Assignment: The Economics of Global Warming

Econ 2216 (2013) Assignment 3 Emissions Reduction Trajectories & Technical Change

Ruth Forsdyke Due: Wednesday March 20th Question 1: Dire Predictions a) Look at the graph on pg. 99. What is the range of sea level rise predicted for the year 2100? Noting that there is evidence of past sea level rises of 4 – 5 meters for a couple of centuries during transition from the last ice age to the current interglacial period, Hansen considers these numbers to be conservative. Indeed, even higher numbers are possible as the current climate shock is unusual because GHGs are usually lag not lead variables. Discuss some recent observations (pg. 98) that are not modeled in the “state of the art” models. b) Based on page 102, why might investment in water storage systems be a good way to adapt to climate change? c) What is the estimated effect of an increase in Earth’s average surface temperature of 40C relative to preindustrial on i) coral reefs, ii) species extinctions, iii) global coastal wetlands and iv) global food production of 30C on tropical rainforests? (pg. 109) How confident are scientists regarding species extinction rates? (pg. 119). d) If both the Greenland and West Antarctic Ice Sheet melted, sea levels would rise by more than 10 meters. If the sea level rises by 10 meters, how many people would have to move globally? In Bangladesh (world population = 7 billion, Bangladesh population = 150 million). What would happen to New York and Boston? e) In addition to damaging impacts due to sea level rise, coastal areas will experience impacts due to more intense storms. List some impacts due to more intense storms. What are estimates of global warming damages in coastal areas due to a 1 meter sea level rise, a 10 meter sea level rise? Note that as sea level rise depends on GHG concentration, which in turn depends on emissions, estimates such as these can be made for various levels of emissions giving us the MD from sea level rise equations. We then add the MD from all damage categories to get the aggregate MD equation. f) Conserving wetlands will help to slow global warming since they are excellent carbon sinks. List some other reasons why humans need wetlands (pg. 113). g) As global warming occurs, ecosystems are expected to slowly migrate polewards. Will this necessarily prevent their destruction? How might humans help the ecosystems migrate and hence adapt or partially adapt (meaning they will be less biodiverse) to climate change? (pg. 113) h) Explain how global warming may have already have contributed to the extinction of the golden toad and harlequin frog? (pg. 118). i) What is happening to some rivers in the Amazon and how might this affect hydro electricity generation rates? (pg. 123) j) Climate change unchecked is predicted to cause the creation of hundreds of millions of environmental refugees. How many environmental refugees are there estimated to be already? (pg.

128). In what locations are these environmental refugees being created? Why can this lead to wars? k) Crop and livestock yields are predicted to increase globally for moderate warming (1 – 30C) with winners and losers. Identify some winning and losing countries. What is the global prediction for food crop yields for warming greater than 30C? (pg. 131) l) By how much has forest fire area extent increased in the US over the past 2 decades? (pg. 135) m) How fast is the Arctic warming relative to the world as a whole? Question 2: Actual Electricity GHG footprint Calculation for a Consumer In this question, we will calculate an electricity footprint. If you have an electricity bill, you are encouraged to use your own bill so that you can calculate your own carbon footprint. Date kWh/day Jan-Feb 29.6 March – April 33.05 May – June 18.1 July to August 9.05 Sept – Oct 8.45 Nov - Dec 11.15 a) Calculate: i) average electricity usage/day ii) yearly total b) Assume, the person lives in Nova Scotia and gets their electricity from Nova Scotia Power, the GHG intensity of electricity production is 0.850 kg/kWh1, find this person’s electricity GHG emissions/yr (Ei2009) . c) Calculate the total GHG electricity externality for this person per year under the following three 2009 marginal damage estimates. i) $50/ tonne, $100/tonne, $200/tonne, $400/tonne. d) How much tax would this person pay under the 4 possible carbon taxes? e) Do you think this tax will have big effect on behaviour? You will need to consider different income classes. f) If the person is perfectly compensated for the income loss due to income tax reductions and lump sum rebates of equal size made to all households, will the person still have increased incentives to decrease their electricity bill. g) Now assume the person lives in Quebec. Here the GHG intensity of electricity is much lower at 0.002 kg/kWh. How much carbon tax would the Quebecer pay at a carbon price of $200/tonne. h) Quebec has a much lower GHG intensity of electricity due to having rich hydro reserves while Ontario’s GHG intensity is .1000 kg/kWh due to getting a large share of electricity from nuclear power while also having hydro and growing wind power. Based on page 123, why can hydro electricity be a risky strategy given global warming?

