Economics 134 L7. Climate Change I Lecture Notes PDF

Economics 134 L7. Climate Change I Will Rafey UCLA October 23, 2024 Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 1 / 35 Climate change Why study climate change? 1 One of...

Economics 134 L7. Climate Change I Will Rafey UCLA October 23, 2024 Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 1 / 35 Climate change Why study climate change? 1 One of the greatest challenges of our time 2 Raises new and interesting economic issues 1 balancing energy use with decarbonization (today) 2 discounting and long-run environmental policy (L8) 3 risk, uncertainty, and irreversibility (L9) 4 international negotiation and cooperation (L10) Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 2 / 35 1. Unprecedented rise in global temperature due to CO2 Source. IPCC August 2021, p. 8 Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 3 / 35 2. Strong correlation between CO2 and economic output CO2 per dollar GDP, across countries Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 4 / 35 Plan for today Today, we’ll introduce two sides of the equation: 1 Some economic damages from climate change (benefits to ↓ temperatures) 2 Some economic value of carbon emissions (costs of mitigation) and we will study the efficient climate change policies that they imply. For now, we’ll assume we know how to (a) value events in the future; (b) deal with uncertain and/or irreversible outcomes; (c) coordinate with every country. ,→ each of these assumptions is unrealistic and we will relax them all, but it is useful to start with the simplest case. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 5 / 35  1. Estimating climate damages 1. Estimating climate damages Empirical strategy Aggregate damage function 2. Estimating costs of reducing climate change Three strategies Case studies Aggregate cost function 3. Calculating the optimal global carbon price Integrated assessment modeling Social cost of carbon Policy evaluation Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 5 / 35  1. Estimating climate damages Estimating climate damages Estimating the economic damage from climate change involves a few steps: 1 mapping CO2 7→ climate change already demonstrated a robust average relationship X predicting when and where such changes will occur is much more difficult we will leave this (mostly) to the climate scientists! 2 mapping climate change (e.g., temperature) 7→ economic damage this is economists’ comparative advantage Some challenges are tremendous uncertainty about the details of the climate physics the myriad effects climate has on a vast range of economic activities Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 6 / 35  1. Estimating climate damages Empirical strategy Example: Agricultural yields and temperature Much of the work underlying the economics of climate change involve looking at specific industries and relating changes in temperature to outcomes We’ll briefly consider an example, that looks at agricultural yields in the U.S. 2.6m workers (1.4% of workforce); $136bn output (0.6% of GDP) in 2020 world’s largest agricultural producer (41%, 38% of world’s corn, soybeans) Paper: Schlenker and Roberts (2009), “Nonlinear temperature effects indicate severe damages to U.S. crop yields under climate change,” Proceedings of the National Academy of Sciences, 106(37): 15594–15598. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 7 / 35  1. Estimating climate damages Empirical strategy Empirical strategy Research strategy: combine detailed spatial data on daily temperature (exposure during growing season) and U.S. crop yields from 1950–2005 In words: compare crops grown in the same county in different years controlling for state-specific effects over time to isolate the effect of hotter days on yields (yield ≡ output/acre). In math: estimate a nonlinear function g to fit the data: yieldit = g (temperatureit , controlsit ) + εit across counties i and years t, given measurement error εit. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 8 / 35  1. Estimating climate damages Empirical strategy Agricultural yields and temperature: Results Source. Schlenker and Roberts (2009, Figure 1A, p. 15595). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 9 / 35  1. Estimating climate damages Empirical strategy Agricultural yields and temperature: Results Source. Schlenker and Roberts (2009, Figure 1B, p. 15595). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 9 / 35  1. Estimating climate damages Empirical strategy Agricultural yields and temperature: Results Source. Schlenker and Roberts (2009, Figure 1C, p. 15595). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 9 / 35  1. Estimating climate damages Empirical strategy Agricultural yields and temperature: Results Finding: threshold in output effects starting between 29–32◦ C, depending on the crop temperature moderately beneficial until the threshold very harmful above the threshold Why should we care? ,→ if the distribution of average temperature shifts to the right, then we will see more very hot days We can study this directly, by projecting the estimates into the future using predicted temperatures under future climate change scenarios ,→ Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 10 / 35  1. Estimating climate damages Empirical strategy Implications of global warming Source. Schlenker and Roberts (2009, p. 15595). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 11 / 35  1. Estimating climate damages Empirical strategy Implications of global warming, cont’d Source. Schlenker and Roberts (2009, p. 15595). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 11 / 35  1. Estimating climate damages Empirical strategy Many empirical studies Many other studies proceed along these lines: (a) try to isolate comparisons that control for omitted variables, and then (b) learn about the effects of temperature on outcomes of economic interest. For example, economists have found hotter days increase mortality (Barreca et al. 2015) hotter days reduce worker productivity (Heal and Park 2016) hotter days increase workplace injuries (Park, Pankratz, and Behrer 2021) higher annual temperatures lower economic growth in developing countries (Dell, Jones, Olken 2012) hurricanes and tropical storms reduce long-run economic output (Hsiang 2010) See Dell, Jones, Olken 2014 (course website) for one synopsis. