Econ energy market

Rannnn

SlidesEnergyExternalitiesClimate-RevisedandUpdated.ppt

Home >Business & Finance homework help >Economics homework help >Econ energy market

Energy, Externalities & Climate

Emissions & Externalities

Much of energy produced and used in U.S. and around the world is from fossil fuels
Burning fossil fuels yield air-borne emissions
SO2
NOx
CH4
VOC
PM2.5
Mercury (from coal)
CO2

Emissions & Externalities

Much of energy produced and used in U.S. and around the world is from fossil fuels
Burning fossil fuels yield air-borne emissions
SO2
NOx
CH4
VOC
PM2.5
Mercury (from coal)
CO2
So??
Damage to natural environment, crops
Damage to buildings, infrastructure
Most important of all – ill health and even death
CO2 – greenhouse gas that can affect climate

Emissions

OK, sure there is some bad stuff coming from fossil fuels, but they yield a tremendous amount of valuable, low-cost energy
The economic problem is negative externalities.
If the people who produce and/or consume fossil fuels actually (somehow) bear the costs and adverse consequences of emissions, then you could say the benefits of this energy outweigh the costs.
But if NOT then this production/consumption imposes negative externalities on others. As a result, too many fossil fuels are produced and consumed.

Energy and the Environment

Before Climate Change (BCC) Era
Major environmental challenges
Acid rain – SO2 and NOx emissions from burning coal
Urban smog and air pollution – mainly from NOx , PM, and VOC from cars/trucks
Policies in BCC Era
Clean Air Act Amendments of 1990
Established EPA Acid Rain Program – Innovative Cap & Trade Program
Restricted auto emissions via technology standards (e.g., catalytic converters), tighter CAFÉ standards, and blended fuel requirements

Energy and Climate Change

Production and consumption of fossil fuels results in greenhouse gas (GhG) emissions – mainly CO2 and CH4 (methane)
The greenhouse effect from GhG emissions results in climate change – a multi-faceted impact
How has CO2 in atmosphere been changing?

Energy and Climate Change

Production and consumption of fossil fuels results in greenhouse gas (GhG) emissions – mainly CO2 and CH4 (methane)
The greenhouse effect from GhG emissions results in climate change – a multi-faceted impact
How has CO2 in atmosphere been changing?
And what are the impacts of this?

Economic Analysis of Environmental Impacts

Before we go too far into climate issues, let’s look at how we can analyze environmental policy related to energy issues.
And look at lessons from prior environmental policy efforts

Model of emissions regulation

Two sides of emissions
Damages – Changes in emissions result in marginal cost of emissions
For CO2, we refer to MC of emissions as Social Cost of Carbon (SCC)
“Benefits” – Emissions are a side-effect of productive economic activity (like burning natural gas to generate electricity)
Marginal benefit (MB) of emissions is extra benefit as emissions increase.
Mirror image of MB is marginal abatement cost of reducing emissions.

Managing Emissions Externalities

abatement

marginal abatement cost

Social Optimum

abatement

marginal abatement cost

social optimum

emissions

Policy Options

Do Nothing
So called business as usual
Emissions Tax
Where do tax revenues go?
Emissions Cap
Technology Standard(s)
Cap and Trade Program
Issue emissions permits equal to capped emissions level
Auction off permits or give away (grandfather)

Managing Emissions Externalities

abatement

marginal abatement cost

Managing Emissions Externalities

abatement

marginal abatement cost

Managing Emissions Externalities

abatement

marginal abatement cost

CAP

Cap & Trade

abatement

marginal abatement cost

CAP

Measuring Economic Damages from Emissions

A wide variety of damages
Contaminated air and water, damage to crops, illness/death
Two main approaches for measuring damages
Contingent Valuation
Ask people about WTP for better environmental quality, reduced health/mortality risks
Based on survey or questionnaire responses
Market-based Valuation
Indirect method to reveal WTP for enviro quality, reduced health/mortality risks
Based on market price or wage changes as enviro quality, health/mortality risks vary

Illustration – Mortality Risk

Suppose you knew for sure that reducing air emissions by some amount would save one life; you don’t know which person’s life, just that one life is saved.
How much is this worth in dollars? How much should society and policy-makers value this life?

Illustration – Mortality Risk

Suppose you knew for sure that reducing air emissions by some amount would save one life; you don’t know which person’s life, just that one life is saved.
How much is this worth in dollars? How much should society and policy-makers value this life?
Gov. Andrew Cuomo: “My mother’s not expendable. You cannot put a value on human life. You do the right thing. That’s what Pop taught us.”
But let’s suppose you needed to come up with a $ value for saving a life – how would you do it? What would you come up with?

