Climate as a public good
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When we talk about public goods and climate we talk about excludability, rivalry, externalities, common/global pool resources, tragedy of commons and Eleanor Ostrom, free rider problem, degrowth, International environmental agreements: Kyoto Protocol, Carbon emissions trading and Cap and trade
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Climate as a public good
- 1. Climate as a Public Good Gala Korniyenko UBPL 705 Economic Analysis for Planners March 2015
- 2. • Excludability • Rivalry • Externalities • Common/global pool resources • Tragedy of commons and Eleanor Ostrom • Free rider problem • Degrowth • International environmental agreements: Kyoto Protocol • Carbon emissions trading • Cap and trade OUTLINE
- 3. THE PROBLEM
- 4. We are sinking … Source: http://www.wcpo.com/news/local-news/kenton-county/covington/jeff-ruby-waterfront- restaurant-barge-taking-on-water-sinking-into-ohio-river What are positive and negative externalities of public goods?
- 5. The Economic Risks of Climate Change Source: http://riskybusiness.org/reports/national- report/regions/great-plains
- 6. The Economic Risks of Climate Change Source: http://riskybusiness.org/reports/national- report/regions/great-plains
- 7. The Economic Risks of Climate Change Source: http://riskybusiness.org/reports/national- report/regions/great-plains How much should company pay for damaging the climate?
- 9. ANALYZING THE GOODS AND EFFECTS Contributing markets Affected markets Coal/oil industry Electrical power sector Lumber industry Construction/Coastal property Metallurgy Agriculture Chemical industry Healthcare Petroleum coke industry Tourism Landfills Car production Urban sprawl Customers Developed countries Developing countries Which goods in the table are public and which are private? What is special about cost/benefit of public goods?
- 10. GOALS AND OBJECTIVES Environmental Economics Paul Samuelson global public good non-rivalrous and non-excludable throughout the whole world Common-pool resources free-rider problem congestion, overuse, or degradation http://www.nbcbayarea.com/news/national-international/Incredible-Photo-Weasel-Hitches-Ride-on-Woodpecker- 294899771.html How to solve the problem of a free rider dealing with climate?
- 12. THE KEY CHALLENGE IS MANAGEMENT Source: http://www.andysinger.com, https://www.pinterest.com/pin/411586853419930966/
- 13. Eleanor Ostrom: “when a common-pool resource is closely connected to a larger social- ecological system, governance activities are organized in multiple nested layers” Source:http://www.shareable.net/sites/default/files/blog/top-image/elinor_ostrom.jpg
- 15. Source: http://tutor2u.net/economics/revision-notes/as-marketfailure-negative-externalities.html
- 16. Cap Source: https://www.youtube.com/watch?v=fJ rFSLfaeeE Can private companies which are polluting the environment voluntarily reduce the emission?
- 18. Carbon trading Source: http://www.macleans.ca/economy/business/why-the-difference-between-carbon-taxes-and- cap-and-trade-isnt-as-important-as-you-think/ Emission Emission greenhouse gas-emitting products
- 19. Ukraine – Japan Agreement Source: www.carbonunitsregistry.gov.ua, http://www.asiaecon.org/special_articles/read_sp/12632
- 20. New trains for Kyiv metro Source: http://photo.unian.net/eng/themes/517 17/
- 21. Data of the Agreement/Effectiveness • Ukraine was the first country in the world which transferred Assigned Amount Units to Emission Reduction Units (ERU). Rate: 1 ton of reduced CO2 costs 10 Euros • 53 million of Ukrainian ERUs among the 111 million of the world’s ERUs. That is 56% of the world market • ≈ 92 million of Ukrainian carbon units were issued by SEIA (the State Environmental Investment Agency of Ukraine) as on 1 November 2013 • 817 projects, 7 of a big scale projects: metro and hybrid cars some of them: the projects with Japan saved ≈ 60 million Euros • 1220 hybrid cars "Toyota Prius” were supplied by "Sumitomo" (Japan) to the Ministry of Internal Affairs • The "Comprehensive train modernization (E-type) for Kyiv Metro"- 7945 tones of CO2 eq. per year reduced • "Technical re-equipment (replacement of existing police patrol cars with hybrid engine" - 31 692.89 tones CO2 eq. / Year Source: 2014 year report of State Environmental Investment Agency of Ukraine
- 24. EXAMINING THE STRATEGIES IN ECONOMIC TERMS
