Week 1 Lecture Notes: Economics of Climate Change PDF

**[Week 1 Lecture Notes: Economics of Climate Change]** Week 1 Content: - Lecture 1A: Introduction to the economics of climate change - Lecture 1B: Climate change in economic models - Tutorial Questions & Answers [Lecture 1A: Introduction to the economics of climate change ] [A few quest...

**[Week 1 Lecture Notes: Economics of Climate Change]** Week 1 Content: - Lecture 1A: Introduction to the economics of climate change - Lecture 1B: Climate change in economic models - Tutorial Questions & Answers [Lecture 1A: Introduction to the economics of climate change ] [A few questions for you: ] 1. What is your background? 2. Why did you choose to study climate change? And why climate change economics? 3. How would you describe climate change as a phenomenon? 4. How are 'economics' and climate change related to each other? 5. Who is responsible for (addressing) climate change? [Table of Contents:] 1. **Climate change: a primer** 2. The economy and the climate: Stylized facts 3. Climate economics: a primer [Climate change: an illustration] A diagram of the greenhouse effect Description automatically generated [Greenhouse gases: ] **Greenhouse gases (GHGs)** are like a cozy blanket around the earth: the more they accumulate, the more they keep it warm The most important greenhouse gases are: - Carbon dioxide ([CO~2~)]{.math.inline} - Methane ([CH~4~]{.math.inline}) - Nitrous oxide ([*N*~2~0]{.math.inline}) - Fluorinated gases (e.g. HFCs) - Water vapor Fluorinated gases are synthetic, but all others occur naturally. Still, **human activity** affects their levels [Greenhouse gases and climate change:]  [The case of CO2: ] The main source of anthropogenic (i.e. human-made) GHG emissions is carbon dioxide (CO2). But how do we emit CO2? (emit= produce or discharge) The main cause is the burning of fossil fuels, like coal, oil, or natural gas. - Fossil fuels are fossils used to produce energy - Fossils are mostly made of Carbon (C) - To release energy, you need to burn them - The combustion uses (di)oxygen (O2), which pairs with carbon to create carbon dioxide (CO2) Lifetime of CO2 in the atmosphere is extremely long: 40% remains after 100 years, 20% after 1000 years, and 10% as long as 10,000 years later (Source: NRDC) [The case of other greenhouse gases: ] - Methane (CH4) is also released from the exploitation of fossil fuels. In addition, livestock (and in particular beef production) are key sources of emissions - Nitrous oxide (N2O) mostly generated through agricultural and some industrial activities - Fluorinated gases are emitted from more specific applications and processes (e.g. used as refrigerants) - Water vapor is not emitted by humans, but its concentration is still indirectly affected by human activities. Ambiguous effects: - Emissions of other GHG warm the planet and oceans, which through evaporation increases the quantity of water vapor; - The higher quantity of clouds makes the planet "whiter" which reflects the solar radiation away from earth bad for people with solar panels [What are fluorinated gases? ] F-gases are human-made gases, the main ones are hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride. [Methane production from ruminants (=cattle, like sheep, cows, goats, deer, giraffes etc)] A diagram of a cow Description automatically generated Chemical reaction: a process called **enteric fermentation** micro-organisms (bacteria) break down complex carbonhydrates into simple sugars used as energy by the ruminants, and various gases including methane (CH4). [Carbon dioxide absorption from photosynthesis: ]  Chemical reaction: Light enables carbon dioxide and water to generate chemical energy  and (di)oxygen (O2) [Table of Contents:] 1. Climate change: a primer 2. **The economy and the climate: Stylized facts** 3. Climate economics: a primer [Economic Development: ] - Since the 1940s economics development is measured by **Gross National Product or Gross Domestic Product (GNP/GDP)** - Why was this indicator invented? How are we using it today? - "The welfare of a nation can scarcely be inferred from a measurement of national income" (S. Kuznets, 1934) "There has been a growing concern in recent years that **the patterns of economic growth (GDP)** being experienced in many parts of the world **are not sustainable** because they are being accompanied by a **depletion of many natural resources** and a **deterioration in various environmental services**" (K. Arrow, 2010) [GDP over the long run:] A graph of a graph Description automatically generated with medium confidence Economics growth took off in the late 1800 (why?): unprecedented phenomenon [GDP and Poverty: ] At the same time, many people were lifted out of extreme poverty... This related to Absolute and relative decoupling, Kaya identity If GDP goes up, then emissions will also go up. How is this related? Climate damages will become so severe that unemployment will increase again [GDP and health:]... which also led to better health conditions... A graph with blue and pink color Description automatically generated [GDP and education]... and other benefits such as higher levels of education  [Human Development Index:] A graph of growth of a number of people Description automatically generated with medium confidence [GDP and energy:] Economics growth has gone hand in hand with energy demand. So far, weak evidence of absolute "decoupling"...  [Absolute VS Relative decoupling:] - Absolute decoupling implies achieving economic growth using fewer resources - Relative decoupling implies achieving economic growth with fewer resources per unit of output A diagram of a diagram Description automatically generated [Future energy demand: ]... and so we can forecast even greater energy demand in the coming decades  [More...] Does this figure below imply absolute or relative decoupling between 2017 and 2040? Why? answer: the figure suggests that future energy demand met by more fossil fuels, but a larger percentage of renewables in energy-mix **relative decoupling** A graph of energy prices Description automatically generated [Trends in carbon concentration: **the Keeling curve**] - The Keeling curve depicts the level of carbon dioxide in the Earth's atmosphere over time - Named after Charles David Keeling who started continuous measurement of carbon concentration at the Mauna Loa Observation in Hawaii in 1958 - How does it work? - Short run GHG (greenhouse gases) concentrations from frequently collected samples - And what about the distant past? - Long run GHG concentrations from ice sheet - What do we learn? - Trends in atmospheric carbon concentration [Trends in CO2 concentration and global average temperature:]  **How is this measured? How is CO2 concentration measured?** [Climate change: what is to be expected] Different future scenarios are possible. Note: these figures mask great uncertainty, especially as emissions increase A graph of the global ghg emissions Description automatically generated [Climate change: pathways to +1.5°C limit warning:] The +1.5°C target is extremely unlikely to be achieved without negative emissions.  [Average temperature increases masks spatial heterogeneity:] A screenshot of a diagram Description automatically generated Source: IPCC, AR6 [... as well as time heterogeneity:]  [What is Spatial Heterogeneity?] - Spatial Heterogeneity: is a property generally ascribed to a landscape or to a population. It refers to the uneven distribution of various concentrations of each species within an area. [Expected frequency of extreme temperatures:] A graph of temperature and temperature Description automatically generated with medium confidence [Beyond temperatures, precipitations are greatly affected as well:]  Source: IPCC, AR6 [The consequences of heat and humidity: ] - Wet-bulb temperature is a frequently used measure to describe the interaction between heat and humidity - If the relative humidity is 100%, the wet-bulb temperature is equal to the air temperature (dry-bulb temperature); if humidity is lower, the wet-bulb temperature is lower than the dry-bulb temperature - More frequent extreme heat waves and a more humid atmosphere pose major health risks. - Why? When the air is too hot and too humid, transpiration does not evaporate and the body cannot cool. - Major consequence already observed in several parts of the world: (see video, slide 34) [Expected evolution of Arctic ice] September Arctic sea ice area A graph of different colored lines Description automatically generated Source: IPCC, AR6 The melting is a self-reinforcing mechanism: the white sheet is replaced by water or dust darker sheet that absorbs more light (see video, slide 35) [Expected acidification of oceans: ] Global ocean surface pH (a measure of acidity)  Oceans become more acid (i.e. their pH decreases) as they absorb more CO2. Great impact on ecosystems [Sea level rise:] Global mean sea level change relative to 1900 A graph of a number of people Description automatically generated with medium confidence Source: IPCC, AR6 Very slow process, that will continue well beyond the XXIth century. By 2300, great uncertainty: "sea level rise greater than 15m cannot be ruled out with high emissions" (IPCC, AR6) [Economic consequences of sea level risk:]  - Why will a rise in sea level cause disproportionate economic damages? - And some consequences of even limited sea-level rise: see video [Short-term evolution of environmental disasters] A graph of different colored bars Description automatically generated with medium confidence [Short-term evolution of biodiversity: ]  Multiple causes: deforestation, land use, agricultural practices (c.f. Silent Spring), climate change, etc. [Deforestation around the world:] A map of the world with red and blue circles Description automatically generated Source: World Bank data. Note: new forests do not substitute for the old-growth forests that have much richer ecosystems [Water scarcity and women labor: ]  Economic developments has lifted out of poverty billions of people in the past decades. Still, in several regions of the world living conditions remain difficult and may further impacted by environmental degradation, such as droughts and reduced agricultural yields. Tight link between environmental and living conditions. [Table of Contents:] 1. Climate change: a primer 2. The economy and the climate: Stylized facts 3. **Climate economics: a primer** [A paradoxical field? ] Economics and the environment are intertwined in more than one way: 1. The **root cause of climate change and environmental degradation** is human economics activity (closely mirrored by GDP growth) 2. Economic progress/growth has historically driven human flourishing decimating poverty, widespread education, life expectancy, and much more - Many economists (green growth) believe that growth will remain essential in a world of climate change - Other (degrowth) point towards the destructive and self-harmful properties of the economy - The **fundamental tension:** economic growth causes climate change and climate change hurts the economy. What to do? [Economics of Climate change:] Economics of climate change can help navigate fundamental tension. But what is it? Lets first define economics, such as: - "the science which studies human behaviour as a relationship between (given) ends and **scarce means** which have alternative uses" (Lionel Robbins) As the study of **allocation of scarce resources**, economics is clearly concerned with natural resources and the environment! What about the climate? Resources affecting other scarce resources, hence many economic questions! [Examples of topics in climate economics:] - How do temperatures affect agricultural yields? - What is the impact of higher temperature on workers' productivity? On students' test scores? On