Climate change policy

Climate change policy - Basic economics needed to...

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1 Basic economics needed to understand climate change policy October 16, 2007
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2 Topics covered in this section These notes provide basic theory that is helpful in answering two types of questions: 1. Given that we have decided to reduce emissions, what is the “best” type of policy of achieving this goal? (What should we mean by “best” -- most efficient, most politically feasible?) I emphasize taxes versus cap and trade. 2. Given estimates of the costs and the benefits associated with GHG abatement, how should we determine the optimal level of abatement – i.e. the level that “balances” costs and benefits? I emphasize uncertainty and time dimension of problem.
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3 Begin discussing details of different policies for reducing emissions "Best efforts approach". Encourage developed countries to undertake their best efforts to reduce emissions. This is worth doing because it is low cost, but it is not likely to lead to major reductions in emissions. “No regrets" reforms, e.g. liberalization of energy markets, impose standards that also reduce costs. These are worth doing, their effect is questionable. (Economists' skepticism regarding $20 bill lying in the street. Discuss economic analysis of the costs of achieving California’s AB32 goals.) Actual US energy-related publicly funded and privately funded R&D has fallen over last 10 years. Better technology will not lead to abatement unless firms have an incentive to use it, and this requires some kind of government pressure. The two prominent mandatory (economically costly) policies are taxes and cap-and-trade.
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4 Taxes versus “cap-and-trade” (quotas) They have different distributional effects, depending on how tax revenues or emissions permits are distributed. They produce the same level of output and emissions under cost certainty (and perfect competition). (Discuss analogy with tariffs and quotas, as explained in an earlier lecture.) They produce different results under cost uncertainty. The tax enables policymaker to choose the marginal abatement cost (equal to the tax), but it leaves the amount of abatement (the amount of emissions) uncertain. The cap-and-trade has the opposite tradeoff. For climate change, tax is likely to be more economically efficient, but may not be politically feasible.
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Political and “practical” features of taxes and quotas Political: “Taxes” is a dirty word; “revenue neutral” taxes may not be much better. Quotas are a valuable asset; quota recipients (“grandfathers”) may benefit from quota policy. The quota recipients obtain the asset, and the quota raises entrants costs – if these do not receive quota allocation. Practical: There are costs of organizing cap and
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This note was uploaded on 08/01/2008 for the course ECON 131 taught by Professor Karp during the Fall '07 term at Berkeley.

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Climate change policy - Basic economics needed to...

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