Pegram Lecture 3, August 10, 2012

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Pegram Lecture 3, August 10, 2012

  1. 1. Resilience and theKnowledge Revolution™ Pegram Lecture No 3 Brookhaven National Laboratories, LI NY Graciela Chichilnisky www.chichilnisky.com UNESCO Chair in Mathematics and Economics Columbia University Columbia Consortium for Risk 1 Management (CCRM) www.columbiariskmanagement.net
  2. 2. Human impact on the environment is uncertainCLIMATE CHANGEandBIODIVERSITY DESTRUCTION These are global problems. They are new. Science is uncertain. Columbia Consortium for Risk 2 Management (CCRM) www.columbiariskmanagement.net
  3. 3. INTERGOVERNMENTAL PANEL ON CLIMATE CHANGESCIENTIFIC ASSESSMENT OF CLIMATE CHANGEPolicy-Makers SummaryJuly 1990Under a Business-as-Usual Scenario of Greenhouse Gas Emissions:●Global Mean Temperature will increase at a rate of 0.3°C perdecade(with uncertainty range of 0.2°C to 0.5°C per decade) 1°C above present by 2025 3°C above present by end of next century●Rate of increase will be uneven and will vary regionally (e.g. ,higher over land).●Global Mean Sea Level is expected to rise 6 cm per decade (with anuncertainty range of 3-10 cm per decade 20 cm above present by 2030 65 cm above present by end of next century Columbia Consortium for Risk 3 Management (CCRM) www.columbiariskmanagement.net
  4. 4. ● Most of the destruction of theearth’s ecosystems is driven byeconomic incentives●Forests, where most knownbiodiversity resides, are clearedfor the extraction of naturalresources (oil, wood products) orto give way for cash crops andgrazing Columbia Consortium for Risk 4 Management (CCRM) www.columbiariskmanagement.net
  5. 5. The globalization of the world economy since World War II has intensified a pattern of resource use by which developing nations extract most natural resources,exporting them to industrial nations at prices that are often below replacement costs Columbia Consortium for Risk 5 Management (CCRM) www.columbiariskmanagement.net
  6. 6. To solve the environmental dilemmawe must cut the link between resource use and economic progress. The key is to achieve a new type ofindustrialization, which is not based on resource exports: a knowledge intensive form of economic progress. Columbia Consortium for Risk 6 Management (CCRM) www.columbiariskmanagement.net
  7. 7. ● We must incorporate thedynamics of markets in themanagement of ecosystems● The market has become akey institution in thedestruction of the earth’secosystems. No policy thatignores this fact can succeed. Columbia Consortium for Risk 7 Management (CCRM) www.columbiariskmanagement.net
  8. 8. MARKETS are the dominant institution in the global economy.As the century turns, the market itself is evolving. Columbia Consortium for Risk 8 Management (CCRM) www.columbiariskmanagement.net
  9. 9. TWO MAJOR TRENDS The Knowledge Revolution Global Environmental Issues Lead to new and fundamental different types of markets Columbia Consortium for Risk 9 Management (CCRM) www.columbiariskmanagement.net
  10. 10. Markets are widely used institutions They are decentralized, and can be efficient. But global environmental markets trade unusual goods: privately produced public goods Biodiversity is one The planet’s atmosphere is another Columbia Consortium for Risk 10 Management (CCRM) www.columbiariskmanagement.net
  11. 11. EXAMPLES The trading of SO2 in the Chicago Board of Trade since 1993, following the Clean Air Act The CO2 Kyoto Protocol carbon market Water markets in Australia – water is the most scarce resource in the world today Columbia Consortium for Risk 11 Management (CCRM) www.columbiariskmanagement.net
  12. 12. Market for Emission Permits* Annex I Countries are given allocations of property rights on emissions summing up to the 1990 level, and they can trade these freely among themselves** Chichilnisky and Heal “Carbon Taxes and Markets for Emissions Rights” OECD 1995 Columbia Consortium for Risk 12 Management (CCRM) www.columbiariskmanagement.net
