Carbon Pricing and Economic Impact Quiz

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is a potential consequence of high carbon prices as discussed in relation to carbon leakage?

Companies might increase production within high carbon price countries.

Investment in clean technologies would significantly decrease.

Energy-intensive industries would collapse in lower carbon price countries.

Companies could shift production to countries with lower carbon prices. (correct)

Which of the following is NOT listed as a proposed solution to carbon leakage?

Encouraging the use of renewable energy sources. (correct)

Implementing a global carbon price.

Providing free permits to energy-intensive importers.

Imposing tariffs on foreign goods.

What was the initial strategy employed by the EU to address import competition before implementing the CBAM?

Establishing a global carbon trading framework.

Mandating all countries to adopt equivalent carbon prices.

Providing free ETS permits to companies. (correct)

Imposing heavy tariffs on all imports.

What challenge was identified with the previous system of providing free permits in the EU's carbon market?

It limited the incentives for companies to decarbonize. Signup and view all the answers

What impact does the Carbon Border Adjustment Mechanism (CBAM) aim to achieve?

To encourage foreign countries to create their own carbon pricing. Signup and view all the answers

Which option is NOT a common condition set by the IMF for loan approval?

Democratization Signup and view all the answers

What factor increases the risk associated with sovereign borrowing?

Spending borrowed money on personal luxuries Signup and view all the answers

Which of the following events was NOT part of the Great Depression from 1929 to 1939?

Price levels remained stable throughout the decade Signup and view all the answers

What economic strategy did the US adopt to address stock market speculation in 1929?

Increased interest rates Signup and view all the answers

During the Great Depression, what percentage did the unemployment rate peak at in the US?

25% Signup and view all the answers

What was a significant cause of the banking panic during the Great Depression?

Widespread bank failures Signup and view all the answers

What economic condition characterized the period leading to the Great Depression in the 1920s?

Continued reliance on the Gold Standard Signup and view all the answers

What is likely to happen when customers begin to withdraw their funds from a bank?

The bank is more likely to run out of money. Signup and view all the answers

How did the Smoot-Hawley Tariffs affect global trade during the Great Depression?

Led to a collapse in world trade Signup and view all the answers

Which factor contributed to the spread of the Great Depression to Europe?

Rise in protectionism and cessation of US credit. Signup and view all the answers

What effect did the breakdown of the Gold Standard have on economic policy?

It facilitated bank bailouts and monetary expansion. Signup and view all the answers

What significant effect did the lockdown have on consumer behavior?

Boosted demand for goods like Peloton bikes and Playstations Signup and view all the answers

Why did FDR declare a bank holiday during the Great Depression?

To prevent bank runs through temporary deposit insurance. Signup and view all the answers

What economic shift occurred due to the inflow of gold from Europe to the US?

An increase in inflation, lowering borrowing costs. Signup and view all the answers

What is the primary concern for policymakers regarding inflation during a supply shortage?

Boosting the money supply without addressing supply chain issues Signup and view all the answers

What is the policy goal referred to as a 'Soft' landing?

Decreasing inflation without triggering a recession Signup and view all the answers

How did the failure of European banks relate to the Great Depression?

It was aided by reparations and war debts becoming harder to repay. Signup and view all the answers

What role did Keynesian ideas play during the economic crisis?

They supported government stimulus and bailouts. Signup and view all the answers

Which of the following statements about global economic imbalances is true?

They contribute to financial and currency crises Signup and view all the answers

What challenge do countries face in addressing economic crises caused by supply-side shocks?

Global interdependence complicates coordinated efforts Signup and view all the answers

What was a consequence of the increased government spending during the New Deal?

It helped improve economic indicators and employment. Signup and view all the answers

In the context of the pandemic's economic impact, what did disrupted supply chains primarily affect?

The ability to meet demand for goods Signup and view all the answers

What was a consequence of the economic reopening after lockdowns?

Challenges in the service industry finding workers Signup and view all the answers

What may happen if monetary policy excessively boosts demand in the current economic climate?

Further fueling of inflation issues Signup and view all the answers

What was one of the main reasons for the formation of OPEC in 1960?

