The Economics of Externalities & Climate Change Eric Jamelske Department of Economics

University of Wisconsin-Eau Claire
The Economics of
Externalities & Climate Change
Eric Jamelske
Department of Economics
University of Wisconsin-Eau Claire
[email protected]
University of Wisconsin-Eau Claire
Overview
Negative Externalities
 Economics & The Environment
 Climate Change as a Negative Externality
 Choices
 Climate Science
 Climate Change, Global Warming, Extreme Weather
 Public Opinion Research

University of Wisconsin-Eau Claire
Negative Externalities

An externality arises when an activity influences the well-being
of others with no compensation for that effect.

When the impact is adverse, the externality is negative.
– OVER-DO IT!
Climate Change as a
Negative Externalities

If the US could go its own merry way—keeping the CO2 it emits
over its own territory, warming up its own atmosphere, bearing
itself whatever costs (including hurricanes) that result, that would
be one thing. But that is not so.

The energy profligate lifestyle of the US inflicts global damage
immensely greater than any war it might wage. The Maldives will
within 50 years be our own 21st century Atlantis, disappearing
beneath the ocean; a third of Bangladesh will be submerged.
Climate Change as a
Negative Externalities

A subsidy means that a firm does not pay the full costs of
production. Not paying the cost of damage to the environment is a
subsidy, just as not paying the full costs of workers would be.

In most of the developed countries of the world today, firms are
paying the cost of pollution to the global environment, in the form
of taxes imposed on coal, oil, and gas. But American firms are
being subsidized—and massively so.
Internalizing
Negative Externalities

There is a simple remedy: other countries should prohibit the
importation of American goods produced using energy intensive
technologies, or, at the very least, impose a high tax on them, to
offset the subsidy that those goods currently are receiving.

There is a way out through a common (global) environmental tax
on emissions. There is a social cost to emissions, and this
environmental tax would simply make everyone pay the social
cost. This is in accord with the most basic of economic principles,
that individuals and firms should pay their full (marginal) costs.

The world would, of course, have to agree on assessing the
magnitude of the social cost of emissions.
Or…..

Under some scenarios, the Maldives will be under water shortly.

Would taking drastic measures to cut carbon emissions
substantially reduce this likelihood? If so, would relocating the
population (about 370,000) to higher ground be substantially
cheaper than reducing greenhouse gasses sufficiently to halt the
effects of planetary warming?

Are there other offsetting benefits to people in cooler climates
that should properly be considered?
Carbon Tax Details

According to the Center for Climate and Electricity Policy, a tax
of $25 per ton of carbon-dioxide emitted — through the
combustion of fossil fuels used in electricity production,
commercial and residential heating and transportation —
— would raise approximately $125 billion annually which could be
invested in R&D for the development of clean energy alternatives.

Such a tax would add about 21 cents per gallon of gasoline and
about 1.2 cents per kilowatt-hour of electricity.
Carbon Tax Details

A prominent politician has proposed a $100 per ton tax on carbon
emissions from fossil fuels —
— clearly such a tax has the potential to reduce the buildup of GHG
in the atmosphere, but at a significant cost.

Such a tax is estimated to increase the price of coal by about $70
per ton (300%) and increase the price of oil by about $8 per barrel
(13%).

There are too many uncertainties about the impact of such a tax
and thus we should be very cautious of implementing this plan.
University of Wisconsin-Eau Claire
Energy/Transportation Alternatives

Coal (SO2, Acid Rain, GHG, Carbon)

Oil & Gas (Cars, Trucks, Refineries)

Nuclear (Radioactive Waste)

Solar, Wind, Water, Biofuels

Clean Coal, Natural Gas
What Needs To Be Done?

Shift to fuels with higher ratio of useful energy to CO2 emissions.

Develop technologies that use less energy per unit output.

Shift demand to products with lower energy intensity of production.

Plant trees, reduce deforestation, carbon sequestration

Natural Gas, Clean Coal, Nuclear, Solar, Wind

Reduce output (less stuff)
Need vs Want (Choices)

WE will need fossil fuels like oil and gas for the foreseeable
future. So there’s really little choice (sigh).

We have to frack for natural gas and we must approve the
Keystone XL pipeline to get Canadian oil.

This mantra, repeated on TV ads and in political debates, is
punctuated with a hint of inevitability and regret.

But, increasingly, scientific research and the experience of other
countries should prompt us to ask:

To what extent will we really “need” fossil fuel in years to come?

To what extent is it a choice?

Birds, Coastal and Hillside Views, Desert Tortoises

Intermittent energy sources meaning the sun/wind isn’t
always shining/blowing

Large amounts of land will be needed, thus taking it away
from alternative uses such as farming, housing, recreation or
open/green space.

To reduce CO2 emissions by one billion metric tons, wind
power would require thirty million acres of land, about the
size of New York

To reduce CO2 emissions by one billion metric, solar power
would require five million acres of land, about the size of
Connecticut
IPCC – AR4: A State of the Planet Report

“Warming of the climate system is unequivocal, as is now evident from
observations of increases in global average air and ocean temperatures, widespread melting of snow
and ice and rising global average sea level.”

“Global atmospheric concentrations of carbon dioxide, methane and nitrous oxide have increased
markedly as a result of human activities since 1750 and now far exceed pre-industrial values
determined from ice cores spanning many thousands of years.”

“There is very high confidence that the net effect of human
activities since 1750 has been one of warming.”

Advances since the TAR show that discernible human influences extend beyond average temperature
to other aspects of climate. Anthropogenic warming over the last three decades has likely had a
discernible influence at the global scale on observed changes in many physical and biological systems.

Anthropogenic warming and sea level rise would continue for centuries due to the time scales
associated with climate processes and feedbacks, even if GHG concentrations were to be stabilized.
http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm
University of Wisconsin-Eau Claire
Scientific Consensus on Climate Change

“Reviews of scientific literature and surveys of climate scientists
indicate striking agreement, anthropogenic GHG have been
responsible for “most” of the ‘unequivocal’ warming of the Earth’s
average global temperature over the second half of the 20th century.”
- Anderegg et al. (2010)

“Despite claims sometimes made by some groups that there is not
good evidence that Earth's climate is being affected by human
activities, the scientific community is in overwhelming agreement
that such evidence is clear and persuasive.”
- Oreskes (2004)
Climate Change Resources & Information

Intergovernmental Panel on Climate Change
– http://www.ipcc.ch/

United Nations Framework Convention on Climate Change
– http://unfccc.int/2860.php

National Aeronautics and Space Administration
– http://climate.nasa.gov/

National Oceanic & Atmospheric Administration
– http://www.noaa.gov/climate.html

The World Bank
– http://climatechange.worldbank.org/