Environment and Ecological Economics

Environment and Ecological Economics present on: Climate Economics, Economics, Sustainability, and Democracy, Planetary Economics, The Economics of Climate Change and the Change of Climate in Economics, Peak Oil, Climate Change, and the Limits to China Economic Growth,...

A ROUTLEDGE FREEBOOK Environment and Ecological Economics Introduction 01:: Climate Economics 02:: Economics, Sustainability, and Democracy 03:: Planetary Economics 04:: The Economics of Climate Change and the Change of Climate in Economics 05:: Peak Oil, Climate Change, and the Limits to China?s Economic Growth 06:: Environmental and Natural Resource Economics Routledge Environmental and Ecological Economics Visit routledge.com/ economics and enjoy all titles at 20% off just use YRK67 at checkout! Offer good through 31 October 2015 Introduction HOW TO USE THIS BOOK This Freebook offers selected passages from Ecological and Environmental scholarship across our vast collection of Economic research These selections are meant to highlight just a few of our premier titles in this field Enjoy 20% off all titles shown through 31 October 2015 Climate Economics: The State of the Art Getting climate economics right is not about publishing the cleverest article of the year but rather about helping solve the dilemma of the century The tasks ahead are daunting, and failure, unfortunately, is quite possible Better approaches to climate economics will allow economists to be part of the solution rather than part of the problem This book analyzes potential paths for improvement Frank Ackerman is Professor in the Global Development and Environment Institute at Tufts University, USA El izabet h A St ant on is a Senior Economist with the Stockholm Environment Institute (SEI-US) Economics, Sustainability, and Democracy: Economics in the Era of Climate Change The book commences with an exposition of major aspects of orthodox macroeconomic and microeconomic theory It then explores the bounds of orthodox theory in relation to ethics, liberalism, ideology, society, the international economy, globalization, and the environment, and seeks lessons for a future economics Issues raised by natural resource use and climate change are given particular prominence Many of the issues of critical importance in coming decades involve not private goods but public goods: goods which markets are ill-equipped to deal with In the resolution of these issues political processes will need to be engaged The availability to each individual of clean air, clean water and adequate sustenance, goods which cannot be provided for by economic production alone, are of central concern Christ opher Nobbs?s abiding professional interest has been in issues at the intersection of science, economics, and politics, particularly as they relate to the environment He is a graduate of the Universities of Auckland, London and Cambridge Planetary Economics: Energy, climate change and the three domains of sustainable development The book shows that the transformation of energy systems involves all three domains - and each is equally important From them flow three pillars of policy ? three quite distinct kinds of actions that need to be taken, which rest on fundamentally different principles Any pillar on its own will fail Only by understanding all three, and fitting them together, we have any hope of changing course And if we do, the oft-assumed conflict between economy and the environment dissolves ? with potential for benefits to both Planetary Economics charts how Michael Grubb is Senior Researcher and Chair of Energy and Climate Policy at Cambridge University, UK and Senior Advisor on Sustainable Energy Policy to the UK Energy Regulator Ofgem Lead contributor Jean-Charl es Hourcade is Research Director at the Centre National de la Recherche Scientifique and at the École des Hautes Études en Sciences Sociales, France He is Professor at the École Nationale des Ponts et Chaussées and was formerly Director of the Centre International de Recherche sur l'Environnement et le Développement Lead contributor Karst en Neuhof f is Head of Climate Policy at the German economics research institute Deutsches Institut fürWirtschaftsforschung (DIW), and is Professor at the School of Economics and Management at the Technical University of Berlin, Germany The Economics of Climate Change and the Change of Climate in Economics The starting point and core idea of this book is the long-held observation that the threat of climate change calls for a change of climate in economics Inherent characteristics of the climate problem including complexity, irreversibility and deep uncertainty challenge core economic assumptions and mainstream economic theory appears inappropriately equipped to deal with this crucial issue Kevin Maréchal shows how themes and approaches from evolutionary and ecological economics can be united to provide a theoretical framework that is better suited to tackle the problem Kevin Maréchal is an Associate Professor and co-director of the Center for Economic and Social Studies on the Environment (CEESE-ULB) at the Free University of Brussels (ULB), Belgium Peak Oil, Climate