To stabilize oil prices Signup and view all the answers

Which event led to the OPEC oil embargo in 1973?

The Yom Kippur War Signup and view all the answers

What role does the International Energy Agency (IEA) primarily serve?

Supporting oil-importing countries Signup and view all the answers

Which of the following is a central function of OPEC?

To negotiate with oil companies Signup and view all the answers

How did OPEC assert its power during the 1970s?

By imposing an oil embargo Signup and view all the answers

What can a lack of reliable, cheap energy lead to in an economy?

Deep economic crises Signup and view all the answers

What strategy did OPEC adopt from the 1980s to maintain oil prices?

Mandatory production quotas for its members Signup and view all the answers

Which of the following institutions was created to address global climate change?

UNFCCC Signup and view all the answers

What is a potential consequence of concentrated lobbying from industries regarding climate action?

Climate action is delayed or weakened Signup and view all the answers

Which group is identified as a winner among producers in the context of climate action?

Producers of green energy Signup and view all the answers

What is a major hindrance to collective action in addressing climate change?

The costs of climate action are heavily concentrated Signup and view all the answers

Who typically bears the costs of climate action according to the discussed outcomes?

Consumers rather than businesses Signup and view all the answers

In the short to medium run, which group is likely to lose due to increased restrictions on GHG-intensive activities?

Fossil fuel producers Signup and view all the answers

What is a key characteristic of the benefits associated with effective climate action?

They are broadly diffuse and global Signup and view all the answers

Which industry's producers are likely to be negatively impacted by climate policies implementing higher prices and quotas?

Fossil fuel producers Signup and view all the answers

What challenge do young citizens face in supporting climate action effectively?

The tendency to free-ride off others' efforts Signup and view all the answers

Study Notes

Crises of Financial Openness: Financial and Currency Crises

This presentation outlines various financial and currency crises throughout history, including the Great Depression, Asian Financial Crisis, Great Recession, and 2020 Pandemic.
Review questions assess key IMF loan conditions (e.g., liberalization of trade, democratization, fiscal discipline, and privatization) and factors increasing sovereign borrowing risk (e.g., borrowing in domestic vs. foreign currencies, spending borrowed money on consumption rather than investment).
A game plan uses historical events (1929-1939 Great Depression, 1997-8 Asian Financial Crisis, 2007-2009 Great Recession, and 2020 Pandemic) to analyze patterns and common themes.

Great Depression

The Great Depression was the longest and most severe crisis in industrialized countries.
In the U.S., Real GDP fell by 29% from 1929 to 1933.
Unemployment peaked at 25% in 1933, and 7000 banks failed.
In Europe, manufacturing declined by 39%, and unemployment peaked at 44%. Prices fell 30% or more.
1920s saw Western countries on a Gold Standard with persistent imbalances.
U.S. had a current account surplus. Some European countries had deficits (due to WWI).
Huge war debts and reparations payments flowed to the U.S., but instead of rising prices, the U.S. lent money back through international bonds.
Speculation in the stock market prompted the US to tighten monetary policy to limit speculation, which triggered a stock market crash.
Uncertainty about the economy led to less spending, leading to bank failures.
Smoot-Hawley Tariffs and global trade retaliation caused economic collapse.
Banking panics occurred with no governmental deposit insurance.

Bank Runs

Fractional reserve banking creates a risk of a run on banks as customers remove deposits potentially causing bank failure.
Bank runs are self-fulfilling prophecies as more people believe a bank will fail and remove their deposits.

Where was the Federal Reserve?

Many local banks were not members of the Federal Reserve System and couldn't borrow from the Fed.
Nominal interest rates were close to 0 (or zero), but deflation made borrowing and investment very costly.
Attempts to maintain the Gold Standard restricted expansionary monetary policies and bank bailouts.

Great Depression Spreads to Europe

Gold Standard required monetary contraction in Europe to match U.S. contraction.
Loans from the U.S. stopped to countries needing funding to rebuild from WWI.
Rise in protectionism and US consumer market in depression halted cheap credit creating a slump in industrial production in Europe.
Deflation made it harder for European countries to repay war debts and international reparations.
European banks also began failing.