Illustration – Mortality Risk

Suppose you knew for sure that reducing air emissions by some amount would save one life; you don’t know which person’s life, just that one life is saved.
How much is this worth in dollars? How much should society and policy-makers value this life?
Gov. Andrew Cuomo: “My mother’s not expendable. You cannot put a value on human life. You do the right thing. That’s what Pop taught us.”
But let’s suppose you needed to come up with a $ value for saving a life – how would you do it? What would you come up with?

Putting an economic value on life

Contingent Valuation Approach
Gather survey responses about (hypothetical) WTP to avoid various mortality risks [reduced auto crash risk, workplace death risk, etc.]

From EPA website …

In the scientific literature, these estimates of willingness to pay for small reductions in mortality risks are often referred to as the "value of a statistical life.” This is because these values are typically reported in units that match the aggregate dollar amount that a large group of people would be willing to pay for a reduction in their individual risks of dying in a year, such that we would expect one fewer death among the group during that year on average.

From EPA website …

This is best explained by way of an example. Suppose each person in a sample of 100,000 people were asked how much he or she would be willing to pay for a reduction in their individual risk of dying of 1 in 100,000, or 0.001%, over the next year. Since this reduction in risk would mean that we would expect one fewer death among the sample of 100,000 people over the next year on average, this is sometimes described as "one statistical life saved.”

Now suppose that the average response to this hypothetical question was $100. Then the total dollar amount that the group would be willing to pay to save one statistical life in a year would be $100 per person × 100,000 people, or $10 million. This is what is meant by the "value of a statistical life.” Importantly, this is not an estimate of how much money any single individual or group would be willing to pay to prevent the certain death of any particular person.

Putting an economic value on life

Market-based Valuation Approach
Compensating wage differences – how do wages differ across occupations as mortality risk varies?
You can find this via regression analysis of market wage data
Can derive VSL – value of a statistical life – based on the mortality risk coefficient in a wage regression.

Earnings Regression Approach

Run a regression of annual income (I) on explanatory variables including occupation (OCCP) and mortality rate for jobs in occupation (MORT), where MORT indicates number of deaths per 100,000 workers per year.

I = a + b*EDUC + c*OCCP + d*MORT + … + error

How do you interpret d coefficient?

Earnings Regression Approach

I = a + b*EDUC + c*OCCP + d*MORT + … + error

d = △I/ △MORT = Change in annual income for having one more death/100,000 per year.

VSL = d*100,000

Unique Environmental Challenges Posed by Climate Change

Healthy climate is global public good
Multiple large uncertainties
Inequality and welfare analysis
Long-term persistent impacts
Role of discount rate for NPV analysis

Climate, the Economy, and Climate Policy

Many areas of the natural and social sciences involve complex systems that link multiple areas and disciplines. This is particularly true for the science, economics, and policy of climate change, which involve a wide variety of fields from atmospheric chemistry to game theory.
Integrated assessment analyses and models play a key role in putting the pieces together. Integrated assessment models (IAMs) integrate knowledge from two or more domains into a single framework. These are sometimes theoretical but are increasingly computerized, empirical, dynamic, non-linear models of varying levels of complexity.

Climate, the Economy, and Climate Policy

Many areas of the natural and social sciences involve complex systems that link multiple areas and disciplines. This is particularly true for the science, economics, and policy of climate change, which involve a wide variety of fields from atmospheric chemistry to game theory.
Integrated assessment analyses and models play a key role in putting the pieces together. Integrated assessment models (IAMs) integrate knowledge from two or more domains into a single framework. These are sometimes theoretical but are increasingly computerized, empirical, dynamic, non-linear models of varying levels of complexity.

STERN REVIEW: The Economics of Climate Change

Figure 1 Greenhouse-gas emissions in 2000, by source

Power (24%)

Transport (14%)

Buildings (8%)

Industry (14%)

Other energy related (5%)

Waste (3%)

Agriculture (14%)

Land use (18%)

NON-ENERGY EMISSIONS

ENERGY EMISSIONS

Energy emissions are mostly CO2 (some non-CO2 in industry and other energy related). Non-energy emissions are CO2 (land use) and non-CO2 (agriculture and waste).

Total emissions in 2000: 42 GtCO2e.

Source: Prepared by Stern Review, from data drawn from World Resources Institute Climate Analysis Indicators Tool (CAIT) on-line database version 3.0. Under a BAU scenario, the stock of greenhouse gases could more than treble by the end of the century, giving at least a 50% risk of exceeding 5°C global average temperature change during the following decades. This would take humans into unknown territory. An illustration of the scale of such an increase is that we are now only around 5°C warmer than in the last ice age. Such changes would transform the physical geography of the world. A radical change in the physical geography of the world must have powerful implications for the human geography - where people live, and how they live their lives. Figure 2 summarises the scientific evidence of the links between concentrations of greenhouse gases in the atmosphere, the probability of different levels of global average temperature change, and the physical impacts expected for each level. The risks of serious, irreversible impacts of climate change increase strongly as concentrations of greenhouse gases in the atmosphere rise.