Change, and the Limits to China?s Economic Growth This book studies the limits imposed by the depletion of fossil fuels and the requirements of climate stabilization on economic growth with a focus on China The book intends to examine the potentials of various energy resources, including oil, natural gas, coal, nuclear, wind, solar, and other renewables, as well as energy efficiency Unlike many other books on the subject, this book intends to argue that, despite the large potentials of renewable energies and energy efficiency, economic growth eventually will have to be brought to an end as China and the world undertake the transition from fossil fuels to renewable energies Minqi Li is Associate Professor in the Department of Economics at the University of Utah, USA Environmental and Natural Resource Economics: A Contemporary Approach, 3e Authors Jonathan Harris and Brian Roach present a compact and accessible presentation of the core environmental and resource topics and more, with analytical rigor as well as engaging examples and policy discussions They take a broad approach to theoretical analysis, using both standard economic and ecological analyses, and developing these both from theoretical and practical points of view It assumes a background in basic economics, but offers brief review sections on important micro and macroeconomic concepts, as well as appendices with more advanced and technical material Extensive instructor and student support materials, including PowerPoint slides, data updates, and student exercises are provided Jonat han Harris is Senior Research Associate and Director, Theory and Education Program, Global Development and Environment Institute, Tufts University, USA Brian Roach is Research Associate, Theory and Education Program, Global Development and Environment Institute, Tufts University, USA Climate Economics 01:: Climate Science for Economists The following is excerpted from Climate Economics: The State of the Art by Frank Ackerman and Elizabeth A Stanton © 2013 Taylor & Francis Group All rights reserved To purchase a copy, click here Climate analysis requires an understanding of both economics and science Climate science is a rapidly evolving field, rich with new areas of research, important advances that refine our understanding of well-established facts, and an increasing reliance on interdisciplinary approaches to complex research questions Every few years, this body of knowledge is pulled together, subjected to additional layers of peer review, and published in Assessment Reports by the Intergovernmental Panel on Climate Change (IPCC) The latest of these ? the Fourth Assessment Report (AR4) ? was released in 2007 (IPCC 2007b), reflecting the peer-reviewed research literature through 2006 The next IPCC Assessment is expected in 2013? 14 The process of predicting future economic impacts from climate change and deciding how best to react to those impacts begins with estimates of the baseline, or business-as-usual, future world economy and the quantity of greenhouse gas emissions that it is likely to release Climate scientists build on these economic projections, combining them with records of past climatic changes and the most up-to-date knowledge about the climate system, to predict future atmospheric concentrations of greenhouse gases, temperature increases, and other climatic changes These projections of the future climate system are used to estimate the type and magnitude of impacts expected in terms of physical and biological processes, such as changes to water availability, sea levels, or ecosystem viability Economic modeling places monetary values both on measures that would reduce greenhouse gas emissions and thereby avoid climate damages (the costs of mitigation) and on the physical damages that are avoided (the benefits of mitigation) Comparisons of climate costs and benefits are offered to policy makers to support recommendations of the best actions to take Each step in this process ? from baseline economic projections to climate policy recommendations ? adds more uncertainty, which is a central theme of this book We begin with a review of the current state of the art in climate science as it relates to economic modeling After a brief discussion of forecasts for business-as-usual (no mitigation) emissions, we review the latest projections of the future climate and the expected impacts to natural and human systems We summarize climate system projections and impacts both in terms of the most likely, ?best guess?prediction, and less probable, but still possible, worst case (at times, catastrophic) predictions Later chapters of this book discuss techniques for economic impact assessment, as well as the estimation of costs of mitigation and adaptation under conditions of uncertainty Business-as-usual emissions Baseline, or business-as-usual, emission scenarios not plan for greenhouse gas mitigation These projections are sensitive to assumptions about population and economic growth, innovation and investment in energy technologies, and fuel supply and choice Projections of baseline emissions for future years vary widely The most optimistic business-as-usual scenarios assume significant reductions over time in carbon emissions per unit of energy and in energy use per dollar of output, together with slow population growth and slow economic development These scenarios project atmospheric concentrations of CO2 as low as 500? 