The cost of reducing greenhouse gas emissions

Question 1

Briefly define carbon tax. Why is taxing carbon emissions appealing to the economists?

Answer 1

A carbon tax is a Pigouvian tax on carbon emissions, where the tax rate equals the marginal benefit of reducing emissions, effectively internalizing the carbon externality and incentivizing cost-effective emission reductions. Economists find carbon taxes appealing because they allow the market to find the most cost-effective ways to reduce emissions up to the amount of the tax

Question 2

Define static abatement costs and give examples of static abatement costs. Be sure to provide cost estimates of your examples.

Answer 2

Static abatement costs refer to the expenditures and emission reductions over the life of a specific project compared to a business-as-usual benchmark, ignoring spillovers.

Examples include subsidies to wind generation, with estimated carbon abatement costs ranging from $2 to more than $260 per ton

Another example is the California Solar Initiative, with costs estimated between $130 and $196 per ton of CO2 reduced

Question 3

According to the authors, is there a ‘free lunch’ in reducing carbon emissions? Briefly explain.

Answer 3

The authors are skeptical of “free lunch” static estimates, but they note that some technologies offer remarkably low-cost emission reductions

For instance, blending corn ethanol into gasoline up to a 10 percent ratio provides essentially costless emissions reductions in the United States because ethanol is a less-expensive octane booster than alternatives derived from petroleum

Question 4

Define dynamic abatement costs and provide examples of dynamic abatement costs. Be sure to provide cost estimates of your examples.

Answer 4

Dynamic abatement costs are costs that extend beyond the life of a specific project, recognizing that actions taken today can influence future costs

Examples of dynamic abatement costs are not explicitly provided with cost estimates in the text, but the falling price of solar photovoltaic panels from 2010-2015, driven by demand-side incentives, illustrates the concept

Question 5

Give examples of actions taken today that have high static costs but low dynamic costs.

Answer 5

Actions taken today that may have high static costs but potentially low dynamic costs include policies that encourage the adoption of electric vehicles and solar panels
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Although initially expensive, these policies can stimulate learning-by-doing and technological improvements, leading to cost reductions in the long run