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notes_5_26_2010

# notes_5_26_2010 - Climate Change Adaptation Challenges...

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1 Climate Change: Adaptation Challenges Matthew E. Kahn UCLA and NBER Institute of the Environment Departments of Economics and Public Policy Mek1966.googlepages.com

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Introduction Back to Monday’s class; irreversible investment and uncertainty Greens need for profit businesses to “go green” and make the investments today that will yield the “Next Prius
Simple Ugly Example Two period model; time t and time t+1 At time T, your firm produces X tons of Greenhouse gases Firm can invest F dollars today in a project that will reduce its greenhouse gas emissions to zero at time t+1 There is a 50% chance that the carbon price at time t+1 = \$10 per ton and a 50% chance that the carbon price = \$0 (no regulation) Interest rate = r

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PDV calculation in the Presence of a big Fixed Cost F Will you “go green” at time t? Cost = F, Benefit = .5*10*X/(1+r) Invest in “green tech” at time t if .5*10*X/(1+r) F > 0 New Strategy --- delay investment decision until time t+1 and only do the project if carbon pricing is enacted PDV of delaying decision until time t+1 = .5*(10*X F)/(1+r) > 0
DeShazo’s Feed In Solar Tariff Governments are introducing incentives for firms to “go green” Economists would prefer a simple carbon tax or cap and trade but instead we get complicated subsidies This case study of offering a “Feed in” tariff raises a number of issues What is a feed in tariff? Has it been effective in Europe?

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Feed in Tariff A feed-in tariff is a policy that requires a utility to buy solar power that residents, businesses and public organizations produce by installing solar on their roof-tops, parking lots and vacant land. BENEFITS 1. Produces significant number of in-basin high-wage jobs, 2. Quickly generates energy to meet renewable energy goals, 3. Taps the unused solar generation capacity of homes, businesses and parking lots, 4. Reduces utilities’ out -of-basin transmission costs and peaking costs, 5. Signals a commitment to developing a local green-technology sector
The Status Quo Policy The current solar policy in Los Angeles is based on net metering programs. Net metering seeks to reduce the amount of power each building consumes from the grid (by encouraging the owner to install only enough solar to off-set their own energy needs). These policies often cause solar owners to undersize their installations, leaving much usable roof and parking space without solar panels. In contrast, a well-designed feed-in tariff will create incentives for people to maximize the solar capacity of their roofs and parking lots by transforming them into solar power plants that supply Los Angeles with clean, green power.

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notes_5_26_2010 - Climate Change Adaptation Challenges...

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