1 For GHG Intensity Data for Canada, please visit: http://www.ec.gc.ca/ges-ghg/default.asp?lang=En&n=EAF0E96A-1#footnote3

Question 3: Incentives to adopt renewable energies in Nova Scotia’s Electricity Sector. The short run MAC refers to the short run in which technology is held constant. Suppose that Nova Scotia Power’s short term MAC for 2010 was as follows: MACNSP(ENSP) = 875 – 90ENSP.2 {y-axis units are $/ tonne CO2e and x=axis units are megatonnes (Mt)/y} a) In 2010, the Government of Nova Scotia imposed emissions standards on NSP as part of its policy package to fight climate change.3 The emissions standards are increased in stages towards an emissions cap of 7.5 Mt/y by 2020 (the Copenhagen target deadline). Plot the MAC and the emissions standard on a graph 1. b) Label and calculate NSPs:

i) total abatement costs (TAC) ii) total private costs of compliance (TCCPrivate) (all costs due to complying to

policy). c) Now suppose that NSP adopts renewable energy (for simplicity, we will ignore the independent renewable energy providers under the FIT program). This shifts NSP’s MAC inwards to: MACNSP = 720 – 90ENSP On graph 2, replot your old MAC and the new MAC. For the new MAC label and calculate NSPs:

i) total abatement costs (TAC) ii) total private costs of compliance (TCCPrivate) (all costs due to complying to policy).

d) How much TCCPrivate will NSP save per year by adopting the renewable energy? e) Suppose that other than reducing electricity output (moving along short run MAC), the only way to abate emissions is to purchase wind turbines to replace 3000 GWh of fossil fuel generated electricity/y. A back of the envelope estimate provides an estimate that it will cost $359 million/yr to install the wind turbines (I have divided the total cost of $7.1 billion by the 20 year life of the turbines to get an average number to use for the yearly comparison and have ignored discounting4). Just focusing on the one year, will it be profitable for NSP to purchase the wind turbines in order to shift its MAC? Explain and show work. f) Now instead suppose that NSP is regulated by a carbon tax. What carbon tax would provide incentives to abate to 7.5 Mt/y by 2020 under the old MAC? g) Redraw the two MACs and draw the carbon tax on graph 3. Calculate the total tax, TAC and TCCPrivate with and without the MAC shift. How much TCCPrivate will NSP save by adopting the wind turbines? (be sure to notice that once the MAC shifts, NSP’s abatement incentives will change).

2 This MAC is a very rough back of the envelope version. In 2010, NSP’s GHG emissions were 9.6 megatonnes/yr. NSP is to reduce emissions under a staged emissions standard (cap that is not tradeable) to 7.5 Mt/yr by 2020 (the Copenhagen target year). I used Mark Jaccard’s MAC estimate for Canada as a whole to assign a carbon price of $200/tonne to meet the Copenhagen target and this is apparently near to that estimated by a consulting company. I then drew a line through the BAU point and the target point and use the equation y = mx+b to get my MAC. Hence it is rough but probably reasonable. http://www.nspower.ca/en/home/environment/initiatives/air/default.aspx 3 The plan “Toward a Greener Future” is found here: http://climatechange.gov.ns.ca/doc/ccap.pdf 4 I assumed a price of $3.5 mill per 2MW turbine and that they get 1 MW, which may be conservative. I have ignored other costs. That the fixed costs of installing the turbines fall in year 1 while NSP’s TCCP savings fall over a 20 year time horizon, means that the latter are discounted such that using the average cost of installing the turbines over a 20 year time frame will lead to an underestimate of costs relative to the Net Present Value of the TCCP savings. My Econ 3350 cost benefit analysis students are working this out for their 3rd assignment.

h) Again focusing on the year 2020, will it be profitable for NSP to purchase the turbines in order to shift the MAC? i) Compare your answers for the emissions standard and emissions tax. Under which of the two policies does NSP have a higher incentive to adopt the wind turbines to shift its MAC? j) Although the tax is coming out ahead in terms of its effect on low GHG energy production incentives, NSP is left with a crippling tax bill, which reduces its financing possibilities. As a solution, the Government could provide lump sum subsidies to help finance the renewable energy. Since NSP gets the money back, does this mean that it has no incentive to abate?