Climate Change Economics

Most functions of economic impact assume that climate change is smooth. We here propose impact functions that have stochastic climate change as an input. These functions are identical in shape and have similar parameters as do deterministic impact functions. The mean stochastic impacts are thus similar to deterministic impacts. Welfare effects are larger, and the stochasticity premium is larger than the risk premium. Results suggest that stochasticity is more important for past impacts than for future impacts. This outcome is partly caused by an underestimation of natural variability in the 21st century climate projections.

Substantially reducing carbon dioxide (CO₂) emissions from electricity production will require a transformation of the resources used to produce power. Several different incentive-based policies have been proposed ranging from setting minimums for clean generation sources to maximum emission rate standards and caps on CO₂ emissions, all of which are allowed under the EPA’s Clean Power Plan. This paper analyzes the economic consequences of a suite of different flexible and comprehensive policies to reduce CO₂ emissions from the power sector, including a carbon tax, a tradable emissions rate performance standard, and two versions of a clean energy standard (CES). Modeling results suggest that policies that encourage emissions reductions along multiple margins can be substantially more cost-effective than less flexible policies. The margins are intra and inter fuel, and technology substitution, electricity demand, and generator fuel efficiency. Despite cost differences, all of the policies result in substantial increases in social welfare.

A dynamic computable general equilibrium (CGE) model is linked to a bioeconomic model for the Bristol Bay red king crab (BBRKC) fishery to analyze regional economic impacts of ocean acidification (OA)-induced changes in fishery yields. Yield projections based on two alternative forms (linear versus nonlinear) of OA effects on the survival of juvenile BBRKC are compared to a baseline without OA effects. Results demonstrate considerable uncertainty in yields, and show that economic impacts are sensitive to the form of OA effects, and to changes in the world price of BBRKC (Q22, Q54, Q57, R13).

The issue of climate change is often framed as one in which contemporary actions, often with affixed costs, are necessary in order to prevent even greater costs being paid during a period in the future. Under such a framework it is thus necessary to calculate the rate in which future benefits are discounted to reflect current values. In this paper we examine how individual level discount rates affect their support for a policy tool that incurs contemporary costs in an effort to prevent future environmental damages. We find that individuals with higher discount rates are significantly less likely to support the imposition of a carbon tax in comparison with individuals that have lower discount rates. Even when controlling for other individual level attributes such as party affiliation a person’s rate for discounting the future is shown to be a strong predictor of their support for a carbon tax.

This paper calculates, for the top 20 emitting countries, how much pricing of carbon dioxide (CO₂) emissions would be in their own national interests due to domestic co-benefits (leaving aside the global climate benefits). On average, second-best domestic prices are substantial, $57.5 per ton of CO₂ (for year 2010), reflecting primarily health co-benefits from reduced air pollution at coal plants and, in some cases, reductions in automobile externalities net of fuel taxes/subsidies. Pricing co-benefits reduces CO₂ emissions from the top 20 emitters by 13.5%. However, co-benefits vary dramatically across countries (e.g., with population exposure to pollution) and differentiated pricing of CO₂ emissions therefore yields higher net benefits (by 23%) than uniform pricing. Importantly, the efficiency case for pricing carbon’s co-benefits hinges critically on weak prospects (for the foreseeable future) for comprehensive internalization of other externalities through other (more efficient) pricing instruments.

We report simulation results for alternative multilateral emissions cuts and accompanying policies which could come under renewed reconsideration for the process to follow the Durban UNFCCC negotiations. The model is an Armington type trade model extended to capture climate change. We calibrate the model to alternative BAU damage scenarios following the Stern report and the literature that has followed. We consider different depths, forms, and timeframes for emission reductions by China, India, Russia, Brazil, US, EU, Japan, and a residual row both jointly and block wise. We assume regionally uniform percentage of both climate change and damages by region, which are relaxed later in sensitivity analysis. The welfare impacts of both emission reductions and accompanying measures are computed in Hicksian money metric equivalent form over three alternative potential commitment periods: 2012–2020, 2012–2030, and 2012–2050. Our multiyear multicounty global modeling framework captures the benefit of emission mitigation through preferences incorporating temperature change. Countries are linked not only through shared welfare impacts of global temperature change but also through trade among country subscripted goods. These trade impacts influence net country benefits from alternative emission reduction agreements. We also evaluate the potential impacts of potential accompanying mechanisms including funds/transfers, border adjustments, and tariffs.