600 ppm in 2100 ? up from just above 390 ppm CO2 today.1 Pessimistic business-as-usual scenarios project much more rapid growth of global emissions over time, with CO2 concentrations reaching 900? 1,100 ppm by 2100 Recent research, however, suggests that parameters commonly used to link concentrations to emissions may be mis-specified; the fraction of CO2 emissions sequestered in land and ocean sinks may be shrinking in response to climate change, suggesting that atmospheric concentrations would be higher at every level of emissions In this book, we will refer to a range of business-as-usual scenarios projecting from 540 to 940 ppm in 2100; these endpoints are chosen to match two of the Representative Concentration Pathways, RCP 8.5 and RCP 4.5, that will be used as part of a set of central emissions scenarios in AR5, the next IPCC Assessment Report.2 These scenarios may be compared to those presented in the IPCC?s Special Report on Emissions Scenarios (SRES; Nakicenovic et al 2000) - RCP 8.5 was developed using the MESSAGE model This scenario reaches 540 ppm CO2 in 2050 and 936 ppm CO2 in 2100 (or 1,231 ppm CO2-equivalent [CO2-e] in 2100, including measures of all climate ?forcing?agents) By 2060, it exceeds 560 ppm CO2, or double the preindustrial concentration? a much-discussed milestone related to the rate of temperature change Emissions in RCP 8.5 are similar to those of the SRES A1FI scenario, used in previous IPCC Assessment Reports In the RCP 8.5 scenario, CO2 emissions grow from 37 Gt CO2 in 2010 to 107 Gt CO2 in 2100 - RCP 4.5 was developed using the MiniCAM model It reaches 487 ppm CO2 in 2050 and 538 ppm CO2 in 2100 (or 580 ppm CO2-e in 2100); in this scenario, concentrations stabilize before exceeding 560 ppm CO2 Emissions in RCP 4.5 are similar to those of the SRES B1 scenario, with emissions peaking between 2040 and 2050 and falling to 16 Gt CO2 in 2100 ? a 43 percent decrease from 1990 emissions (a common benchmark) The RCP 4.5 scenario requires substantial use of carbon capture and storage technology (see Chapter 9) and energy efficiency measures; coal use falls significantly, while biomass, natural gas, and nuclear energy grow in importance.3 Clearly, this scenario involves investments that have the effect of reducing emissions, but it does not necessarily involve planned mitigation with the purpose of reducing greenhouse gas emissions Table 1.1 compares the RCP concentration projections to those of SRES, as well as to business-as-usual projections from a recent Energy Modeling Forum (EMF) meta-analysis4 and from Energy Technology Perspectives 2008, published by the International Energy Agency (IEA).5 RCP 8.5 falls in the upper half of EMF baseline scenarios, while RCP 3-PD is more optimistic than any EMF projection IEA projections extend only to 2050 and exceed those of RCP 8.5 for that year Climate projections and uncertainty AR4 found unequivocal evidence of global warming and rising sea levels (IPCC 2007c, Synthesis Report) and reported a very high confidence that these changes are the result of anthropogenic greenhouse gas emissions The report also found it likely (with a probability greater than 66 percent) that heat waves and severe precipitation events have become more frequent over the past 50 years Even if further emissions were halted, great inertia in the climate system would mean that the earth was ?locked in?to several centuries of warming and several millennia of sea-level rise (although at a far slower pace and less extreme endpoints than would occur with additional emissions) Continuing the current trend of emissions could lead to abrupt or irreversible changes to the climate system before 2030, the world will have about 800 gigawatts of nuclear electricity generating capacity operating by 2030 The total uranium requirements will have to rise to about 150,000 tonnes, or almost three times the world?s current uranium production The insufficient supply of uranium alone will force many of the currently planned or proposed nuclear power plants to be abandoned The world?s cumulative uranium production up to 2011 was 2.6 million tonnes As of 2011, the world?s total identified uranium resources were 7.1 million tonnes at a production cost up to 260 dollar per kilogram In addition, there were 10.4 million tonnes of undiscovered conventional uranium resources (NEA 2012: 9? 10) Unconventional uranium resources associated with phosphates, non-ferrous ores, shales, and granites are estimated to be 10? 22 million tonnes (WEC 2010: 202? 