mortality? - How does the anticipation of climate disasters impact the housing market? Are people's anticipations accurate? - Who wins/loses from carbon pricing? How should we adjust the rest of the fiscal system to mitigate adverse distributional effects? - Why do citizens generally oppose carbon pricing? Which type of climate policy do they support more? - How does carbon pricing affect firms' green innovations? How does it affect their output? - How can countries coordinate on global climate action? → Very wide set of topics and tools. [Is climate economics "hot"?] More and more papers are published in the top economic journals (*e.g. American Economic Review*, *American Economic Journal*s, *Journal of Po- litical Economy*, *Journal of the European Economic Association*, *Economic Journal*, etc.). More specialized environmental economic outlets gain traction: - *Review of Environmental Economics and Policy*; - *Journal of Environmental Economics and Management*; - *Journal of the Association of Environmental and Resource Economics* ; - *Ecological Economics*; - *Environmental and Resource Economics*. Relevant climate econ research can also be found in more multidisciplinary journals, such as *Nature Climate Change*. In 2018, William Nordhause was awarded the Nobel prize in Economics for his climate-economy (DICE) model next lecture [Conclusion:] - Climate economics is an emerging and vital field in economics - It studies the fundamental tension and interaction between an **intertwined economy and enviroment** [Appendix: ] Sub-field of environmental economics. Environmental degradation can take many forms. Examples: - biodiversity losses; - land use; - air pollution (*e.g.* from particulate matter); - water pollution; - wastes (*e.g.* nuclear); - rising sea levels; - extreme weather events; - non-renewable resource depletion (*e.g.* oil, some minerals used for batteries); - renewable resource depletion (*e.g.* fish stocks, forests); - etc. Although they may have a common cause, not all these problems are due to climate change. **This course:** focus on climate change, but these other issues will be indirectly involved. [\ ] [Lecture 1B: Climate change in economic models] [The Kaya identity: ] - Economic growth, energy use, and climate change are intertwined - The Kaya Identity decomposes the drivers of climate change: - Denotations: - F = the total anthropogenic GhG emissions - P = the total population - G = the global GDP - E = the global energy consumption - [\$F = P \\times \\frac{G}{P} \\times \\frac{E}{G} \\times \\frac{F}{E}\$]{.math.inline} - Thus, the evolution of total anthropogenic GhG emissions results from the evolution of four distinct factors: 1. Population (P) 2. GDP per capita (G/P) 3. The energy intensity of GDP (E/G) 4. The GhG intensity of energy (F/E) Any increase (decrease) in one of these components leads, everything else equal, to an increase (decrease) in total GhG emissions A graph of a graph showing the difference between gas emissions and fuel combustion Description automatically generated with medium confidence Between 2000 and 2010, production has become **more energy efficient**. However, this is overshadowed by **GDP per capita growth**, **population growth**, and **higher carbon intensity of energy**. [Modeling the climate-economy relationship:] - The Kaya identity is a simple identity: useful for accounting purposes, but: - Does not allow to isolate the effect of policies - Not suited for prescriptive purposes (example of **bad faith** vs **good faith** arguments) - Example: would reducing population by half cut emissions by two? Which half? How would this affect GDP per capita? Etc. - The Kaya identitdy is tautological (F=F) although it may appear to connect the environment (F) with the economy (G). We need fully-fledged models that indicate **causalities** - More importantly, we want to understand mutual causalities: economic growth affects the climate, but how does the climate affect economic activity? To answer these questions, economists have developed a class of models, called **Integrated Assessment Models (IAMs)** - The most well-known IAM is the DICE model - , introduced by William Nordhaus (Ecnomics Nodel Prize 2018) [DICE: Introduction ] - The DICE model describes how the economy (i.e. production and consumption of goods and services) creates emissions that cause environmental damage - The environmental damages feedback by limiting the production of goods and services, thereby establishing this mutual causality - The DICE model is therefore a set of (mathematical) equations that reduce the complex behaviours and natural processes to simply, tractable relationships - These equations can be calibrated to real-world numbers (1) test the accuracy of the model and (2) make predictions for the future [DICE: Climate model] **Objective:** model climate change and how it interacts with the economy The DICE Model contains the following elements: 1. Households enjoy the consumption of a good 2. The production of this good generates GhG emissions 3. Emissions accumulate into carbon stocks 4. GhG atmospheric concentration warms the planet 5. Higher temperatures cause economic damages Trade-off: consuming more pollutes and leads to economic damages that reduce future consumption Note: the mathematics in the following slides is for illustrative purposes only and need not be understood/replicated for assessments. I will explain the math in plain English along the way [Consumption: ] - The population consumers (i.e. Households, [*L*~*t*~]{.math.inline}) enjoys the consumption of final goods and services [*c*~*t*~]{.math.inline} over [*T*~max~]{.math.inline} periods discounted at rate [*ρ*]{.math.inline}. They maximize the utility they get from consumption - Discount rate [*ρ*]{.math.inline} is an incredibly important parameter: it tells us how much value we attach to the future - The higher [*ρ* ( \