Environmental Economics: An Introduction - PDF

Okay, here is the converted markdown format of the document or image: # Environmental Economics An Introduction By Paul BELLEFLAMME, Louvain School of Management [Start] ## Policy Implementation 1 Main Challenges 2 Cost/Benefit Analysis ## What are the challenges? "The urgency of global warm...

Okay, here is the converted markdown format of the document or image: # Environmental Economics An Introduction By Paul BELLEFLAMME, Louvain School of Management [Start] ## Policy Implementation 1 Main Challenges 2 Cost/Benefit Analysis ## What are the challenges? "The urgency of global warming requires **rapid and large-scale action**, and success will largely depend on technological advances. We must avoid increasing the costs of ecological transition, which will be high in any case, by opting for measures that are not effective. The good news is that people are clearly concerned about global warming. The bad news is that they are reluctant to bear the cost of the ecological transition and its consequences on their way of life. At the same time, the lack of transparency on the cost and effectiveness of different measures does not make the discussion any easier." (2021) ## Basic trade-off The graphic shows the trade-off between producing and consuming more and enjoyment of a less-degraded environment. Producing and consuming more has the following: - For current generation - Relatively easy to value Enjoyment of a less-degraded environment: - For current and future generations - Hard to value - The voice of future generations can be heard only through ourselves. But how? - Very different views across economic agents - Costs and benefits of abatement are not equally shared across society. ## Climate change is making inequality worse. ### Across countries **Double inequality** * Rich countries are responsible for the bulk of past CO2 emissions BUT poor countries are generally hit earlier and harder by climate change. * Rich countries became rich through high-carbon growth, which gives them an advantage over poor countries in the 'new way' that must be found. ### Within countries **Climate change policies are often regressive.** * Most climate policies increase the price of energy. * BUT, the budget share devoted to energy decreases with household income. * So, low-income households are hit proportionally harder by these policies. *Climate change impacts fall disproportionately on the poor. ## Belgium - 2021. The neighbourhoods ravaged by the floods are often the poorest. The graphic is a map that shows the mediam revenue per neighbourhood according to the colour of the region. ## Share of $CO_2$ emissions by income group and population The image has a diagram that shows: * Richnest 10% emitting 50% of all missions * Middle 40% emitting 43% of all missions * Poorest 50% emitting 8% of all missions * Huge impact of the middle class * "Carbon emissions of richest 10% are up to 40 times bigger than poorest, and ignoring divide make ending climate crisis impossible, experts say." * "The richest 1% of people are responsible for as much carbon output as the poorest 66%, research from Oxfam shows." ## How to address these challenges? "The public's attitude towards green taxes is determined more by their visibility than their effectiveness. Although unpopular, carbon pricing is essential to the transition because not only does it encourage greener behavior and stimulates green R&D in a transparent and efficient way, but, perhaps more importantly, it allows better choices to be made and overpriced solutions to be rules out. To implement a fair carbon price, it needs to be expanded. (...)" We must also be particularly concerned about potential losers, such as modest households living in suburban and rural areas. (...) This is the only way our societies can face the challenge of global warming in the long run." (2021) ## Measuring costs/benefits **Challenges** * Missing markets for environmental quality * Uncertain long-term impacts 1 **CONTINGENT VALUATIONS** * Use surveys to assess the value of nonmarket resources * $\longrightarrow$ Stated preference approach: Assumes respondents' statements indicate their true preferences. 2 **HEDONIC PRICING** * Use prices of market goods to infer the economic value of unpriced attributes * e.g., house prices $\longrightarrow$ near airports vs. quieter neighborhoods * $\longrightarrow$ Revealed preference approach: Uses behavior as an indication of preferences. [READ MORE] ## Intergenerational fairness The image contains four panels from a cartoon: **Panel 1**: * "It's NOT ETHICAL to create Problems future GENERATIONS **Panel 2**: * "It's NOT ETHICAL to make my KID'S SUFFER TODAY" * "for the SAKE of my great, great, great, Grand. Kids" **Panel 3**: * "Lives are not Like MONEY. one life ALWAYS has the Same VALUE" **Panel 4**: * NOT TRUE! If there was BUTTON that SAVED a LIFE today Instead of • LIFE tomorrow, you WOULD PRESS it. ## Social discount rates (SDRs) **Definition and relevance for climate change** * SDRs put a **present value on costs and benefits that will occur at a later date.** * Very important for working out how much today's society should invest in trying to limit the impacts of climate change in the future. * $\CO_2$ has a very long residence time in the atmosphere * $\implies$ We must value the impacts of today's emissions centuries into the future. **Why discounting the future?** **Reason 1. Growth** * Societies are assumed to grow wealthier over time * $\implies$ €1 today is worth more than €1 in the future when we will enjoy higher incomes. **Reason 2. Impatience** * People prefer income today rather than tomorrow, even if they expect to be no more or less rich tomorrow. * Controversy $\Longrightarrow$ Should this be reflected in policymaking, given that it effectively weighs future generations lower than the present one\`? [READ MORE] ## The social cost of carbon (SCC) **Definition** * Monetary estimate of the cost of the damage done by each additional ton of carbon emissions. * Also: estimate of the benefit of any action taken to reduce a ton of carbon emissions. **How is the SCC calcultated?** * When calculating the social cost of carbon, climate scientists and economists create models to predict what will happen to a range of indicators when new carbon dioxide is put into the atmosphere. * Among these indicators are health outcomes, agricultural production, and property values. An extra ton of carbon emissions shortens lifespans, hurts crops, and causes sea levels to rise, decreasing property values. ## How discount rates affect the social cost of carbon The image is a graph of how discount rates affect social cost of carbon. The graph displays that the amount of social amount over time depending on what the near-term discount rate is with, 3%, 2.5%, 2% and 1.5%. ##### SDR & SCC * A lower SDR, like 1.5%, means we are placing a greater value on benefits to future generations, such as those created by avoiding burning fossil fuels. * That low SDR, when plugged into economists' equations, results in a high SCC, making it more costly to emit carbon dioxide today.