  13. 13. ● Environmental Markets*● Markets for KnowledgeBoth trade new and different typesof goods:Privately Produced PublicGoods (PPP)* Environmental Markets: Equity and Efficiency, G.Chichilnisky and G. Heal, CUP, NewYork 2000 Columbia Consortium for Risk 13 Management (CCRM) www.columbiariskmanagement.net
  14. 14. The Knowledge Revolution™In many countries, is leading to anew economy, with differentenvironmental problems and newopportunities for action.Examples: California USA, AsianTigers and Little Tigers, parts ofIndia and Barbados. Columbia Consortium for Risk 14 Management (CCRM) www.columbiariskmanagement.net
  15. 15. The Knowledge Revolution US leads the pack because of its property-rights systems and financial markets. Japan lost in the software race because of property-rights systems. Columbia Consortium for Risk 15 Management (CCRM) www.columbiariskmanagement.net
  16. 16. ● This is not a ”service economy”as was previously thought.● It is a new economy usingknowledge rather than capital asthe most important input ofproduction.● Fossil fuels are now replaced byinformation technology Columbia Consortium for Risk 16 Management (CCRM) www.columbiariskmanagement.net
  17. 17. Sunrise sectors are knowledge intensive: (1) IT, (2)biotechnology, (3) telecommunications, (4) financialmarkets, (5) health services, (6) entertainment andculture.MORE AMERICANS WORK IN BIOTECHNOLOGY THAN IN THEENTIRE MACHINE TOOL INDUSTRYMORE AMERICANS MAKE SEMICONDUCTORS THANCONSTRUCTION MACHINERYTHE TELECOMMUNICATIONS INDUSTRY IN NORTH AMERICAEMPLOYS MORE PEOPLE THAN THE AUTO AND AUTO PARTINDUSTRY COMBINEDFOSSIL FUEL IS REPLACED BY INFORMATION TECHNOLOGY Columbia Consortium for Risk 17 Management (CCRM) www.columbiariskmanagement.net
  18. 18. “New Economy” Examples The US health and medical industry alone has become larger than defense, and also larger than oil refining, aircraft, autos, auto parts, logging, steel and shipping put together More Americans work in biotechnology than in the entire machine tools industry Columbia Consortium for Risk 18 Management (CCRM) www.columbiariskmanagement.net
  19. 19. Consumers now spend more onhome electronics than on new cars $95 billion a year on home computers, TVs and stereos. $85 billion a year on new cars. Columbia Consortium for Risk 19 Management (CCRM) www.columbiariskmanagement.net
  20. 20. Productivity is driven by the knowledge sectors According to the Federal Reserve Board, US industrial production in 1997-98 increased at a strong 4.1% annual rate, 4.4% during 1996. Take away computers and semiconductors and the rate drops to 2.2% Columbia Consortium for Risk 20 Management (CCRM) www.columbiariskmanagement.net
  21. 21. Productivity is driven by the knowledge sectors According to the Bureau of Economic Analysis, total US industrial production in 2002-2003 increased at a 2.17% annual rate, 4.19% during 2000. Take away the production of computers and electronic products, and this drops to 1.72% (2003) or 3.41% (2000). www.bea.gov: Gross Output by Industry in Current Dollars Columbia Consortium for Risk 21 Management (CCRM) www.columbiariskmanagement.net
  22. 22. The New Economy Starts to Hit HomeIncreases in personal spending:Key old economy itemsMotor vehicles: 0.3%Food: 0.6%Major Appliances: 1.1%Clothing: 2/3%Average: 0.9%Key new economy itemsHome telephone services: 8.8%Entertainment & recreation services: 12.4%Cable TV: 13.4%Brokerage and other financial services: 15.6%Average: 12.5%Source: Business Week, March 23, 1998 Columbia Consortium for Risk 22 Management (CCRM) www.columbiariskmanagement.net
  23. 23. ● Today more Americansmake semiconductors thanconstruction machinery● The telecommunicationsindustry in North Americaemploys more people than theauto and the auto partsindustries combined Columbia Consortium for Risk 23 Management (CCRM) www.columbiariskmanagement.net
  24. 24. Source: “Comparing economic and scientific wealth” of the article “The Scientific Impact of Nations”by David A. King, Nature, July 15, 2004, p. 311-316. Columbia Consortium for Risk 24 Management (CCRM) www.columbiariskmanagement.net
  25. 25. Source: World Bank. www.worldbank.org. Columbia Consortium for Risk 25 Management (CCRM) www.columbiariskmanagement.net