- 25. CONCLUSION • The free market does not deal effectively with public goods. Regulation, privatization and auction are the alternatives considered, and they fit in different situations. – Regulation fits well with environmental pollution – Privatization fits well with toll road, for example – Auction fits well to sell rights to pollute the environment (Coase Theory) • Climate change affects public and private goods, which require different mitigation strategies. – Cap and trade is effective at the acid rain program and can be extended to carbon. – Cap and trade falls short where is no an Assigned Amount Unit (AAU) (a tradable 'Kyoto unit' or 'carbon credit) cadaster or register, as it is the basis for trade. – Where we need to go: develop a national adaptation plans for agriculture, water, energy, transport, health, urban space, forests and landscapes, coastal areas, biodiversity etc. Senate has to sign The American Clean Energy and Security Act of 2009, an energy bill that would have established a variant of an emissions trading plan similar to the European Union Emission Trading Scheme. • Culture and political structure affect the effectiveness of the mitigation strategies; therefore, different countries need different approaches: tax deductions, subsidies, incentives to install energy efficient equipment etc. Degrowth
- 26. Background / literature review Images: Picture of a sinking hotel from Scripps Media, Inc. http://www.wcpo.com/news/local-news/kenton-county/covington/jeff-ruby-waterfront-restaurant-barge-taking-on-water- sinking-into-ohio-river http://en.wikipedia.org/wiki/Global_public_good https://www.e-education.psu.edu/geog432/node/277 image captured by British amateur photographer Martin Le-May, a weasel leaps onto the back of a flying woodpecker http://www.nbcbayarea.com/news/national-international/Incredible-Photo-Weasel-Hitches-Ride-on-Woodpecker- 294899771.html#ixzz3TO4ZhykZ http://www.shareable.net/sites/default/files/blog/top-image/elinor_ostrom.jpg http://www.covenantofmayors.eu/index_en.html Articles and books: Hudson, Blake and Rosenbloom, Jonathan, "Uncommon Approaches to Commons Problems: Nested Governance Commons and Climate Change" (2013). Journal Articles. Paper 153. http://digitalcommons.law.lsu.edu/faculty_scholarship/153 http://www.economicshelp.org/2008/02/can-economics-solve-problem-of-global.html http://www.macleans.ca/economy/business/why-the-difference-between-carbon-taxes-and-cap-and-trade-isnt-as-important- as-you-think/ Econ 101: What you need to know about carbon taxes and cap-and-trade, Stephen Gordon, September 17, 2012 http://www.macleans.ca/economy/business/why-the-difference-between-carbon-taxes-and-cap-and-trade-isnt-as-important- as-you-think/ Mapping The Commons November 13, 2012 The Creation of the Urban Commons, by David Harvey https://mappingthecommons.wordpress.com/2012/11/13/the-creation-of-the-urban-commons-by-david-harvey/ 2014 year report of State Environmental Investment Agency of Ukraine Elinor Ostrom. Governing of Commons, Cambridge University Press, November 1990 The problem of social cost, R. H. Coase, Law and Economics, October,1960, Volume III http://www.epa.gov/captrade/
- 27. THANK YOU FOR YOUR ATTENTION, SMART COMMENTS AND QUESTIONS!
Editor's Notes
- Good morning everyone. Today we will touch on the Climate as a public good. How would you value climate? It is Unquantified: Impossible accurately evaluate harm we make (for example, plant against cancer we didn’t find yet and lost for damage of ecosystem) What definition of “public good” do you remember from the book? A public good is a good or service that can be used by everyone in society. It is impossible to exclude anyone from using it and all the people who wish to use it can do so at the same time (simultaneous consumption). So, everyone can use clean air or benefit from climate and it would be impossible to limit its consumption.
- /’ rai-val-ri / When we talk about public goods and climate we talk about excludability, rivalry… Have you heard about the term Degrowth? Degrowth is a political, economic, and social movement based on ecological economics and anti-consumerist and anti-capitalist ideas. It is also considered an essential economic strategy responding to the limits-to-growth dilemma (see The Path to Degrowth in Overdeveloped Countries and Post growth). Degrowth thinkers and activists advocate for the downscaling of production and consumption—the contraction of economies—arguing that overconsumption lies at the root of long term environmental issues and social inequalities. Key to the concept of degrowth is that reducing consumption does not require individual martyring and a decrease in well-being. Rather, 'degrowthists' aim to maximize happiness and well-being through non-consumptive means—sharing work, consuming less, while devoting more time to art, music, family, culture and community.
