Transcript ppt
Policy ramp versus big bang: optimal global mitigation policy Economic consensus: the bottom line • “Virtually every activity directly or indirectly involves combustion of fossil fuels, producing emissions of carbon dioxide into the atmosphere. • Single bottom line for policy: “correct this market failure by ensuring that: – all people, everywhere, and for the indefinite future are confronted with a market price for the use of carbon that reflects the social costs of their activities.” Nordhaus et al. (2008) Discounting – Ramsey equation • Ramsey optimal growth model: – central framework for thinking about dynamic investment decisions – organizing principle for setting long-run discount rates • The Ramsey equation holds in the welfare optimum Utility(c) low ƞ high ƞ • r = ρ + ƞ* g %chg U %chg c x %chg c ct ct+1 c: consumption – ρ: rate at which utility from consumption is discounted – ƞ: How quickly marginal utility falls as consumption rises. Discounting • SR approach—prescriptive/normative – r = ρ + ƞg = 0.1% + 1*1.3% = 1.4%. • ρ: favors a “low” social rate of time preference = 0.1% – Argument: the only ethical reason to discount future generations is that they might not be there at all (e.g. cataclysmic comet) [consistent with Frank Ramsey] – Prob. of extinction: 0.1%/year • g: growth rate of consumption ~ 1.3%; • ƞ: elasticity of marginal utility of consumption = 1 – (intergenerational) inequality aversion: lower • Nordhaus approach--descriptive/positive • ρ = 1.5% (assumed, Nordhaus 2008, p. 51) • ƞ = 2 (calibrated, given r, ρ and g) – (intergenerational) inequality aversion: higher • r = 6.5% in 2015, falls over time to 4.5% in 2095 as g falls (in DICE 2007, Arrow et al. 2012) Comparison of the discount rate Discount weight under various assumptions 1 Stern, r = 1.4% Nordhaus, r=4.5% 0.9 Discount weight 0.8 0.7 0.6 The level at any given time t represents the weight given to consumption arriving at year t. 0.5 0.4 0.3 0.2 0.1 0 0 20 40 60 80 100 t 120 140 160 180 200 Damages SR used a level of GHG damage at the high end of the expected range. Nordhaus (2008, p. 51) • The ratio of aggregate damages to the size of the economy ($D/$GDP) 100 years from now • commonly assumed: 1-4%. (Weitzman, 2007) • SR: >= 5% Some conclusions • Weitzman (2007): `On the political side … my most-charitable interpretation of (the Stern Review’s) urgent tone is that the report is … – an essay in persuasion… – that is more about gut instincts regarding the horrors of uncertain rare disasters whose probabilities we do not know… – than it is about (conventional) economic analysis. • SR might be right (“act now”) for the wrong reasons (due to bad model parameters instead of a careful analysis of uncertainty).’ The role of uncertainty in climate change policy—Weitzman (2009) • What happens to expected utility-based BCA for fat-tailed disasters? – Can “turn thin-tail-based climate-change policy on it’s head” (p. 2). • Concretely: a fat-tailed distribution over a climate sensitivity parameter (S) which maps CO2 changes into temperature changes. • Can drive applications of EU theory more than discounting (p. 5).