  26. 26. Source: World Bank. www.worldbank.org. Columbia Consortium for Risk 26 Management (CCRM) www.columbiariskmanagement.net
  27. 27. Sources: US Bureau of Economic Analysis (BEA) 2012 data www.bea/gov. World Bank. www.worldbank.org Columbia Consortium for Risk 27 Management (CCRM) www.columbiariskmanagement.net
  28. 28. Sources: US Bureau of Economic Analysis (BEA) 2007 data www.bea/gov. World Bank. www.worldbank.org Columbia Consortium for Risk 28 Management (CCRM) www.columbiariskmanagement.net
  29. 29. Sources: US Bureau of Economic Analysis (BEA) 2007 data www.bea/gov. World Bank. www.worldbank.org Columbia Consortium for Risk 29 Management (CCRM) www.columbiariskmanagement.net
  30. 30. Sources: US Bureau of Economic Analysis (BEA) 2007 data www.bea/gov. World Bank. www.worldbank.org Columbia Consortium for Risk 30 Management (CCRM) www.columbiariskmanagement.net
  31. 31. Sources: US Bureau of Economic Analysis (BEA) 2012 data www.bea/gov. World Bank. www.worldbank.org Columbia Consortium for Risk 31 Management (CCRM) www.columbiariskmanagement.net
  32. 32. Sources: World Bank. www.worldbank.org. World Resource Institute (WRI). www.wri.org Columbia Consortium for Risk 32 Management (CCRM) www.columbiariskmanagement.net
  33. 33. Sources: US Bureau of Economic Analysis (BEA) 2012 data. www.bea/govEnergy Information Administration (EIA). www.eia.doe.gov/ Columbia Consortium for Risk 33 Management (CCRM) www.columbiariskmanagement.net
  34. 34. LEADING THE WAY TO ECO-FRIENDLY PROFITSSome major manufacturers have decided to do more than reducewaste and clean up pollution. They are developing products andprocesses that make it profitable to be environmentally friendly.DUPONT has co-developed 3GT, a bioengineered polyester fabricmade from cornstarch that is lower in cost than oil-basedpolyester and can be recycled indefinitely.SONOCO has created an rectangular “paper can” for Lipton IcedTea that is 70% recyclable.3M has developed a plastic coating for the Navy to replace painton trucks, ships and trains. It’s lighter than paint, which leads togreater fuel efficiency.S.C. JOHNSON reformulated Raid roach killer, converting from asolvent-based to a water-based formula. Columbia Consortium for Risk 34 Management (CCRM) www.columbiariskmanagement.net
  35. 35. ELECTROLUX’ environmental products, including solar-poweredlawn mowers, chain saws lubricated with vegetable oil, and watersaving washing machines, generated 3.8% higher profits last yearthan the company’s conventional products.TOYOTA is introducing a hybrid car that gets 66 mph on acombination of gasoline and electricity.A. FINKL & SONS, a Chicago steel forger, recycles more than 955of its solid waste and has cut energy use by 36.4% over 10 years,making it one of the most efficient forgers in the world.BRITISH PETROLEUM has invested $160 million in developing solarenergy and is building a completely solar-powered Olympic village forthe 1998 Summer Games in Australia.Carbon Capture and Enhanced Oil Recovery (EOR) can produce 23years of additional petroleum consumption without imports in the US(DOE) Columbia Consortium for Risk 35 Management (CCRM) www.columbiariskmanagement.net
  36. 36. The Developing World can leapfrogand avoid resource intensiveindustrializationThe successful Asian tigers relied ontechnology exports, such as consumerelectronicsIn the last ten years India developed aSoftware industry worth $10 Billion USD inexports to 36 countries, one of the mostdynamic in the world Columbia Consortium for Risk 36 Management (CCRM) www.columbiariskmanagement.net
  37. 37. In recent years, nearly one-thirdof new tech companies in theSilicon Valley have beenheaded by Indian or ChineseexecutivesUSA Today, February 24, 1999 Columbia Consortium for Risk 37 Management (CCRM) www.columbiariskmanagement.net
  38. 38. Knowledge intensive growth is here today. It is the future.How to achieve the transition with minimum cost? Columbia Consortium for Risk 38 Management (CCRM) www.columbiariskmanagement.net