242) Theoretically, there could be up to four billion tonnes of uranium resources in the world?s sea water But the concentration of uranium in the sea water is only 0.003 ppm (0.003 parts per million or three parts in every billion molecules) Leeuwen (2007) pointed out that, for the unconventional uranium resources, the energy required to extract and process the uranium would be greater than the energy that could be produced Figure 5.6 World coal production (historical and projected, million tonnes, 1900?2100) (sources: Historical world coal production before 1981 is from Rutledge (2011) World coal production from 1981 to 2012 is from BP (2013) For projections from 1900 to 2100, see text) I assume that the world?s ultimately recoverable uranium resources will be 20 million tonnes (roughly equaling the sum of the world?s cumulative uranium production, the currently identified uranium resources, and the undiscovered conventional uranium resources) Figure 5.7 shows the historical and projected world uranium production and nuclear electricity consumption World uranium production is projected to peak in 2090, with a production level of 121,000 tonnes World nuclear electricity consumption is assumed to grow in proportion with uranium production By the end of the century, world nuclear electricity is projected to more than double from the current level, reaching about 5,500 terawatt-hours (about 470 million tonnes of oil equivalent) Figure 5.7 World uranium production and nuclear electricity generation (historical and projected, 1950?2100) (sources: Historical world uranium production from 1945 to 2000 is from NEA (2006) World uranium production from 2001 to 2011 is from WNA (2013b) World nuclear electricity consumption from 1965 to 2012 is from BP (2013) For projections from 1950 to 2100, see text) Environmental and Natural Resource Economics: A Contemporary Approach, 3rd Edition 06:: Global Climate Change: Policy Response 19.1 Adaptation and Mitigation The following is excerpted from Environmental and Natural Resource Economics by Jonathan M Harris & Brian Roach © 2014 Taylor & Francis Group All rights reserved To purchase a copy, click here As discussed in Chapter 18, the scientific evidence regarding the seriousness of global climate change supports policy action Economic analyses of climate change have generally recommended policy changes, although with considerable variability The Stern Review on the Economics of Climate Change, in particular, calls for ?an urgent global response.?1 Policy responses to climate change can be broadly classified into two categories: adaptive measures to deal with the consequences of climate change and mitigation, or preventive measures intended to lower the magnitude or timing of climate change Adaptive measures include: - Construction of dikes and seawalls to protect against rising seas and extreme weather events such as floods and hurricanes - Shifting cultivation patterns in agriculture to adapt to changing weather conditions - Creating institutions that can mobilize the needed human, material, and financial resources to respond to climate-related disasters Mitigation measures include: - Reducing emissions of greenhouse gases by meeting energy demands from sources with lower greenhouse gas emissions (e.g., switching from coal to wind energy for electricity) - Reducing greenhouse gas emissions by increasing energy efficiency (e.g., demand-side management, as discussed in Chapter 12) - Enhancing carbon sinks.a Forests recycle carbon dioxide (CO2) into oxygen; preserving forested areas and expanding reforestation have a significant effect on net CO2 emissions Economic analysis can provide policy guidance for nearly any particular preventive or adaptive measure Cost-benefit analysis, discussed in Chapters and 18, can present a basis for evaluating whether a policy should be implemented However, as discussed in Chapter 18, economists disagree about the appropriate assumptions and methodologies for cost-benefit analyses of climate change A less controversial conclusion from economic theory is that we should apply cost-effectiveness analysis in considering which policies to adopt The use of cost-effectiveness analysis avoids many of the complications associated with cost-benefit analysis While cost-benefit analysis attempts to offer a basis for deciding upon policy goals, cost-effectiveness analysis accepts a goal as given by society and uses economic techniques to determine the most efficient way to reach that goal In general, economists favor approaches that work through market mechanisms to achieve their goals (see Box 19.1) Market-oriented approaches are considered cost effective; rather than attempting to control market actors directly, they shift incentives so that individuals and firms will change their behavior to take external costs and benefits into account Examples of market-based policy tools include pollution taxes and transferable, or tradable, permits Both of these are potentially useful tools for greenhouse gas reduction Other relevant economic policies include measures to create incentives for the adoption of renewable energy sources and energy-efficient technology Most of this chapter focuses on mitigation policies, but it is becoming increasingly evident that mitigation policies need to be supplemented with adaption policies Climate change is already occurring, and even if significant mitigation policies are implemented in the immediate future, warming and sea-level rise will continue well into the future, even for centuries.2 The urgency and ability to institute