Adventures in Energy
Economics
Robert P. Murphy
Mises Academy
July 16, 2013
Lecture 3: The Economics of Climate Change, Pa...
Economics of Climate
Change, I
I. Review: Rothbard
A. Overview of Law
B. Applied to Pollution
II. Review: Free-Market
Envi...
I. Rothbardian View
A. Overview of Law
Normative (not Positive)
Physical Invasion (not “harm”)
Strict Liability (not “reasonable
person” st...
B. Applied to Pollution
Actual victims (not D.A.) must bring suit.
Privity (in auto example)
Utilitarian considerations...
II. Free-Market
Environmentalism
A. Endangered Species
versus
B. Overfishing:
“Tragedy of the Commons”
Garret
Hardin
1915-
2003
III. Economics of Climate Change
(Mainstream View)
A. Intergovernmental Panel on Climate
Change (IPCC)
B. Equilibrium Climate Sensitivity
(ECS)
In climate models, the equilibrium (after all
feedbacks) increase in global mean ...
C. Integrated Assessment Models
(IAMs)
D. “Social Cost of Carbon” (SCC)
 SCC Heavily Dependent on
Discount Rate
SOURCE: White House Working Group on SCC, May 2013 update
 Because Early Benefits and Distant
Harms!
SOURCE: White House Working Group on SCC, 2010
E. Regulation vs. “Market Solution”
f. Carbon Tax vs. Cap-and-Trade
If government had perfect knowledge of
“abatement costs” (marginal compliance cost of
rest...
 Carbon Tax better if abatement
costs steeper than climate change
damages
Emission Reductions 
 Cap-and-Trade better if abatement
costs Shallower than climate change
damages
Emission Reductions 
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Adventures in Energy Economics, Lecture 3 with Robert Murphy - Mises Academy

  1. 1. Adventures in Energy Economics Robert P. Murphy Mises Academy July 16, 2013 Lecture 3: The Economics of Climate Change, Part I
  2. 2. Economics of Climate Change, I I. Review: Rothbard A. Overview of Law B. Applied to Pollution II. Review: Free-Market Environmentalism A. Endangered Species B. Overfishing”Tragedy of the Commons” III. Economics of Climate Change A. IPCC B. ECS C. Integrated Assessment Models (IAMs) D. “Social Cost of Carbon” E. Regulations vs. “Market Solution” F. Carbon Tax vs. Cap- and-Trade
  3. 3. I. Rothbardian View
  4. 4. A. Overview of Law Normative (not Positive) Physical Invasion (not “harm”) Strict Liability (not “reasonable person” standard)
  5. 5. B. Applied to Pollution Actual victims (not D.A.) must bring suit. Privity (in auto example) Utilitarian considerations can’t trump justice
  6. 6. II. Free-Market Environmentalism
  7. 7. A. Endangered Species versus
  8. 8. B. Overfishing: “Tragedy of the Commons” Garret Hardin 1915- 2003
  9. 9. III. Economics of Climate Change (Mainstream View)
  10. 10. A. Intergovernmental Panel on Climate Change (IPCC)
  11. 11. B. Equilibrium Climate Sensitivity (ECS) In climate models, the equilibrium (after all feedbacks) increase in global mean near-surface air temperature from a doubling of carbon dioxide atmospheric concentrations. IPCC AR4 estimated ECS in range of 2 – 4.5 degrees Celsius, with a best estimate of 3 degrees.
  12. 12. C. Integrated Assessment Models (IAMs)
  13. 13. D. “Social Cost of Carbon” (SCC)
  14. 14.  SCC Heavily Dependent on Discount Rate SOURCE: White House Working Group on SCC, May 2013 update
  15. 15.  Because Early Benefits and Distant Harms! SOURCE: White House Working Group on SCC, 2010
  16. 16. E. Regulation vs. “Market Solution”
  17. 17. f. Carbon Tax vs. Cap-and-Trade If government had perfect knowledge of “abatement costs” (marginal compliance cost of restricting an additional ton of emissions) and schedule of social cost of carbon (marginal benefits of avoided future climate change damages) then two approaches would be equivalent. But with uncertainty, government might err and one approach will be preferable (minimize deadweight loss due to mistake) depending on cost curves.
  18. 18.  Carbon Tax better if abatement costs steeper than climate change damages Emission Reductions 
  19. 19.  Cap-and-Trade better if abatement costs Shallower than climate change damages Emission Reductions 
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