Person B (neighbour) consumes coffee and fresh air every morning on her adjacent balcony
Utility functions of both depend on their wealth M and the days per week A is smoking S
-> What happens if A or B are assigned property rights (according to Coase Theorem)?
- B gets the property right: reduction of (M0 − M ∗ ) and A pays B an amount equal to the area of triangle b
- A gets the property right: reduction of (M0 − M ∗ ) and B pays A an amount equal to the area of triangle d
- > allocation optimal but wealth changes depend on who gets property right
Does the Coase Theorem only work with consumption-consumption externalities?
No, same solution as for consumption-consumption also applies for production-production: assigning property rights wil yield optimal allocation
How does a two player/countries game with two strategies look like?
- each player chooses strategy
- players are identical
- each combination yields a certain outcome
- first letter X’s outcome, second Y’s
How does the prisoner’s dilemma game apply to climate change cooperation?
- pollute is dominant strategy for each player
- treaty stating that both abate is instable
- > non-signatories and signatories of climate agreements are both better of if all cooperate
How does the chicken game apply to climate change cooperation?
- reputation or sequential moves can overcome coordination on one of the possible two equilibria
- negative payoffs for joint pollution change game compared to prisoner’s dilemma
- > non signatories do better than signatories of climate agreements
How does the assurance game apply to climate change cooperation?
- both countries can contribute to assurance financing uncertain climate damages
- assurance only makes sense if both contribute
- two symmetric equilibrium outcomes: both contribute or do not. (threshold effect: benefits exists only when total provision reaches certain level, imagine more players)
- > contribution beneficial only for many signatories