- Introduction / problem statement / motivation Climate is the long-term accumulation of weather events, such as temperature for example, in a given environment. What is our problem with climate? The economic cost of climate change is high: Research in new technology: electrical cars, renewable sources of energy can produce positive externalities on other potential users of these new methods. Positive externalities lead to sustainable future. Negative externalities (costs that are paid for an economic decision made by someone else) Company pollutes the air and government puts restrictions for CO2 emissions and penalties (environmental put costs on the company) The emission of carbon dioxide by a firm adds to the atmospheric stock of greenhouse gases and thereby contributes to global warming/climate change. Green house gas (GHG) is a public bad, mitigation is a public good.
- What economic risks of climate change can you name? Lets look at our region, Kansas in particular. an annual $12 billion increase in electricity bills due to added air conditioning; and billions in lost wages for farmers and construction workers forced to take the day off or risk suffering from heat stroke or worse. By the end of the century, these costs and others put a combined price tag of hundreds of billions of dollars on climate change in the United States. This picture is taken from Risky Business Project co-chairs Michael R. Bloomberg You can go to http://riskybusiness.org/reports/national-report/regions/great-plains and explore The Economic Risks of Climate Change in the United States
- If we stay on our current path, research shows a significant increase in demand for air conditioning over the course of the century which, when combined with other heat-related impacts such as reductions in power generation and in transmission efficiency and reliability, could place a considerable burden on the electricity power sector. As soon as 5 to 25 years from now, this research shows a 0.7% to 2.2% likely increase in nationwide electricity consumption. The country will likely see a roughly corresponding decline in demand for heating, as temperatures warm up in the northern states, but the switch from natural gas and fuel oil-driven heating demand to electricity powered cooling demand has significant implications for the U.S. energy system.
- Kansas rely on two important climate-sensitive industries: agriculture and energy. Altogether, 80% of the region is devoted to cropland, pastures, and range land, which produce $92 billion in agricultural products each year.
- In 1968, Garrett Hardin wrote about the potential for common goods to be exploited and depleted, specifically in the context of fears of overpopulation. the concept persists and is certainly a challenge with energy and sustainability issues we face today. we all do things that don't seem that bad in the bigger energy picture.... So what if I drive a big SUV I don't really need; my commute is short....How much water does it really waste if I leave the sink on while I brush my teeth? While some of these goods aren't necessarily common goods, our environment is, and it's difficult sometimes to see what our individual impact really is. Public goods, like clean air, climate, utilized for private benefit will always be vulnerable to exploitation. Hardin was concerned with how a rapidly increasing population would affect the commons of the environment. As we examine the problem of the commons/public goods from an energy policy perspective. As more and more people aspire to enjoy the creature comforts of modern western life, this puts pressure on our energy systems and resources and necessitates consideration in our policies governing those systems and resources. total benefits of the society is greater than total cost
- Goals and objectives The problem with climate as a public good is that a lot of people do not contribute to the funds necessary for its provision or reducing harm caused by air pollution that results in climate change. This is known as the free rider problem. problems of congestion, overuse, or degradation People figure that since the good is non exclusive, in other words nobody can prohibit them from using it, they can get away with not paying for its provision or reducing the harm. Environmental Economics is a sub-field of economics that is concerned with environmental issues. “Environmental Economics undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world. Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming. How to solve the problem of person who doesn’t want to pay for a good that is provided as a public good? (free riders are the examples of market failures)
- Methodology The greatest challenge we face in solving climate change is our innate tendency to cry “NIMBY” — Not in My Backyard. Economists seek to find solution by using the same tools of capital accumulation and speculative market exchange So they invented the tool by internalizing the externalities. http://www.andysinger.com
- Eleanor Ostrom In a paper prepared for a conference on Global Climate Change, Ostrom elaborated further on the nature of the argument which rests, conveniently for us, on results from a long-term study of the delivery of public goods in municipal regions. “While large-scale units were part of effective governance of metropolitan regions:· Ostrom concludes, “small and medium-scale units were also necessary components:’ The constructive role of these smaller units, she argued, “needs to be seriously rethought:’ The question then arises of how relations between the smaller units might be structured. “many elements are capable of making mutual adjustments ordering their relationships with one another within a general system of rules where each element acts with independence of other elements.” “a variety of market failures and externalities, such as imperfect information, “free-riders,” transaction costs, and collective action problems lead to continued environmental destruction even in the presence of a private property rights system” Ostrom defines other way what might be termed a “successful collective action model,” arguing that herders are not inevitably locked into a tragic fate and that a variety of case studies demonstrate successful collective action to protect resources in the absence of private property rights or government regulation Such groups include communities managing meadows and forests in Torbel, Switzerland, and Hirano, Nagaike, and Yamanoka villages in Japan, as well as communities managing irrigation systems in Valencia, Murica and Orihuela, and Alicante, Spain, and in the Philippines.