  39. 39. Knowledge and Global Environment Assets Are not standard public goods such as law and order They are mostly produced privately, rather than by the government They are costly to produce Columbia Consortium for Risk 39 Management (CCRM) www.columbiariskmanagement.net
  40. 40. Privately Produced Public Goodsare goods which are not “rival” inconsumption, but are privately produced.We all produce emissions but theatmosphere is the same for us all.We produce knowledge privately but canshare all of it with others without losing it. Columbia Consortium for Risk 40 Management (CCRM) www.columbiariskmanagement.net
  41. 41. Knowledge and Global Environment are Privately Produced Public Goods Why are they public goods? ● Knowledge is not “rival” in consumption – it can be shared without losing it Columbia Consortium for Risk 41 Management (CCRM) www.columbiariskmanagement.net
  42. 42. Similarly Global environmental assets such as the carbon content of the atmosphere are one and the same for everybody on the planet. These are physical properties, independent of the economic institutions. Columbia Consortium for Risk 42 Management (CCRM) www.columbiariskmanagement.net
  43. 43. The Paradox of Knowledge It is costly to produce It can be duplicated without losing it. It can be shared at no cost Because it is costly, without property rights, such as patents, there is no incentive to produce knowledge. Example: Japan has no property rights on software, and produces almost none. Columbia Consortium for Risk 43 Management (CCRM) www.columbiariskmanagement.net
  44. 44. Yet because it can be shared at no cost, anyrestriction on the use of knowledge is inefficient.For example:Patents are inefficient because they aremonopolies (J. Stiglitz)We need new systems of property rights forknowledge.What is the solution? Columbia Consortium for Risk 44 Management (CCRM) www.columbiariskmanagement.net
  45. 45. Markets for PPP goods aredifferent from the classical markets.They require new systems of property rights. Columbia Consortium for Risk 45 Management (CCRM) www.columbiariskmanagement.net
  46. 46. Traditional Markets First Theorem of Welfare Economics The allocation resulting from a competitive market equilibrium with private goods is Pareto efficient.This theorem is independent of the distribution of property rights. For example, all but two traders may have zero endowments of property rights and the resulting equilibrium is still Pareto efficient. This requires all goods to be private goods, with rival consumption, and privately owned. Columbia Consortium for Risk 46 Management (CCRM) www.columbiariskmanagement.net
  47. 47. Public goods change mattersA public good is a good which is not“rival” in consumption: this is not an economic or legal definition but rather a physical constraint. Examples: Knowledge , theconcentration for CO2 or CFC’s in the atmosphere or the planet, available biodiversity is the planet. This leads to Columbia Consortium for Risk 47 Management (CCRM) www.columbiariskmanagement.net
  48. 48. A New First Welfare Theorem in Markets with Privately Produced Public Goodsin which equity and efficiency are closely linked Columbia Consortium for Risk 48 Management (CCRM) www.columbiariskmanagement.net
  49. 49. Privately Produced Public Goods are goods which are not “rival” in consumption, but are privately produced. We all produce emissions but the atmosphere is the same for us all.We produce knowledge privately butcan share all of it with others without losing it. Columbia Consortium for Risk 49 Management (CCRM) www.columbiariskmanagement.net
  50. 50. A competitive market with property rights on knowledgeAn economy has H countries or traders who consume N private goods and one public good, Knowledge. They trade private goods x ∈ RN and licenses giving the rights to use knowledge, a ∈ R. Trader h has finite resources which are allocated to produce either private goods or knowledge. Columbia Consortium for Risk 50 Management (CCRM) www.columbiariskmanagement.net