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 12 / 35  1. Estimating climate damages Empirical strategy Caveat Important distinction to keep in mind: climate 6= weather climate: distribution of weather outcomes weather: realization of climate (e.g., today’s temperature or rainfall) Commentators (and economists!) frequently confuse the two. But the distinction is crucial for economic analysis: climate change is somewhat permanent and should affect longer-run economic decisions (where to live, where to work, what technology to invent) changes in the weather may be transient and entail very different economic responses Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 13 / 35  1. Estimating climate damages Aggregate damage function Discussion General idea of constructing a damage function: obtain a lot of these small estimates add them up to obtain total damage for each sector and each county for a given increase in temperature use to trace out the aggregate climate damages curve as a function of the temperature increase Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 14 / 35  1. Estimating climate damages Aggregate damage function Aggregate climate damage function Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 15 / 35  2. Estimating costs of reducing climate change 1. Estimating climate damages Empirical strategy Aggregate damage function 2. Estimating costs of reducing climate change Three strategies Case studies Aggregate cost function 3. Calculating the optimal global carbon price Integrated assessment modeling Social cost of carbon Policy evaluation Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 15 / 35  2. Estimating costs of reducing climate change Three ways to prevent climate change Broadly, three strategies for slowing climate change: 1 Reduce emissions from economic production 2 Directly remove carbon from emissions or the atmosphere (carbon removal) 3 Engineer the climate directly (geoengineering) or engage in other adaptation strategies. With the possible exception of (3), each of these strategies will play a role in our response to climate change. We’ll discuss them in reverse order. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 16 / 35  2. Estimating costs of reducing climate change Three strategies 3. Geoengineering Conceptually straightforward (cloud seeding since the 1970s; well-established link between volcanic eruptions and temperature reductions); very inexpensive. Details are much murkier. Possibly very bad side effects. Bottom line: adaptation should and will be undertaken, but it’s not free geoengineering may or may not be allowed even proponents agree that it is dangerous to rely exclusively on untested technology to radically alter the environment some concerns that the prospect of geoengineering itself may delay the transition to clean technology (e.g., Acemoglu and Rafey 2023) Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 17 / 35  2. Estimating costs of reducing climate change Three strategies 2. Carbon removal Highly attractive in principle: reverse combustion! Difficult in practice: very costly per ton of carbon, both in terms of money and also energy lots of engineers trying to solve this problem, but limited progress Trees offer a natural solution, though require continuous monitoring + management. ,→ we’ll discuss this more later in the course! Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 18 / 35  2. Estimating costs of reducing climate change Three strategies 1. Reduce emissions Lowering emissions (abatement): policymakers’ main focus since the first UN assessment (IPCC, 1990) “the only realistic option to deal with climate change” (Nordhaus 2018, p. 447) Broadly, two complementary strategies: substitute away from fossil-fuel intensive production towards different activities that do not use fossil fuels e.g., switch from coal to natural gas, nuclear, or renewables for electricity generation (or stop consuming energy entirely) better technology to improve the efficiency of carbon-based production e.g., more efficient internal combustion engines; electric cars Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 19 / 35  2. Estimating costs of reducing climate change Three strategies 1. Reduce emissions, cont’d From an economic perspective, both should entail costs. ,→ If individuals (firms) are maximizing utility (profits), economic theory indicates that distorting their decisions will entail some costs for these individuals (firms). Of course, this does not suggest that such costs will exceed the benefits. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 20 / 35  2. Estimating costs of reducing climate change Case studies 1. Reduce emissions, cont’d Substitution and more efficient technology each can be important. In the U.K., largely phased out coal substantially increased share of renewables for electricity outsourced emissions to other countries with trade In China, improved efficiency has been important: still a very coal-intensive, rapidly growing industrial economy significant decline in “emissions intensity” largely due to replacing older coal plants with newer, much more efficient coal power plants Of course, always do both: China has invested substantially in renewables; the UK has also invested in more efficient technology. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 21 / 35  2. Estimating costs of reducing climate change Case studies UK emissions, 1990–2020 Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 21 / 35  2. Estimating costs of reducing climate change Case studies 1. Reduce emissions, cont’d Substitution and more efficient technology each can be important. In the U.K., largely phased out coal substantially increased share of renewables for electricity outsourced emissions to other countries with trade In China, still a very coal-intensive, rapidly growing industrial economy significant decline in “emissions intensity” largely due to replacing older coal plants with newer, much more efficient coal power plants Of course, always do both: China has invested substantially in renewables; the UK has also invested in more efficient technology. