Assignment: The Economics of Global Warming

L9a_Aggregating MACs & MDs (c) Ruth Forsdyke, 2013

1- Introduction

- Here, we take a brief look at how to aggregate MAC and MD curves.

- Note that our development of the MAC so far has assumed that the only way to reduce GHGs is to reduce output. This only holds in the very short run due to being unable to substitute low GHG technologies in production.

- Abatement costs fall privately on the consumers and producers. To aggregate MACs (for either consumers alone, producers alone or private parties as a whole), add subgroup MACs up horizontally (as is the case with regular demand and supply curves).

- If we have a consumer MAC and a producer MAC for a given set of emissions, since the private abatement costs are shared between consumers and producers, we must add them together such that they are added vertically.

- Net damage reductions (D) are the net benefits of abatement. Since these net benefits are shared by many third parties existing in future time periods, they are public goods. MD curves are aggregating vertically as with regular public goods.

2 - Aggregating Consumer MACs

M A

C L

isa

5

6000 M A

C B art

GHGs tonnes CO2e/y

20

M A

C A

gg

?0 0 0

PGHG ($/ tonne CO2e)

3000

0

2.5

10 ?

PGHG ELisa EBart EAgg 6000 3000 0 (BAU)

ELisa

EBart

EAggEBart

Consumer MACs

M A

C L

isa

5

6000 M A

C B art

GHGs tonnes CO2e/y

20

M A

C A

gg

250 0 0

PGHG ($/ tonne CO2e)

3000

0

2.5

10 12.5

PGHG ELisa EBart EAgg 6000 0 0 0 3000 2.5 10 12.5 0 (BAU) 5 20 25

ELisa

EBart

EAggEBart

6000

GHGs Gt CO2e/y

MAC Agg Consumer

53

PGHG ($/ tonne CO2e)

0

EEarth2013

To get global consumer MAC for the year 2013, add up > 7 billion MACs horizontally.

3 - Aggregating Producer MACs

M A

C F

irm 1

10

8000 M A

C Firm

2

GHGs mega tonnes CO2e/y

20

M A

C A

gg

?0 0 0

PGHG ($/ tonne CO2e)

4000

0

5

10 ?

PGHG EFirm1 EFirm2 EAgg 8000 0 0 0 4000 5 10 15 0 (BAU) 10 20 30

ENS Power

EBart

EAggETransAlta #1

Producer MACs

8000

GHGs Gt CO2e/y

MAC Agg Producer

53

PGHG ($/ tonne CO2e)

0 ?

EEarth2013

To get global producer MAC for the year 2013, add up all the producer MACs horizontally.

4 - Aggregating MDs

8000

GHGs Gt CO2e/y

MAC Agg

53

PGHG ($/tonne CO2e)

0 EEarth

To get global MAC for the year 2013, vertically sum the consumer MAC and producer MAC.

14000

MACCons

6000

MACProd

- These #’s are far too high as I aggregated “back of the envelope very short term MACs” for people in early industrialized countries with MACs in low income countries being much lower. - These are very short term MACs in which it is assumed that the only way to reduce emissions is to reduce output. - With a y-intercept of 263 $/tonne, the area under the entire MAC would equal the World GDP of ~ $ 70 trillion. - $263/tonne would hence give a minimum y-intercept estimate if the MAC was linear. However, the MAC is likely to be convex to the origin and the y-intercept could be considerably higher.

Aggregating Damages: - complicated since damages from a given year fall primarily in future. - add up damages from a given emission in year 2013 upon all party’s damages in each future year while that GHG remains in the atmosphere. - damages from each emission are shared by many and must hence be added up.

MDPerson 1 MDPerson 2 = 2

E2013

10 -8 $/tonne CO2e

MDAgg = 3

GHGs Gt CO2e/y 53

- money will have different values in the future when damages occur and so we need to weight with “discount factors” (which could be negative). This will be discussed later.

Aggregating Damages:

MDPerson 1 MDPerson 2 = 2

E2013

$/tonne CO2e MDAgg

= ?

GHGs Gt CO2e/y 53

TextAdd up over many people

Not to scale

100

5 -Summary

Damage Aggregation - use vertical aggregation (damages shared by 3rd parties = public bads)

MACs - use horizontal aggregation (for consumer MACs, producer MACs or private MACs) - except vertically aggregate consumer and producer component of MAC for a given set of emissions.

- Notice that abatement costs “privately fall” on the polluters, such that abatement costs are aggregated horizontally as with regular demand and supply curves.