  51. 51. For each trader, there is a tradeoffbetween producing more private goods and producing more knowledge. However, more knowledge leads to higher productivity. Formally∀h xh = φh (ah, a), with ∂φh < 0, ∂ah a = Σah and ∀h , ∂ xh > 0 ∂a or a = sup H h h∈ a Columbia Consortium for Risk 51 Management (CCRM) www.columbiariskmanagement.net
  52. 52. Countries or traders have property rightsΩh ∈ RN on private goods and ownlicenses that allow them to useknowledge, ah ∈ R.Traders derive utility from use of privategoods x.Through negotiable licenses knowledge isavailable to all. Columbia Consortium for Risk 52 Management (CCRM) www.columbiariskmanagement.net
  53. 53. Traders may use their licenses toaccess knowledge or may sell theirlicenses in the market. If they wish to use more knowledge than their licenses allow, they buy more licenses in the market. Markets for licenses are competitive. Columbia Consortium for Risk 53 Management (CCRM) www.columbiariskmanagement.net
  54. 54. Market equilibrium with knowledge Each trader maximizes welfare Max uh(xh) s.t. xh = φh (ah,a) + q (ah – ah)i.e. the value of consumption equals the valueof production plus the value of licenses bought or sold, and all markets clear: Σa h = Σa h = a Columbia Consortium for Risk 54 Management (CCRM) www.columbiariskmanagement.net
  55. 55. First Welfare Theorem for Markets with Privately Produced Public Goods Theorem In and economy with k≥2 traders, j≥1 private goods and a privately produced public good, there exists at most a one- dimensional manifold of property rights allocations on the use of the public good (allocation of “permits”) from which the competitive equilibrium is Pareto efficient.This is the Manifold of Efficient Allocations of Property Rights Columbia Consortium for Risk 55 Management (CCRM) www.columbiariskmanagement.net
  56. 56. Theorem 1 (Chichilnisky, Heal and Starrett, 1993)* There is only a finite number of ways of distributing licenses of property rights on the use of PPP goods between the traders so that the market equilibrium in Pareto efficient.*Environmental Markets: Equity and Efficiency, CUP Chichilnisky and Heal 2000 Columbia Consortium for Risk 56 Management (CCRM) www.columbiariskmanagement.net
  57. 57. PolicyThose who have fewer endowmentsof private goods must be endowedwith more property rights on the useof the PPP good. Otherwise, themarket does not operate efficiently. Columbia Consortium for Risk 57 Management (CCRM) www.columbiariskmanagement.net
  58. 58. ● Efficiency and distribution areconnected in markets with PPP goods.● A measure of equity is necessary forefficiency.● Markets with knowledge andenvironmental assets require equityfor efficiency Columbia Consortium for Risk 58 Management (CCRM) www.columbiariskmanagement.net
  59. 59. Policy Conclusions Markets with knowledge require some equity to function efficiently It is standard to favor lower income groups in knowledge-use. Examples are school subsidies for low income groups and SUN Microsystem’s GDP dependent price lists. The system of property rights proposed here is different from patents, because there is no exclusivity. Patents are exclusive Columbia Consortium for Risk 59 Management (CCRM) www.columbiariskmanagement.net
  60. 60. Policy Conclusions The system proposed here consists of negotiable licenses which are accessible to all, together with a covenant and a system of property rights allocation (such as auctions) that favors those with low income. There exists microchips (Wave Technology, Inc.) that can measure the use of knowledge as required for the implementation of these results. Columbia Consortium for Risk 60 Management (CCRM) www.columbiariskmanagement.net
  61. 61. Traders may use their licenses toaccess knowledge or may sell theirlicenses in the market. If they wishto use more knowledge than theirlicenses allow, they buy morelicense in the market.Markets for licenses are competitive Columbia Consortium for Risk 61 Management (CCRM) www.columbiariskmanagement.net
  62. 62. General Market Equilibrium of two nations trading knowledge and private goods Columbia Consortium for Risk 62 Management (CCRM) www.columbiariskmanagement.net
  63. 63. Columbia Consortium for Risk 63 Management (CCRM)www.columbiariskmanagement.net