adaptive measures varies across the world It is the world?s poor who face the greatest need to adapt but also most lack the necessary resources [Climate change?s] adverse impacts will be most striking in the developing nations because of their geographical and climatic conditions, their high dependence on natural resources, and their limited capacity to adapt to a changing climate Within these countries, the poorest, who have the least resources and the least capacity to adapt, are the most vulnerable Projected changes in the incidence, frequency, intensity, and duration of climate extremes (for example, heat waves, heavy precipitation, and drought), as well as more gradual changes in the average climate, will notably threaten their livelihoods? further increasing inequities between the developing and developed worlds.3 The Intergovernmental Panel on Climate Change (IPCC) classifies adaptation needs into seven sectors, as shown in Table 19.1 Some of the most critical areas for adaptation include water, agriculture, and human health Climate change is expected to increase precipitation in some areas, mainly the higher latitudes including Alaska, Canada, and Russia, but decrease it in other areas, including Central America, North Africa, and southern Europe A reduction in water runoff from snowmelt and glaciers could threaten the water supplies of more than a billion people in areas such as India and parts of South America Providing safe drinking water in these regions may require building new dams for water storage, increasing the efficiency of water use, and other adaptation strategies Changing precipitation and temperature patterns have significant implications for agriculture With moderate warming, crop yields are expected to increase in some colder regions, including parts of North America, but overall the impacts on agriculture are expected to be negative, and increasingly so with greater warming Agricultural impacts are expected to be the most severe in Africa and Asia More research is necessary to develop crops that can grow under anticipated weather conditions Agriculture may need to be abandoned in some areas but expanded in others.4 The impacts of climate change on human health are already occurring The World Health Organization (WHO) has estimated that more than 140,000 people per year are already dying as a direct result of climate change, primarily in Africa and Southeast Asia.5 The WHO recommends strengthening public health systems, including increased education, disease surveillance, vaccination, and preparedness The spread of tropical diseases such as malaria can be limited by insect control and the provision of mosquito nets and adequate hygiene Various estimates exist for the cost of appropriate adaptation measures The United Nations has estimated that by 2030 the total cost of adapting to climate change will be between about $60 billion and $190 billion annually.6 While adaptation costs for water, agriculture, and human health will be higher in developing countries, infrastructure adaptation will be higher in developed countries because the existing infrastructure is much more extensive The report noted the need for ?policy changes, incentives, and direct financial support?to encourage a shift in investment patterns A review of these UN estimates concludes that its costs were probably too low by a factor of two to three and even more when the costs for excluded sectors, such as tourism and energy, are also considered.7 Further, adaptation costs are expected to increase after 2030 as warming and other impacts become more severe In 2010 the World Bank estimated the costs of adaptation in developing countries at $75 billion to $100 billion annually from 2010 to 2050.8 The report notes that funding for adaptation measures could be met by doubling current foreign aid from developed countries It also mentions that fostering economic development will provide developing countries with greater internal resources to adapt to climate change 19.2 Climate Change Mitigation: Economic Policy Options The release of greenhouse gases in the atmosphere is a clear example of a negative externality that imposes significant costs on a global scale In the language of economic theory, the current market for carbon-based fuels such as coal, oil, and natural gas takes into account only private costs and benefits, which leads to a market equilibrium that does not correspond to the social optimum From a social perspective, the market price for fossil fuels is too low and the quantity consumed too high, as discussed in Chapter 12 Carbon Taxes A standard economic remedy for internalizing external costs is a per-unit tax on the pollutant In this case, what is called for is a carbon tax, levied on carbon-based fossil fuels in proportion to the amount of carbon associated with their production and use Such a tax will raise the price of carbon-based energy sources and so give consumers incentives to conserve energy overall (which would reduce their tax burden), as well as shifting their demand to alternative sources of energy that produce lower carbon emissions (and are thus taxed at lower rates) Carbon taxes would appear to