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 21 / 35  2. Estimating costs of reducing climate change Case studies China’s emissions, 1990–2020 Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 22 / 35  2. Estimating costs of reducing climate change Case studies A last example: Sweden Often hailed as a success story. ,→ Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 22 / 35  2. Estimating costs of reducing climate change Case studies A last example: Sweden Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 22 / 35  2. Estimating costs of reducing climate change Case studies Sweden endowed with renewable energy since 1970s Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 22 / 35  2. Estimating costs of reducing climate change Case studies Sweden’s carbon emissions and carbon tax Source. Andersson (2019, AEJ: Economic Policy 11(4): 1–30). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 22 / 35  2. Estimating costs of reducing climate change Aggregate cost function Discussion Similar to economic damages from climate change, the idea is to add up the costs of switching to lower-carbon activities account for innovation and technical change over time for each level of global emissions, calculate the total abatement costs (relative to not doing anything or “business-as-usual”) use these estimates to construct costs for different levels of climate policy Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 23 / 35  2. Estimating costs of reducing climate change Aggregate cost function Abatement costs across various models Source. Nordhaus (2018, p. 447). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 24 / 35  2. Estimating costs of reducing climate change Aggregate cost function Not on an exam If you’re curious, the models in the previous figure are: FUND (Climate Framework for Uncertainty, Negotiation and Distribution) at the University of Sussex DICE (Dynamic Integrated Climate Change) at Yale IGSM (Integrated Global System Modeling) at MIT GCAM (Global Change Analysis Model) at the University of Maryland WITCH (World Induced Technical Change Hybrid) at the European Institute on Economics and the Environment, Milan MERGE (Model for Estimating the Regional and Global Effects of Greenhouse Gas Reductions) at the Electric Power Research Institute, Washington DC PISCES (Psychological Intelligence Schemes for Expediting Surrender) at The White Visitation Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 25 / 35  3. Calculating the optimal global carbon price 1. Estimating climate damages Empirical strategy Aggregate damage function 2. Estimating costs of reducing climate change Three strategies Case studies Aggregate cost function 3. Calculating the optimal global carbon price Integrated assessment modeling Social cost of carbon Policy evaluation Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 25 / 35  3. Calculating the optimal global carbon price Integrated assessment modeling Integrated assessment modeling Recall our solution to externalities: π 0 (q FB ) − D 0 (q FB ) = 0. (?) In this case, marginal profits depended on output (higher q, lower marginal profits) marginal damage depended on output (higher q, higher marginal damages) Now, suppose q is carbon emissions: marginal abatement cost (−π 0 ) depends on speed of emission reductions marginal benefit of reducing emissions (D 0 ) depends on total carbon stock Nordhaus’ Nobel Prize contribution: an “integrated assessment model” that tries to find q FB by solving a dynamic version of (?) that incorporates climate physics. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 26 / 35  3. Calculating the optimal global carbon price Integrated assessment modeling Need for integrated assessment Source. Nordhaus (2018, Figure 4, p. 443). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 27 / 35  3. Calculating the optimal global carbon price Integrated assessment modeling Key contributions Nordhaus’ research has led directly to two important outcomes: 1 the social cost of carbon (i.e., D 0 ), which, from our previous lectures, we know relates to the optimal carbon tax 2 a systematic way to evaluate different climate policies (emissions trajectories) with cost-benefit analysis Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 28 / 35  3. Calculating the optimal global carbon price Social cost of carbon Social cost of carbon The social cost of carbon is calculated as D 0 (q), the marginal damage of an additional ton of carbon dioxide: Source. Nordhaus (2018, Table 1, p. 454). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 29 / 35  3. Calculating the optimal global carbon price Policy evaluation Net benefits of different policies Source. Nordhaus (2008, Figure 5-2, p. 86). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 30 / 35  3. Calculating the optimal global carbon price Policy evaluation Discussion Key insights: huge net benefits for climate policy relative to inaction start emissions reductions as soon as possible ramp up over time, to give firms time to adapt more stringent targets entail much higher costs... Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 31 / 35  3. Calculating the optimal global carbon price Policy evaluation Net benefits: Stricter climate targets Source. Nordhaus (2008, Figure 5-1, p. 85). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 32 / 35  3. Calculating the optimal global carbon price Policy evaluation Benefits v. costs: Stricter climate targets Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 33 / 35  3. Calculating the optimal global carbon price Policy evaluation Technological breakthrough f Source. Nordhaus (2008, Figure 5-3, p. 90). Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 34 / 35  3. Calculating the optimal global carbon price Policy evaluation Technological breakthrough Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 34 / 35  3. Calculating the optimal global carbon price Policy evaluation Technological breakthrough “We estimate that such a low-cost zero-carbon technology would have a net value of around $17 trillion in present value because it would allow the globe to avoid most of the damages from climate change” (Nordhaus 2008, p. 19) Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 34 / 35  3. Calculating the optimal global carbon price Policy evaluation Next Monday Please read: Nordhaus (2018), “Climate change: The ultimate challenge for economists,” Nobel Prize Lecture, December 8, 2018 (on the website) No other homework. Will Rafey (UCLA) Econ 134 L7 – Climate Change I October 23, 2024 35 / 35