Transcript ppt - Department of Environmental Science and Policy

ESP 165:
Climate Policy
Michael
Springborn
Department of Environmental
Science & Policy
UC Davis
Policy ramp versus big bang:
optimal global mitigation policy
In 2006 the UK released an “Economics of Climate Change”
report by Nicholas Stern that sparked debate by calling for
much more aggressive action than others
•
AKA: the Stern Review (SR)
•
Sir Nicholas Stern (Nobel Laureate)
•
Adviser to the UK government on the
Economics of Climate Change and
Development 2005-2007
•
Chair of the Grantham Research Institute on Climate Change and the
Environment at the London School of Economics (LSE) since 2008
The SR used estimates of damage from climate
change that were much larger than previous studies
Tol and Yohe (2006)
The SR used a much lower discount rate
than other mainstream economists.
Discount factor (weight) under various assumptions
1
Stern, r = 1.4%
Nordhaus, r=4.5%
0.9
0.8
The level at any given time t
represents the weight given to
benefits and costs (affecting
consumption) arriving at year t.
Discount weight
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
20
40
60
80
100
t
120
140
160
180
200
William Nordhaus is a distinguished economist
with significant leadership experience in
academia and public policy
Faculty member of Yale
University since 1967
Nordhaus, W. (2007). “Critical
assumptions in the Stern Review on
climate change.” Science 317, 201–
202.
Nordhaus, W. (2010). Economic
aspects of global warming in a postCopenhagen environment.
Proceedings of the National Academy
of Sciences 107(26), 11721-11726.
Nordhaus expresses the stringency of his policy ramp
recommendation vs. the “big bang” by estimating the
carbon tax needed to get the targeted mitigation.
“big bang”/Stern assumptions
Nordhaus policy ramp/DICE baseline
Nordhaus (2007)
Nordhaus (2008, p. 174):
To set the discount rate
Stern was prescriptive
(normative),
Nordhaus was
descriptive (positive).
Specifying a social discount rate for long-run climate
policy analysis often employs the Ramsey framework
Ramsey (1928) optimal growth model:
Economy operates as if a “representative agent” selects consumption
and savings to max PV of the stream of utility from consumption over
time.
One implication of the Ramsey model is the following equation:
• ρ = δ+ ƞg
• ρ: discount rate on consumption, c
– “long-run real return on capital” (in equilibrium)
• δ: discount rate on utility, u(c)
– “pure rate of time preference”, “utility rate of discount”
• ƞ: elasticity of marginal utility w.r.t. consumption (how curved
is the utility function)
– also an indicator of intergenerational inequality aversion
• g: average growth rate of consumption (per capita)
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
–
ƞ: How quickly marginal utility falls as consumption rises (elasticity of marginal utility of
consumption)
Discounting – Ramsey equation
Also indicates: aversion to consumption
inequality among generations.
• ƞ:
• Lower ƞ (Stern) MU changes relatively little over
consumption pays less attention to whether
future is richer/poorer  cares less about
intergenerational inequality
• Higher ƞ (Nordhaus)  MU changes more
rapidly more attention to income (consumption)
changes  cares more about intergen. inequality.
To set the discount rate Stern was
prescriptive, Nordhaus descriptive
• 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)
– (average over the next century (Nordhaus, 2008, 10)): r = 0.04
»
5.5% over first 50 years (61).
The big bang approach is >10 times more stringent
than Nordhaus’ policy ramp in the short term.
“big bang”/Stern assumptions
Nordhaus policy ramp/DICE baseline
Nordhaus (2007)
Stern’s analysis is substantially driven
by damages from the distant future
Nordhaus (2008):
“…if the Stern Review’s methodology is
used, more than half of the estimated
damages “now and forever” occur after
2800.”
The economic logic of the policy ramp is that some investment in
mitigation capital is good but only up to a point--forgoing
investment in technological (and other kinds of) capital is costly
t: time
At+1 = At + a(Mt)Ft - R(At)
At: GHG
stock
Mt+1 = Mt + mt
mitigation
capital
Kt+1 =
Kt + kt
Kt: technological
capital stock
mt: invest in
mitig. cap.
+R(At)
R(At): natural
GHG cycling
Since “capital is productive and
damages are far in the future … the
highest-return investments today
are primarily in tangible,
technological, and human capital.”
(Nordhaus, 2007)
(1-D(At))*FE(Kt):
Production
Consumption: Ct
kt:
Investment
U(Ct): utility
et: educ./invest in human. cap.
Et+1 = Et + et
While CO2 intensity (tons/$GDP) has fallen,
growth in population & GDP have led to rising
emissions.
(Nordhaus, 2012)