What Led to "Recovery"?

In the U.S., FDR declared a bank holiday and implemented deposit insurance, ending bank runs.
Gold inflows to Europe from economic and political crisis led to inflation, making borrowing less costly.
FDR's "New Deal" initiated government spending to stimulate the economy.
Globally, the breakdown of the Gold Standard and expanded monetary policies to rescue banks, coupled with World War II and large government spending, stimulated economic growth, although at the expense of high personal costs for most citizens.

Impact of Economic Ideas

Economic policy debate centered on Keynesianism and Austrian School viewpoints
The difference in opinions on both schools of thought influenced the response to the crisis(es)

Financial and Currency Crises in Emerging Markets (1990s)

Global rise in private capital flows to newly liberalized stock markets, with Asia as the largest recipient, followed by Latin America.
Hot/transient money entering developing markets could be readily removed from those markets.
Increased volatility and repeated crisis in emerging markets occurred in 1994 in Mexico, 1997 and Indonesia, Malaysia, South Korea, 1998 Brazil, and Russia, 2000 Turkey, and 2001 Argentina.

Commonality Across Crises

There was a fixed exchange rate.
Heavy reliance on short-term capital, which involved continuous roll-over of foreign liabilities.
These issues often depend on government's ability to maintain confidence in fixed exchange rate commitments.
Sudden shifts in market confidence usually triggered abrupt capital flows, followed by government devaluation and/or possible governmental collapse.

Asian Financial Crisis

Financial markets in Asia were liberalized in the late 1980s and early 1990s, leading to easier access for international borrowing.
This made domestic banks in Asia intermediaries for these large-scale international transactions, creating a high expectation of profit.
However, these transactions often resulted in risky behavior by borrowers, like short-term loans made based on foreign currency.
Problems with currency exchange and fluctuating global markets frequently exposed banks to large-scale debt and withdrawal problems.
Problems included shocks to the system (e.g., currency appreciation against the Japanese Yen in the mid-1990s, difficulty exporting/importing to/from countries, real estate prices falling due to large-scale debt, and bank failures).
There was a lot of "contagion," where one country's crisis triggered a regional or global crisis in other areas (e.g., Panic started in Thailand, and then cascaded throughout Southeast Asia and beyond).

A Risky Banking System

Flaws in banking regulations due to moral hazard, where banks assumed more risk because they believed governments would bail them out.
Issues included close ties to government and/or direct government ownership of some major financial institutions.
A lack of financial regulation and enforcement also played a large role in creating an unsafe situation.

Shocks to the System

Asian Countries' exchange rates rose against the Yen, and then the Dollar, creating difficulties exporting to Japan, which led to debt problems for firms that focused on exporting,
Real estate prices began to decline creating debt problems for real estate firms.
Finance One, a major Thai Financial Institution, revealed itself to be insolvent in Spring of 1997 creating a crisis of confidence.

Contagion

Panic started in Thailand in May 1997, rapidly spread to Philippines, Indonesia, Malaysia and Taiwan.
South Korea's government devalued its currency in November.
$60B was pulled from Southeast Asia for foreign investments in the second half of 1997.

The Repercussions

IMF involvement in lending to affected countries in return for economic reforms (e.g., monetary policy tightening and fiscal policy tightening).
Severe economic and political repercussions include recessions, rises in poverty, protests, and political instability.

Great Recession 2007-2009

Global imbalances in the years leading to the recession (especially high US current account deficits during the 2000s).
US blames "savings glut," trying to force China and Germany to adopt new policies.
US policy makers tried to push China to expand consumption and allow the Yuan to appreciate against the US dollar.
Cheap credit in the US fueled real estate bubbles, as mortgage-backed securities (MBS) with diverse risk profiles concentrated into single securities.
The price of real estate soared in the U.S. from 2000-2006 causing a market boom.
In 2007, real estate prices began to collapse triggering large amounts of defaults.
Global credit markets froze due to the bankruptcy of Lehman Brothers in 2008 due to the interconnectedness of worldwide financial markets.
The U.S. went to great lengths to bail-out financially troubled or failing banks and made unprecedented use of government resources to stimulate the global economy
Policy responses included bank bailouts, central bank injections of liquidity, and (eventually) coordinated international efforts.