consumers as energy price increases But since taxes would be levied on primary energy, which represents only one part of the cost of delivered energy (such as gasoline or electricity) and more important, since one fuel can in many cases be substituted for another, overall price increases may not be jolting Consumers can respond to new prices by reducing energy use and buying fewer carbon-intensive products (those that require great amounts of carbon-based fuels to produce) In addition, some of these savings could be used to buy other less carbon-intensive goods and services Clearly, a carbon tax creates an incentive for producers and consumers to avoid paying the tax by reducing their use of carbon-intensive fuels Contrary to other taxed items and activities, this avoidance has social benefits? reduced energy use and reduced CO2 emissions Thus, declining tax revenues over time indicate policy success? just the opposite of what happens when tax policy seeks to maintain steady or increasing revenues Table 19.2 shows the impact that different levels of a carbon tax would have on the prices of coal, oil, and natural gas Based on energy content, measured in Btus, coal is the most carbon-intensive fossil fuel, while natural gas produces the lowest emissions.b Calculating the impact of a carbon tax relative to the standard commercial units for each fuel source, we see that a $10/ton carbon tax, for example, raises the price of a barrel of oil by about a dollar (see Box 19.2 for a discussion of the difference between a tax on carbon and a tax on CO2) This is equivalent to only about cents per gallon.c A $100/ton carbon tax equates to an increase in gasoline prices of about 24 cents per gallon Even though natural gas has a lower carbon content than oil, its relatively low price in 2012 means that a carbon tax would increase its price by a higher proportion The impact of a carbon tax would be most significant for coal prices? a $100/ton carbon tax would more than double coal prices Will these tax amounts affect people?s driving or home heating habits very much, or impact industry?s use of fuels? This depends on the elasticity of demand for these fuels As noted earlier (see Chapter Appendix), elasticity of demand is defined as: Economists have measured the elasticity of demand for different fossil fuels, particularly gasoline One study surveyed all the available research on the elasticity of demand for motor fuels and found that in the short term (about one year or less) elasticity estimates averaged ? 0.25.10d This means that a 10 percent increase in the price of gasoline would be expected to decrease gasoline demand in the short term by about 2.5 percent In the long term (about five years or so) people are more responsive to gasoline price increases, as they have time to purchase different vehicles and adjust their driving habits The average long-term elasticity of demand for motor fuels, based on fifty-one estimates, is ? 0.64.11 According to Table 19.2, a $200 carbon tax would increase the price of oil by 21 percent, which would add 48 cents per gallon to the price of gasoline Assuming a retail price of $3 per gallon, this would translate to a 16 percent price increase A long-term elasticity of ? 0.64 suggests that after people have time to fully adjust to this price change, the demand for gasoline should decline by about 10 percent Figure 19.1 shows a cross-country relationship between gasoline prices and per capita consumption (Since the cost of producing a gallon of gasoline varies little across countries, variations in the price of a gallon in different countries is almost solely a function of differences in taxes.) Note that this relationship is similar to that of a demand curve: Higher prices are associated with lower consumption, and lower prices with higher consumption The relationship shown here, however, is not exactly the same as a demand curve; since we are looking at data from different countries, the assumption of ?other things equal,? which is needed to construct a demand curve, does not hold Differences in demand may, for example, be in part a function of differences in income levels rather than prices Also, people in the United States may drive more partly because travel distances (especially in the western United States) are greater than in many European countries, and public transportation options fewer But there does seem to be a clear price/consumption relationship The data shown here suggest that it would take a fairly big price hike? in the range of $0.50? $1.00 per gallon or more? to affect fuel use substantially Would a large gasoline tax increase, or a broad-based carbon tax, ever be politically feasible? Especially in the United States, high taxes on gasoline and other fuels would face much opposition, especially if people saw it as infringing on their freedoms to drive and use energy As Figure 19.1 shows, the United States has by far the highest gasoline consumption per person and the lowest prices outside the Middle East But let us note two things about the proposal for substantial carbon taxes: - First, revenue recycling could redirect the revenue from carbon and other environmental