1 Economics 331 1

Finale on climate change policy Today: Endgame Alternative perspectives Environmentalist perspective Conservative perspective Reprise on learning Tipping points and policy 2

Endgame for course 1. Final exam (absence by Dean’s excuse only) ECON 331. Assigned to exam group 33 Friday, May 6, :00 am – 11:00 am 2. Structure: probably three parts: will probably have choice. 40 minutes for “prepared questions” (to be posted); 40 minutes problems; 40 minutes more problems 3. I will post last year’s exams (but no answers) 4. Review sessions: WN 1 next week; WN 1 week after; office hours by Lint 5. Grades will be approximately based 20 percent on the problems, 30 percent on the paper, 20 percent on the midterm, and 30 percent on the final, all with adjustments. 6. Paper due noon April 27 (hard copy outside my office; electronic copies to WN and LB) 7. Hard deadlines for seniors. No postponements for last-minute procrastinations. 3

Strong Stern A----B----C DICE------D Lomberg--- Weak policies $100 /tCO2 $10 - $20/tCO2 $1/tCO2 policies 4 The spectrum of economic views on climate change Stern: Stern Review, also summarized in his Ely lecture, American Economic Review. Lomberg has organized the Copenhagen consensus of (largely) conservative thinkers to rank major issues. A, B, C, D are other models

The Copenhagen Consensus: Priorities for Action Economics 487b, Spring “In ordering the proposals, the panel was guided predominantly by consideration of economic costs and benefits.” nconsensus.com

Environmentalist critique Stern/Krugman critique* of the DICE model approach: 1.Uses too high a discount rate 2.Ignores the uncertainty and the “fat tail” of low- probability catastrophic outcomes 3.Uses a temperature sensitivity coefficient of 3 °C per CO 2 doubling instead of more realistic 6 °C Next slide shows the sensitivity of the emissions control rate if we introduce these sequentially. Which are most important? *Stern Review : treasury.gov.uk/sternreview_index.htm Krugman, “Building a Green Economy,” NYT Magazine, 2010, 6

Emissions Controls for Environmentalist Assumptions 7

Reprise on learning 8

Original example 9

Revised example with lower damage in bad state. 10

Conclusion Example shows how expected strength of policy can either go up or down with learning. No general theorem about whether learning increases or decreases your abatement (or investments more generally) 11

How can we treat tipping points and threshold effects? 12

k k***k**k* 13 OOPS!!!!!!!

k k*** k** k* 14 Note: Have new and different locally stable equilibrium

Non-linearities in the climate system Most of the impacts literature examines gradual climate change, with roughly linear systems and impacts. Scientists have been particularly concerned about discontinuities, abrupt climate change, tipping points, catastrophic impacts. How can we deal with thresholds in our economic analysis? A very tough problem on the frontier.

Examples from climate system Source: Lenton et al., “Tipping Elements,” PNAS, Feb 2008,

17 Total Abatement Cost Temperature Total Damage 0 Temperature* Optimum Without Thresholds

18 Total Abatement Cost Temperature Total Damage 0 Temperature* Optimum With Thresholds

19 Marginal Abatement Cost Temperature Marginal Damage 0 Temperature* Optimum Without Thresholds

20 Marginal Abatement Cost Temperature Marginal Damage 0 Temperature* Optimum With Thresholds ???!!!???

21 Temperature Net income 0 Which is the real maximum?

Have multiple equilibrium for system and policy DICE type model. Catastrophic damage at 3 °C = 50 % of output Have abatement choice about whether to pass the threshold as function of costs and benefits. Abatement cost varies from 1% to 100% of output. Next slide shows whether optimally pass the threshold as function of abatement cost. Note that SOLVER can’t reliably get the right answer near the cross-over because it is local optimizer! 22

Solutions for temperature 23 Note: 1. Have algorithm problems because multiple local maxima. 2. Sharp discontinuity in solution around threshold.

Solutions for PV net income 24 Note: Solution is continuous for PV income (although bad)

Solutions for first-period control rate 25 Note: Paradox that control rate goes UP around switch point. Why? First you speed up, then when you know you are going to miss your plane, slow down. Note: had slightly wrong graph in class.

26 Where do we go from here? It is in YOUR hands… Where do we go from here? It is in YOUR hands…