  64. 64. A VISION OF A NEW ECONOMYVery innovative in the use of knowledgeVery conservative in the use of resourcesCentered on diversity and human capitalNew types of markets based on property rights of enviromental use and knowledgeOffering the prospect of substantial economic progress without damaging the ecosystems that support life on Earth Columbia Consortium for Risk 64 Management (CCRM) www.columbiariskmanagement.net
  65. 65. US Policy in the World Economy: Help create International Markets for Trading Property Rights on the Use of Global Commons Possibly in conjunction with GATT or WTO Ensure Efficient Market Functioning for which Those regions with fewer endowments of private goods must be endowed with more property rights on the common environmental assets. Otherwise the market cannot operate efficiently. Columbia Consortium for Risk 65 Management (CCRM) www.columbiariskmanagement.net
  66. 66. ● What are the institutionsneeded to implementemission trading?● How to ensure efficiencyand fair trading? Columbia Consortium for Risk 66 Management (CCRM) www.columbiariskmanagement.net
  67. 67. To answer these questions, a global financial mechanismmust be designed that reflects full equitable and activeparticipation of developing and industrial nations Columbia Consortium for Risk 67 Management (CCRM) www.columbiariskmanagement.net
  68. 68. An International Bank for Environmental Settlements can help achieve this goal the IBES will help to obtain economic value from environmental assets without destroying them will help bridge the gap between developing and industrial countries Will provide a forum for adjusting to new scientific findings Columbia Consortium for Risk 68 Management (CCRM) www.columbiariskmanagement.net
  69. 69. The IBES could help organize and broker: The trading of rights on the use of global airwaves The trading of rights on greenhouse gases emissions and biodiversity use The trading of environmental bonds and earth stocks The trading of options and other derivatives based on the above Columbia Consortium for Risk 69 Management (CCRM) www.columbiariskmanagement.net
  70. 70. The IBES could also Securitize profit sharing agreements on genetic blueprints Securitize profitable investments in aquifers, watersheds, biological soil enhancement and fisheries Provide bridge financing and credit enhancement facilities for all the above Columbia Consortium for Risk 70 Management (CCRM) www.columbiariskmanagement.net
  71. 71. The case for an International Bank for Environmental Settlements (IBES) Based on new economic findings on the existing proposal for trading carbon permits, an IBES can be created which●will be self-financing●will offer a combination of markets solution and continuing multilateral negotiations Columbia Consortium for Risk 71 Management (CCRM) www.columbiariskmanagement.net
  72. 72. An International Bank forEnvironmental Settlements (IBES) GIVES ACCESS TO INTERNATIONAL CAPITAL MARKETS FOR FUNDING CONSERVATION TO ALLEVIATE DEFAULT RISKS: CREDIT ENHANCEMENT BY WORLD BANK OR GEF Columbia Consortium for Risk 72 Management (CCRM) www.columbiariskmanagement.net
  73. 73. The population explosion sinceWorld War II put stress on waterresources globallyClean water is the most scarceresource around the world Columbia Consortium for Risk 73 Management (CCRM) www.columbiariskmanagement.net
  74. 74. ● IBES provides an institutional frameworkthat combines the best aspects of freemarkets and multinational policy● IBES can offer a continuing way to drawcapital from global financial markets tosupport global environmental policy● IBES will regulate and monitor complianceof trading of carbon permits globally(borrowing, lending and derivatives) Columbia Consortium for Risk 74 Management (CCRM) www.columbiariskmanagement.net
  75. 75. Policies To Avert Climate ChangePolicies to prevent climate changefocus mainly on curtailing emissionsof carbon dioxide (CO2), the mostimportant greenhouse gas. ● Regulatory Approaches ● Market Approaches --- Carbon Taxes --- Joint Implementation --- Tradable Permits Columbia Consortium for Risk 75 Management (CCRM) www.columbiariskmanagement.net
