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Lecture_20 - Economic Models of Global Warming and Climate...

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Economic Models of Global Warming and Climate Policy Preliminaries – -- CO 2 as a stock pollutant -- CO 2 constraint as a policy variable Three economic models: (1) Hotelling Model of an Environmental Stock Constraint (2) Dynamic Efficiency (3) Combining (1) and (2)
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Hotelling Model of Environmental Stock Constraint: Other Model Elements (1) demand function for energy (2) marginal extraction cost for energy (c) (3) interest rate (r) (4) Initial stock of fossil fuel resources (S 0 ) [irrelevant element, actually!] (5) Backstop (renewable) resource at marginal cost c B (and the backstop resource produces no CO 2 )
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Hotelling Model of Environmental Stock Constraint Assumption: environmental stock constraint is reached prior to the fossil fuel stock constraint. This is a common assumption in research on economics of climate change. Go to : mathematical analysis of the model
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Hotelling Model (cont.) Choice variables Objective function Constraint Set up Lagrangean and apply our standard procedure!!
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