taxes to lower other taxes Much of the political opposition to high energy taxes comes from the perception that they would be an extra tax? on top of the income, property, and social security taxes that people already pay If a carbon tax were matched, for example, with a substantial cut in income or social security taxes, it might be more politically acceptable The idea of increasing taxes on economic ?bads,?such as pollution, while reducing taxes on things we want to encourage, such as labor and capital investment, is fully consistent with principles of economic efficiency Rather than a net tax increase, this would be revenue-neutral tax shift? the total amount that citizens pay to the government in taxes is essentially unchanged Some of the tax revenues could also be used to provide relief for low-income people to offset the burden of higher energy costs Second, if such a revenue-neutral tax shift did take place, individuals or businesses whose operations were more energy efficient would actually save money overall The higher cost of energy would also create a powerful incentive for energy-saving technological innovations and stimulate new markets Economic adaptation would be easier if the higher carbon taxes (and lower income and capital taxes) were phased in over time Tradable Permits An alternative to a carbon tax is a system of tradable carbon permits, also called cap and trade A carbon trading scheme could be national in scope or include several countries An international permit system could work as follows: - Each country would be allocated a specific permissible level of carbon emissions The total number of carbon permits issued would equal the desired national goal For example, if carbon emissions for a particular country are currently 40 million tons and the policy goal is to reduce this by 10 percent, then permits would be issued to emit only 36 million tons Note that different countries could be obliged to meet different targets, which was the case under the Kyoto Protocol agreement on climate change (see Section 19.4) - Permits are allocated to individual carbon-emitting sources in each country Including all carbon sources (e.g., all motor vehicles) in a trading scheme is clearly not practical It is most effective to implement permits as far upstream in the production process as possible to simplify the administration of the program and cover the most emissions.e Permits could be allocated to the largest carbon emitters, such as power companies and manufacturing plants, or even further upstream to the suppliers through which carbon fuels enter the production process? oil producers and importers, coal mines, and natural gas drillers These permits could initially be allocated for free on the basis of past emissions or auctioned to the highest bidders As discussed in Chapter 16, the effectiveness of the trading system should be the same regardless of how the permits are allocated However, there is a significant difference in the distribution of costs and benefits: Giving permits out for free essentially amounts to a windfall gain for polluters, while auctioning permits imposes real costs upon firms and generates public revenues - Firms are able to trade permits freely among themselves Firms whose emissions exceed the number of permits they hold must purchase additional permits or else face penalties Meanwhile firms that are able to reduce their emissions below their allowance at low cost will seek to sell their permits for a profit Firms will settle upon permit prices through free market negotiations It may also be possible for environmental groups or other organizations to purchase permits and retire them? thus reducing overall emissions - Countries and firms could also receive credit for financing carbon reduction efforts in other countries For example, a German firm could get credit for installing efficient electric generating equipment in China, replacing highly polluting coal plants A tradable permit system encourages the least-cost carbon reduction options to be implemented, as rational firms will implement those emission-reduction actions that are cheaper than the market permit price As discussed in Chapter 16, tradable permit systems have been successful in reducing sulfur and nitrogen oxide emissions at low cost Depending on the allocation of permits, it might also mean that developing countries could transform permits into a new export commodity by choosing a noncarbon path for their energy development They would then be able to sell permits to industrialized countries that were having trouble meeting their reduction requirements While the government sets the number of permits available, the permit price is determined by market forces In this case, the supply curve is fixed, or vertical, at the number of permits allocated, as shown in Figure 19.2 The supply of permits is set at Q0 Firms?demand curve for permits represents their willingness to pay for them In turn, their maximum willingness to pay for permits is equal to the potential profits they can earn by emitting carbon This is similar to the idea presented in Chapter in which fishers were willing to pay up to their potential economic