  76. 76. Policies To Prevent Climate ChangeCarbon TaxesA mechanism to reduce carbon emissions is a carbon tax –a tax levied on all fossil fuels in proportion to their carboncontents.●By raising the cost of fuels and energy intensive products,this tax would discourage all fossil fuel use in proportion totheir carbon contents and encourage the development ofless carbon-intensive alternatives.●A recent statement by leading economists favors taxesover a regulatory approach. However, taxes increasegovernment’s intervention in the economy and are out ofpublic favor in today’s market-oriented environment Columbia Consortium for Risk 76 Management (CCRM) www.columbiariskmanagement.net
  77. 77. Policies To Prevent Climate ChangeJoint ImplementationThis is a mechanism that allows a firm in onecountry to invest in a project that reducesemissions in another country, and to receivecredit for those reductions at home. It wasproposed by President Clinton on October 22,1997. An example might involve Norway andPoland. International joint implementation of CO2emissions reductions would allow a utility inNorway to achieve an emissions reduction bycontracting to pay a factory in Poland to installmore fuel-efficient furnaces Columbia Consortium for Risk 77 Management (CCRM) www.columbiariskmanagement.net
  78. 78. Policies To Prevent Climate ChangeTradable Permits● This is the most market-oriented and efficient approach, which is already used for sulfur dioxide permits in the Chicago Board of Trade● One argument for tradable permits is the perceived political difficulty of proposing a change in the tax structure● The most difficult issue in the use of tradable permits is how to allocate them to potential users. For small fuel users tradable permits could cause administrative burdens Columbia Consortium for Risk 78 Management (CCRM) www.columbiariskmanagement.net
  79. 79. Policies To Prevent Climate ChangeCarbon taxes or tradable permits increasethe cost of energy and could reduceeconomic growth. Different models showdifferent impacts.Despite the complexity of the models, onlya handful of easily understandableassumptions are important in determiningthe simulation results. Columbia Consortium for Risk 79 Management (CCRM) www.columbiariskmanagement.net
  80. 80. THE PREDICTED IMPACTS ON GDP IN 2020 OF STABILIZINGCO2 EMISSIONS AT 1990 LEVELS: THE EFFECT OF CHANGINGUNDERLYING ASSUMPTIONSSource: Shackleton, R. et al (1992) The Efficiency Value of Carbon Tax Revenues. Washington, D.C.: U.S. Environmental Protection Agency. Columbia Consortium for Risk 80 Management (CCRM) www.columbiariskmanagement.net
  81. 81. The International Bank for Environmental SettlementsWin-Win Solutions● Uncertain though they are, there are costs associated with doing nothing in the face of rising greenhouse gas concentrations.● The few models that do take expected damages from climate change into account predict that a carbon tax set at an appropriate rate, with revenues recycled efficiently back into the economy, actually improves economic welfare (Nordhaus and Young, 1996; Jorgenson et al., 1995; Nordhaus, 1994, 1993). Columbia Consortium for Risk 81 Management (CCRM) www.columbiariskmanagement.net
  82. 82. GDP LOSS (1990-2010) UNDER ALTERNATIVE RECYCLING OPTIONSSource: Shackelton, R. et al (1992) The Efficiency Value of Carbon Tax Revenues. Washington, D.C.: U.S. Environmental Protection Agency. Columbia Consortium for Risk 82 Management (CCRM) www.columbiariskmanagement.net
  83. 83. A Win-Win Proposal A market-based approach Global Trading, Clearing and Settlement of Tradable Carbon Permits International Bank for Environmental Settlements (IBES) Columbia Consortium for Risk 83 Management (CCRM) www.columbiariskmanagement.net
  84. 84. The International Bank for Environmental Settlements A market-oriented institution Acts as an intermediary, organizes and regulates global trading of carbon permits and other environmental assets Governance and operating budget decided by the nations of the world Columbia Consortium for Risk 84 Management (CCRM) www.columbiariskmanagement.net
