Economics, Ethics and Climate Change

1
Economics, Ethics and Climate Change

• KV Economics of Climate Change
• Alexander Jagl, Thomas Schinko, Gerald
  Senzenberger

2
Content

• Characteristics
• Ethical aspects
• Evaluation over time
• Discounting
• Risk Uncertainty
• Public policy
• Mitigation
• Adaptation

3
Market failure
1. Characteristics

• Public good
• Non rival
• Non excludable
• Negative externality
• Costs of climate change not borne by emitter
• Shifted to general public
• No incentives for emitters to reduce GHGs
• P lt SCC
• Biggest market failure in history

4
Externalities (1)
1. Characteristics
Source Pindyck, Rubinfeld (2001)
5
Externalities (2)
1. Characteristics

• Differences from common externalities
• Global in causes and consequences
• Long term impacts
• Uncertainty
• Effects on global economy

6
Optimal degree of abatement
1. Characteristics
Source Stern (2007)
7
Dynamic approach
1. Characteristics
Source Stern (2007)
8
Ethics and welfare
2. Ethical aspects

• Effects of climate change are
• Global
• Intertemporal
• Inequitable
• Poor countries suffer the most BUT
• Rich countries are responsible for most GHGs
• At home abroad

9
GHG Emission - 2000
2. Ethical aspects
Source worldmapper.org
10
GHG by region per capita
2. Ethical aspects
Source IPCC (2007)
11
Global wealth distribution - 2015
2. Ethical aspects
Source worldmapper.org
12
GHG per unit GDP
2. Ethical aspects
Source IPCC (2007)
13
Poor Vs Rich
2. Ethical aspects

• Rich responsible for most GHGS
• Developing countries are more vulnerable
• Strong dependence on agriculture
• Geography (mega deltas, sahel zone,)
• Fewer resources for adaptation
• Lower health standards

14
Ethical aspects of climate change
2. Ethical aspects

• Enhancement of basic social welfare function
• Millennium development goals
• questions of rights
• Sustainability
• Stewardship

15
Social Welfare Function (1)
2. Ethical aspects

• Basic welfare economics (BWE)
• Focuses on consumption of goods and services
• welfare from consumption
• utility maximizing
• more is better approach
• only consequences of actions,no room for ethical
  dimensions of processes
• Single decision maker interaction between
  players important
• GDP proper indicator for welfare?

16
Social Welfare Function (2)
2. Ethical aspects

• enhancement of BWE
• Broader concept of goods and services
• Consumption includes
• Consumption as used in BWE
• Education
• Health
• Environment
• Social Welfare Function
• Expressed in terms of real income
• Major differences in willingness to pay across
  countries

17
Footprint/HDI 2003
2. Ethical aspects
USA, Austria, Cuba
Source WWF (2003)
18
UN Millenium Development Goals
2. Ethical aspects

• Provide basics for ethical questions
• Goal 7 ensure environmental sustainability
• Integrate the principles of sustainable
  development into country policies and programs
  reverse loss of environmental resources
• Reduce by half the proportion of people without
  sustainable access to safe drinking water
• Achieve significant improvement in lives of at
  least 100 million slum dwellers, by 2020

19
Questions of rights
2. Ethical aspects

• Protection from harm done by others (e.g.
  property rights,)
• Polluter pays
• Moral legal responsibility of OECD-countries
• How to define emission-rights?
• Equal amount of emission per capita?Energy
  efficiency, comparative advantages

20
Sustainability
2. Ethical aspects

• Future generations should have a right to a
  standard of living no lower than the current one
• Standard of living for future generations depends
  on a collection of stocks
• Substitution only to certain degree
• stewardship,particular aspects of the world,
  which should themselves be past on in a state at
  least as good as that inherited from previous
  generation

21
Conclusion of questions of ethics
2. Ethical aspects

• Different notions of ethics emphasize different
  aspects,but
• Main focus similar
• Consumption
• Education
• Health
• Environment

22
Discounting (1)
3. Evaluation over time

• Why? To find present value of future
  consumption increment
• Marginal comparison approach
• Investment project with small variations around a
  particular path
• E.g. new technique in electricity
  generationW1welfare along path with
  projectW2welfare along path without
  project?uhchange in welfare for household h
  because of project

23
Discounting (2)
3. Evaluation over time

• Climate change
• Not-marginal consequences
• Long-run global effects
• Many different paths (scenarios)
• ? marginal comparison approach cant be
  applied!!!
• Evaluation of W for each path
• Discounting marginal changes along different
  paths but no marginal comparison between paths!