profits to acquire an individual transferable quota Assume that the permits will be auctioned off one by one to the highest bidders Figure 19.2 shows that the willingness to pay for the first permit would be quite high, as a particular firm stands to make a relatively large profit by being allowed to emit one unit of carbon For the second permit, firms that failed to obtain the first permit would be expected to simply repeat their bids The firm that successfully bid for the first permit could also bid for the second permit, but would be expected to bid a lower amount assuming their marginal profits are declining (i.e., their supply curve slopes upward, as is normal) Regardless of whether the same firm wins the bid for the second permit, or a new firm, the selling price for the second permit would be lower This process would continue, with all successive permits selling for lower prices, until the last permit is auctioned off The selling price of this permit, represented by P* in the graph, is the market-clearing permit price We can also interpret P* as the marginal benefit, or profit, associated with the right to emit the Q0th unit of carbon While all permits could theoretically sell for different prices, tradable permit markets are normally set up so all permits sell for the market-clearing price This is the case for the acid rain program in the United States, which has operated since 1995 and is widely considered to be a successful emissions trading program, as discussed in Box 16.1 In that program, all parties interested in purchasing permits make their bids, indicating how many permits they are willing to purchase at what price Whoever bids the highest gets the number of permits that were requested Then the second-highest bidders get the number of permits they applied for, and so on until all permits are allocated The selling price of all permits is the winning bid for the very last permit available This would be P* in Figure 19.2 All bidders who bid below this price not receive any permits Another important point is that each firm can choose to reduce its carbon emissions in a cost-effective manner Firms have various options for reducing their carbon emissions Figure 19.3 shows an example in which a firm has three carbon reduction strategies: replacing older manufacturing plants, investing in energy efficiency, and funding forest expansion to increase carbon storage in biomass In each case, the graph shows the marginal costs of reducing carbon emissions through that strategy These marginal costs generally rise as more units of carbon are reduced, but they may be higher and increase more rapidly for some options than others In this example, replacement of manufacturing plants using existing carbon-emitting technologies is possible but will tend to have high marginal costs? as shown in the first graph in Figure 19.1 Reducing emissions through greater energy efficiency has lower marginal costs, as seen in the middle graph Finally, carbon storage through forest area expansion has the lowest marginal costs The permit price P* (as determined in Figure 19.2) will govern the relative levels of implementation of each of these strategies Firms will find it profitable to reduce emissions using a particular strategy so long as the costs of that option are lower than the cost of purchasing a permit In this example, we see that forest expansion would be used for the largest share of the reduction, while plant replacement would be used for the lowest share Firms (and countries if the program is international) that participate in such a trading scheme can decide for themselves how much of each control strategy to implement and will naturally favor the least-cost methods This will probably involve a combination of different approaches In an international program, suppose that one country undertakes extensive reforestation It is then likely to have excess permits, which it can sell to a country with few low-cost reduction options The net effect will be the worldwide implementation of the least-cost reduction techniques This system combines the advantages of economic efficiency with a guaranteed result: reduction in overall emissions to the desired level The major problem, of course, is achieving agreement on the initial number of permits and whether the permits will be allocated freely or auctioned off There may also be measurement problems and issues such as whether to count only commercial carbon emissions or to include emissions changes that result from land use changes such as those associated with agriculture and forestry ... Limits to China?s Economic Growth 06:: Environmental and Natural Resource Economics Routledge Environmental and Ecological Economics Visit routledge.com/ economics and enjoy all titles at 20% off ... Climate Economics 02:: Economics, Sustainability, and Democracy 03:: Planetary Economics 04:: The Economics of Climate Change and the Change of Climate in Economics 05:: Peak Oil, Climate Change, and. .. science, economics, and politics, particularly as they relate to the environment He is a graduate of the Universities of Auckland, London and Cambridge Planetary Economics: Energy, climate change and