Lecture on optimal climate policy. Covers Chapter 8 of the Climate Economics textbook.

1. Optimal Emission Reduction
• The problem
• The solution
– What will it cost?
– What to do?

2. How deep?
The ultimate objective of [the United Nations
Framework Convention on Climate Change] [...]
is to achieve [...] stabilization of greenhouse
gas concentrations in the atmosphere at a
level that would prevent dangerous
anthropogenic interference with the climate
system. Such a level should be achieved within
a time-frame sufficient to allow ecosystems
to adapt naturally, to ensure that food
production is not threatened and to enable
economic development to proceed in a
sustainable manner.

3. How deep?
• Concentration

 
 

 

   

1 1
1Stabilization:
1
t t t
t t
M M E
M M
EM M E M

5. How deep?
• Maier-Reimer & Hasselmann
  
  
 

 


  
     
  



5
,
1
5
, , 1 1
1
1 2 3
54
; 1
1 1/2; 1 1/17; 1 1/74;
1 1/363; 1
Stabilization: 0
t i t
i
i t i i ii t t
i
M M
M M E
E

6. Optimal Climate Policy
• In a static optimum, the marginal costs should
equal the marginal benefits
• In a situation like climate change, where the
benefits are a stock and the costs are a flow,
the marginal costs should equal the net
present value of the marginal benefits

7. Optimal Climate Policy
• In a static optimum, the marginal costs should
equal the marginal benefits
max ( ) ( ) ( )
E
W E B E C E 
0 0
W B C B C
E E E E E
    
     
    

8. Optimal Climate Policy
• In a situation like climate change, where the
benefits are a stock and the costs are a flow,
the marginal costs should equal the net
present value of the marginal benefits
0 1
1
1, ,...
( , ,...) ( )
max ( )
( )
t t t t t
t
E E
t
B E E C E
W E
r
 



1
1( )
t s t
s
s t t
B C
t
r E E
 
 
  


11. 0
50
100
150
200
250
2005 2025 2045 2065 2085 2105
Carbontax(2000$pertoncarbon)

12. 350
400
450
500
550
600
650
700
750
2005 2025 2045 2065 2085 2105
Atmosphericconcentrationofcarbondioxide(ppm)

13. Optimal Emission Control
• If the world were ruled by a benevolent
dictator, what would she do?
• A little emission reduction in the beginning,
more later, but not enough to stabilise
concentrations
• The first part is robust, the second part is
very sensitive to assumptions
• The last part is robust, unless there is a cheap
alternative to fossil fuels
• If we consider many countries, optimal
emission reduction goes down!

14. Gain
Emissions
Marginal private gains
from emissions
Marginal social losses
from emissions
Marginal net social gains
from emissions

15. Optimal Emission Control
• If the world were ruled by a benevolent
dictator, what would she do?
• A little emission reduction in the beginning,
more later, but not enough to stabilise
concentrations
• The first part is robust, the second part is
very sensitive to assumptions
• The last part is robust, unless there is a cheap
alternative to fossil fuels
• If we consider many countries, optimal
emission reduction goes down!