STERN REVIEW: The Economics of Climate Change

Figure 1 Greenhouse-gas emissions in 2000, by source

Power

(24%)

Transport

(14%)

Buildings

(8%)

Industry (14%)

Other energy

related (5%)

Waste (3%)

Agriculture

(14%)

Land use

(18%)

NON-ENERGY

EMISSIONS

ENERGY

EMISSIONS

Energy emissions are mostly CO

(some non-CO

in industry and other energy related).

Non-energy emissions are CO

(land use) and non-CO

(agriculture and waste).

Total emissions in 2000: 42 GtCO2e.

Source: Prepared by Stern Review, from data drawn from World Resources Institute Climate

Analysis Indicators Tool (CAIT) on-line database version 3.0.

Under a BAU scenario, the stock of greenhouse gases could more than treble by the

end of the century, giving at least a 50% risk of exceeding 5°C global average

temperature change during the following decades. This would take humans into

unknown territory. An illustration of the scale of such an increase is that we are now

only around 5°C warmer than in the last ice age.

Such changes would transform the physical geography of the world. A radical

change in the physical geography of the world must have powerful implications for

the human geography - where people live, and how they live their lives.

Figure 2 summarises the scientific evidence of the links between concentrations of

greenhouse gases in the atmosphere, the probability of different levels of global

average temperature change, and the physical impacts expected for each level. The

risks of serious, irreversible impacts of climate change increase strongly as

concentrations of greenhouse gases in the atmosphere rise.

STERN REVIEW: The Economics of Climate Change

Figure 2 Stabilisation levels and probability ranges for temperature increases The figure below illustrates the types of impacts that could be experienced as the world comes into equilibrium with more greenhouse gases. The top panel shows the range of temperatures projected at stabilisation levels between 400ppm and 750ppm CO2e at equilibrium. The solid horizontal lines indicate the 5 - 95% range based on climate sensitivity estimates from the IPCC 20012 and a recent Hadley Centre ensemble study3. The vertical line indicates the mean of the 50th percentile point. The dashed lines show the 5 - 95% range based on eleven recent studies4. The bottom panel illustrates the range of impacts expected at different levels of warming. The relationship between global average temperature changes and regional climate changes is very uncertain, especially with regard to changes in precipitation (see Box 4.2). This figure shows potential changes based on current scientific literature.

1°C 2°C 5°C4°C3°C

Risk of weakening of natural carbon absorption and possible increasing natural methane releases and weakening of the Atlantic THC

400 ppm CO2e

450 ppm CO2e

550 ppm CO2e

650ppm CO2e

750ppm CO2e

5% 95%

Sea level rise threatens major world cities, including London, Shanghai, New York, Tokyo and Hong Kong

Falling crop yields in many developing regions FoodFood

WaterWater

EcosystemsEcosystems

Risk of rapid Risk of rapid climate climate change and change and major major irreversible irreversible impactsimpacts

Eventual Temperature change (relative to pre-industrial)

0°C

Rising crop yields in high-latitude developed countries if strong carbon fertilisation

Yields in many developed regions decline even if strong carbon fertilisation

Large fraction of ecosystems unable to maintain current form

Increasing risk of abrupt, large-scale shifts in the climate system (e.g. collapse of the Atlantic THC and the West Antarctic Ice Sheet)

Significant changes in water availability (one study projects more than a billion people suffer water shortages in the 2080s, many in Africa, while a similar number gain waterSmall mountain glaciers

disappear worldwide – potential threat to water supplies in several areas Greater than 30% decrease

in runoff in Mediterranean and Southern Africa

Coral reef ecosystems extensively and eventually irreversibly damaged

Possible onset of collapse of part or all of Amazonian rainforest

Onset of irreversible melting of the Greenland ice sheet

Extreme Extreme Weather Weather EventsEvents

Rising intensity of storms, forest fires, droughts, flooding and heat waves

Small increases in hurricane intensity lead to a doubling of damage costs in the US

Many species face extinction (20 – 50% in one study)

Severe impacts in marginal

Sahel region

Rising number of people at risk from hunger (25 – 60% increase in the 2080s in one study with weak carbon fertilisation), with half of the increase in Africa and West Asia.