24
3. Evaluation over time
Discounting (3)

• Consumption today valued higher than tomorrows
  ? consumption discount rate
• Pure time preference ? utility discount rate

?discount rate µelasticity of marginal utility
of consumption c/cgrowth rate of consumption
(along path) dpure time discount rate
Source Stern (2007)
25
Discounting (4)
3. Evaluation over time

• Conclusions
• Single constant discount rate for different paths
  is unacceptable
• High discount rates ? low value for future
  generations ? climate change seen as minor
  problem
• Stern report
• growing consumption is a reason for
  discounting ? standard consumption discount
  rates
• if you care little about future generations you
  will care little about climate change ? Lower
  pure time discount rate than most other studies

26
Risk and Uncertainty
3. Evaluation over time

• High in case of climate change
• Uncertainty is no alibi for inaction
• Potential losses gt costs of avoidance
• Without actions against climate changelarge
  impacts relative to global economy not-marginal
  impacts
• Risk aversion leads toprecautionary principle

27
Different paths
3. Evaluation over time
Source Stern (2007)
28
Public mitigation policy
4. Public policy

• Externality requires a price for emissions
• Pigou tax based on marginal damages
• RD barriers for innovations
• Property rights (public good character of
  knowledge)
• Asymmetric information
• Uncertainty about future carbon prices
• Moral hazard
• Grandfathering
• Price dynamics of fossils
• Standards and regulations
• Energy efficiency
• Landlord-tenant relations in property

29
International action
4. Public policy

• Climate change is global problem
• Climate Mitigation is a public good
• Sustain international collective necessary
• Free Riding problem!!!
• Adaptation provides local benefits -gt private
  returnsbut prevented by market failures
• Imperfect information on future impacts
  positive externalities
• Ethics of adaptation support for developing
  countries

30
Individual decision
4. Public policy

• Intergenerational
• Moral obligation for future generation
• No children, less pollution
• Lower impacts on our generation
• Utility maximizing
• Higher consumption without mitigation
  adaptation
• Can less carbon related consumption be more
  maximizing?
• Solidarity
• To whom? Children, other countries? Why?

31
Thank you for your attention!
32
Question 1

• What incentives do the individuals have to
  support mitigation, when non mitigation
  strategies would lead to a higher income during
  his/her lifetime and the effect of climate change
  w or w/o mitigation during his lifetime will be
  non relevant?

33
Question 2

• After recognizing the failure of the use of
  renewable standard crops e.g. as biofuels,
  technology efficiency improvements and demand
  reduction are the most promising existing options
  of mitigation. Demand reductions mean less
  industrial work. Do we have to change the meaning
  of life from hard work to low consumption spare
  time activities, like sports?

34
Question 3

• One notion of ethics postulates equal share of
  CO2 emissions for everyone. Instead of taxing the
  governments which would lead to further debt
  explosions and demand shocks, shall we tax the
  individuals? Each relevant output/product
  including transport and distribution should be
  CO2 taxed. Governments can make their decisions
  of climate regulations without being in the
  stranglehold of the finance ministers and large
  companies. Collected taxes above the certain
  average shall be given to the people who consumed
  less than they are allowed too.

35
Question 4

• Global decisions need global deciders. Nations
  will always decide how they can profit the most,
  like the USA has acted so far. How can the
  United Nations become more powerful? Shall a
  public consensus give complete leadership on
  global problems to them? Or is a new global
  institution necessary, e.g. an United peoples
  organisation?

36
Question 5

• Bread is better than nothing. Nothing is better
  than a juicy steak. Therefore bread is better
  than a juicy steak. We cant go on like this on a
  global way and for sure our lifestyle cannot be
  reached by 5 billion other people without severe
  negative effects? What are possibilities fur a
  sustainable and fair future, while preventing
  developing countries from making the same
  mistakes as the OECD?

37
Question 6

• What are the Stern Reviews main arguments
  against excessive discounting in the case of
  climate change and how is its aproach different
  from other studies?

38
Question 7

• Some would argue, that the negative effects of
  climate change are quite uncertain to happen and
  therefore stringent climate policies are
  unnecessary. How can this somehow rational
  sounding argument be disproved by concentrating
  on costs, consequences risks of action /
  inaction against climate change?

39
Question 8

• What are policy options to tackle the market
  failure climate change and what kind of barriers
  exist for options like RD and energy efficiency?