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1423class21 - 14.23 Government Regulation of Industry Class...

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14.23 Government Regulation ± of Industry± Class 21: Markets for Greenhouse Gases MIT & University of Cambridge± 1
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Outline • The GHG problem • Some Economics relevant to Climate Change • Marginal damage costs of Climate Change • The Nature of Uncertainty • Economic Policy and Uncertainty • Benefits of International Co-operation • McCain-Lieberman Draft Bill 2
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Source: Reilly et al., 2003, http://web.mit.edu/globalchange/www/PewCtr_MIT_Report03.pdf , p.5. 3
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Potential damage of rising climate Sea level rise leading to: dryland loss, wetland loss, coastal protection and migration. Agricultural output and distribution of output effects. Heat stress, cold stress, malaria, tropical cyclones, extra tropical storms, river floods and unmanaged ecosystems. The effect of these would be deaths, migration and increased mitigation expenditures. Standard estimate range is that average global temperature will rise by 1.5-4.5C by 2100. 4
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Some difficulties in assessing climate change We are actually talking about managing risk under uncertainty. There are two ways of dealing with this: insurance and mitigation. • Problems for analysis: – Difficulty in assessing risks. Why? – Risks are endogenous. Why? – Individual risks correlated with each other. So, what? – Irreversibility. How is this significant? 5
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Is insurance the answer? If I (or the UK) am worried about climate change, why can’t I (or the UK) just take out an insurance policy? • State of nature contingent markets do exist: – Chicago Catastrophe Futures – Monte dei Paschi di Siena agricultural insurance In theory it might be possible for countries to offer insurance on the basis of differences in their perceived risk.
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This note was uploaded on 11/18/2011 for the course ECON 14.23 taught by Professor Daronacemoglu during the Fall '09 term at MIT.

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1423class21 - 14.23 Government Regulation of Industry Class...

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