  85. 85. The International Bank for Environmental SettlementsThe IBES Mandate● To enhance wealth generation while protecting the environment. It will accomplish this by:● Providing liquidity and economic return from environmental assets (such as forests) while ensuring judicious use. Columbia Consortium for Risk 85 Management (CCRM) www.columbiariskmanagement.net
  86. 86. The International Bank for Environmental SettlementsHow IBES OperatesPreserving national sovereign rights, IBES will: - Act as an intermediary in multilateral borrowing and lending of permits - Trade options on carbon permits in the future - Clear and settle multinational transactions - Ensure market integrity and efficient price mechanisms (such as SEC, CFTC) Columbia Consortium for Risk 86 Management (CCRM) www.columbiariskmanagement.net
  87. 87. The International Bank for Environmental SettlementsHow IBES Operates - Once the world’s ceiling of emissions is agreed upon, permits can be allocated following a sliding rule - Starting from today’s usage, the rule moves towards an incentive system allocating more to those who emit less - Auctions can be used to allocate permits efficiently Columbia Consortium for Risk 87 Management (CCRM) www.columbiariskmanagement.net
  88. 88. The International Bank for Environmental SettlementsThe IBES: A Win-Win Solution The industrial nations have more capital. The developing nations are richer in the environmental account. They emit less carbon and have most of the world’s forests and 80% of its biodiversity. According to the economic models, there are gains to be made from trade while insuring judicious use of environmental assets. Columbia Consortium for Risk 88 Management (CCRM) www.columbiariskmanagement.net
  89. 89. Source: Earthrends World Resource Institute (WRI) Columbia Consortium for Risk 89 Management (CCRM) www.columbiariskmanagement.net
  90. 90. Source: Chichilnisky, G. and Eisenberger, P. Energy Security, Economic Development and Global Warming: Addressingshort and long term challenges. International Journal of Green Economics, 2009 Columbia Consortium for Risk 90 Management (CCRM) www.columbiariskmanagement.net
  91. 91. Source: Chichilnisky, G. and Eisenberger, P. Energy Security, Economic Development and Global Warming: Addressingshort and long term challenges. International Journal of Green Economics, 2009 Columbia Consortium for Risk 91 Management (CCRM) www.columbiariskmanagement.net
  92. 92. Source: Chichilnisky, G. and Eisenberger, P. Energy Security, Economic Development and Global Warming: Addressingshort and long term challenges. International Journal of Green Economics, 2009 Columbia Consortium for Risk 92 Management (CCRM) www.columbiariskmanagement.net
  93. 93. Sources:1. FloodSmart.gov2. California Department of Insurance3. California Department of Insurance and National Association of Insurance Commissioners (the two sources differ by $.1) http://www.aic.org/Releases/2007_docs/NAIC_Releases_Homeowners_Ins_Report.htm, and http://www.naic.org/documents/research_stats_homeowners_sample.pdf Columbia Consortium for Risk 93 Management (CCRM) www.columbiariskmanagement.net
  94. 94. Source: Chichilnisky, G. and Eisenberger, P. Energy Security, Economic Development and Global Warming: Addressingshort and long term challenges. International Journal of Green Economics, 2009 Columbia Consortium for Risk 94 Management (CCRM) www.columbiariskmanagement.net
  95. 95. Source: Chichilnisky, G. and Eisenberger, P. Energy Security, Economic Development and Global Warming: Addressingshort and long term challenges. International Journal of Green Economics, 2009 Columbia Consortium for Risk 95 Management (CCRM) www.columbiariskmanagement.net
  96. 96. Source: Chichilnisky, G. and Eisenberger, P. Energy Security, Economic Development and Global Warming: Addressingshort and long term challenges. International Journal of Green Economics, 2009 Columbia Consortium for Risk 96 Management (CCRM) www.columbiariskmanagement.net
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