Policy Reactions

Several countries had unprecedented bank bailouts.
Central banks lowered interest rates to zero.
Injections of liquidity into markets.
Coordinated international action included a shift from G-7 to G-20 focus.

Global Imbalances

Ongoing global imbalances - US continued to have current account deficits. Pressure from Trump to change Chinese and German policies had limited success.

Coronavirus

Coronavirus pandemic was a unique supply and demand shock.
Global commodity prices (e.g., lumber) rose drastically due to lockdowns, consumer demand shifts to goods from services (e.g., increase in demand for coloring books), and severe disruptions to supply chains from lockdowns.
Governments responded with coordinated monetary and fiscal policies throughout the world (increased money supply, incentivized people to spend)

A Coronavirus-Specific Problem: Inflation

Supply-chain issues and manufacturing shutdowns impacted supply chains that provided goods and services globally.
Demand surged as individuals focused more time on goods versus services. Shortages and supply constraints created inflationary pressures in the global economy.
Responses via fiscal and monetary policies had unintended consequences and exacerbated supply chain disruptions and inflationary pressures,
The combination of supply and demand pressures created inflation in the short term for a wide variety of goods.

Core Take-Aways

Global imbalances contribute to financial and currency crises
Economic interconnectedness enhances propagation of shocks
Fixed exchange rates are difficult to maintain in globalized markets with short-term capital flows.
Crises are tougher when they contain supply shocks.

Climate Change

The need for collective action (everyone has to do something to tackle climate change collectively), but incentives to free-ride are present, as are differing priorities.
Historical agreements, including 1992 UNFCCC and Kyoto, were created, but have limitations
The Paris Agreement provides a new way of handling emission reductions, but is still struggling to achieve enough commitment.

Domestic Interests

Costs of climate action are often concentrated (e.g., on a few industries and or sectors) and easily lobbyed
Businesses tend to lobby for their own interests while the positive and more diffuse benefits of climate action fall onto the rest of the world. (e.g., in the short run the cost to businesses of transitioning to cleaner energy or moving away from high carbon-producing means frequently appears higher than the diffuse benefit to society in the longer run).
The problem of energy poverty makes these situations even more challenging as households (the poorest) also have different priorities when it comes to climate action.
Solutions to climate change include carbon taxes and emission trading that create specific prices for emitting carbon, incentivize changes, or limit emissions in other ways.

Common Policy Approaches

Carbon Taxes
Emission Trading
Green Industrial Policy

International Climate Negotiations

History of international interactions related to climate change including significant dates and important agreements (e.g. the Paris agreement).
A "New Model" from the Paris Agreement includes different and more politically palatable goals, as well as different approaches to financing climate action and dealing with differences in political priorities across countries.

Limits of State Capacity

State capacity is the ability of a government or state to efficiently meet the needs of citizens, which includes (but is not limited to) policy-making, implementation, and service delivery.
Limits to a state's capacity to effectively implement a "green transition" (e.g., making and incentivizing investments, monitoring and enforcing climate laws, and climate aid and disaster response).

International Climate Finance

Funding for mitigation and adaptation efforts in developing countries.
Developed countries have set a goal to mobilize funds for climate action in developing countries. Significant delays and ongoing disagreements exist on raising the necessary investment levels for these important and needed actions.

A New Supply Challenge: Raw Materials

Energy transition depends on critical raw materials like those used in batteries, low-carbon power generation, and electricity grids.
Disruptions to the supply of raw materials are a significant threat to the energy transition
Dependence on particular countries for critical materials risks disruption in those supplies which can also threaten economic disruptions.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge on carbon pricing, the Carbon Border Adjustment Mechanism, and the economic conditions of the Great Depression. This quiz covers key concepts related to carbon leakage, IMF loan conditions, and historical economic strategies. Explore how these elements interconnect in today's global economy.