Entire regions experience major declines in crop yields (e.g. up to one third in Africa)

2 Wigley, T.M.L. and S.C.B. Raper (2001): 'Interpretation of high projections for global-mean warming', Science 293: 451-454 based on Intergovernmental Panel on Climate Change (2001): 'Climate change 2001: the scientific basis. Contribution of Working Group I to the Third Assessment Report of the Intergovernmental Panel on Climate Change' [Houghton JT, Ding Y, Griggs DJ, et al. (eds.)], Cambridge: Cambridge University Press. 3 Murphy, J.M., D.M.H. Sexton D.N. Barnett et al. (2004): 'Quantification of modelling uncertainties in a large ensemble of climate change simulations', Nature 430: 768 - 772 4 Meinshausen, M. (2006): 'What does a 2°C target mean for greenhouse gas concentrations? A brief analysis based on multi-gas emission pathways and several climate sensitivity uncertainty estimates', Avoiding dangerous climate change, in H.J. Schellnhuber et al. (eds.), Cambridge: Cambridge University Press, pp.265 - 280.

STERN REVIEW: The Economics of Climate Change

Figure 2 Stabilisation levels and probability ranges for temperature increases

The figure below illustrates the types of impacts that could be experienced as the world comes into

equilibrium with more greenhouse gases. The top panel shows the range of temperatures projected at

stabilisation levels between 400ppm and 750ppm CO

e at equilibrium. The solid horizontal lines indicate

the 5 - 95% range based on climate sensitivity estimates from the IPCC 2001

and a recent Hadley

Centre ensemble study

. The vertical line indicates the mean of the 50

percentile point. The dashed

lines show the 5 - 95% range based on eleven recent studies

. The bottom panel illustrates the range of

impacts expected at different levels of warming. The relationship between global average temperature

changes and regional climate changes is very uncertain, especially with regard to changes in

precipitation (see Box 4.2). This figure shows potential changes based on current scientific literature.

1°C2°C 5°C4°C3°C

Risk of weakening of natural carbon absorption and possible increasing

natural methane releases and weakening of the Atlantic THC

400 ppm CO

450 ppm CO

550 ppm CO

650ppm CO

750ppm CO

5% 95%

Sea level rise threatens

major world cities, including

London, Shanghai, New

York, Tokyo and Hong Kong

Falling crop yields in many developing regions

Food

Water

Ecosystems

Risk of rapid

climate

change and

major

irreversible

impacts

Eventual Temperature change (relative to pre-industrial)

0°C

Rising crop yields in high-latitude developed

countries if strong carbon fertilisation

Yields in many developed regions

decline even if strong carbon fertilisation

Large fraction of ecosystems unable to maintain current form

Increasing risk of abrupt, large-scale shifts in the

climate system (e.g. collapse of the Atlantic THC

and the West Antarctic Ice Sheet)

Significant changes in water availability (one

study projects more than a billion people suffer

water shortages in the 2080s, many in Africa,

while a similar number gain water

Small mountain glaciers

disappear worldwide –

potential threat to water

supplies in several areas

Greater than 30% decrease

in runoff in Mediterranean

and Southern Africa

Coral reef ecosystems

extensively and

eventually irreversibly

damaged

Possible onset of collapse

of part or all of Amazonian

rainforest

Onset of irreversible melting

of the Greenland ice sheet

Extreme

Weather

Events

Rising intensity of storms, forest fires, droughts, flooding andheat waves

Small increases in hurricane

intensity lead to a doubling of

damage costs in the US

Many species face extinction

(20 –50% in one study)

Severe impacts

in marginal

Sahel region

Rising number of people at risk from hunger (25

–60% increase in the 2080s in one study with

weak carbon fertilisation), with half of the

increase in Africa and West Asia.

Entire regions experience

major declines in crop yields

(e.g. up to one third in Africa)

Wigley, T.M.L. and S.C.B. Raper (2001): 'Interpretation of high projections for global-mean warming', Science 293:

451-454 based on Intergovernmental Panel on Climate Change (2001): 'Climate change 2001: the scientific basis.

Contribution of Working Group I to the Third Assessment Report of the Intergovernmental Panel on Climate Change'

[Houghton JT, Ding Y, Griggs DJ, et al. (eds.)], Cambridge: Cambridge University Press.

Murphy, J.M., D.M.H. Sexton D.N. Barnett et al. (2004): 'Quantification of modelling uncertainties in a large

ensemble of climate change simulations', Nature 430: 768 - 772

Meinshausen, M. (2006): 'What does a 2°C target mean for greenhouse gas concentrations? A brief analysis based

on multi-gas emission pathways and several climate sensitivity uncertainty estimates', Avoiding dangerous climate

change, in H.J. Schellnhuber et al. (eds.), Cambridge: Cambridge University Press, pp.265 - 280.