- Questions of the commons at the metropolitan level have been handled through mechanisms of state regional and urban planning, in recognition of the fact that the common resources required for urban populations to function effectively, such as water provision, transportation, sewage disposal, and open space for recreation, have to be provided at a metropolitan, regional scale. Example of metropolitan level solution for climate change is Covenant of Mayors. The Covenant of Mayors is the mainstream European movement involving local and regional authorities, voluntarily committing to increasing energy efficiency and use of renewable energy sources on their territories. By their commitment, Covenant signatories aim to meet and exceed the European Union 20% CO2 reduction objective by 2020. https://www.youtube.com/watch?v=fJrFSLfaeeE
- Carbon Emissions Trading The EU Emissions Trading Scheme (EUETS) was launched in 2005 and is a market-based mechanism to incentivize reduction of C02 emissions in a cost-effective and efficient manner. The EU scheme operates through the trade of CO2 emissions allowances. It creates a market in the right to emit C02. One allowance represents one ton of C02 equivalent. Companies get most permits free now but many electricity generators in Europe will have to pay for all these from 2013. A cap is set on emissions – this creates the scarcity required for the market. At the end of each year businesses are required to ensure they have enough allowances to account for their installation’s actual emissions. There are heavy fines for those without such permits. The aim of carbon trading is to create a market in pollution permits and put a price on carbon. In this way, policy can help internalize environmental costs of firms’ production and encourage lower emissions to tackle climate change In a cap and trade system, the number of available permits would gradually decline. As the price of the permits rises, so the economics of investing in cleaner technologies will change.
- Emissions trading or cap and trade ("cap" meaning a legal limit on the quantity of a certain type of chemical an economy can emit each year)[1] is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants Since 2005 EU Emissions Trading Scheme (EUETS) has sated a cap on a total amount of greenhouse gases companies can emit each year and requires monitoring of these emissions. A fixed number of allowances which are the currency of the carbon market are issued. And each year companies hold enough allowances to cover their emissions or face significant fines. Rules (laws): how we can use it? Who can use it? For how long? Voluntarily assuming the costs of cleaning up its own pollution would be irrational for a business – it would lower profits and put it at a competitive disadvantage with rival companies. Only government can effectively address this problem by devising policies to ban or discourage pollution. Resource Depletion. Like individual businesses, capitalist economic systems must grow or die. But as the worldwide economy grows, depletion of non-renewable resources necessarily increases dramatically. For example, the United States, with five percent of the world’s population, currently consumes twenty-six percent of the world’s energy – most of it in non-renewable forms. If the rest of the developing world were to rise to our levels of energy use, non-renewable energy resources would quickly be used up. A worldwide capitalist economy engaged in unlimited growth is fundamentally incompatible with a world where many vital resources are limited.
- Using taxes, price on carbon we create market. Don’t have enough of allowances? Cut your emissions or buy extra allowances from another emitter. Have extra allowances? Keep them for the next year or sell them. This flexibility insures that emissions are cut where it costs the least to do so. Over the time cup is reduced, fewer allowances are issued, technics to cut emissions are developed (green energy: wind, solar power) and total emission is dropped. Companies have financial incentive to cut their emissions or pay others to do so. EUETS proves that putting the price on carbon is possible: flexible, cost effective and business friendly.
- cap-and trade is the equivalent of a carbon tax. Before the policy, the intersection of the supply and demand curves for greenhouse gas-emitting products—point A on the graphs—will generate emissions equal to Q0, and the price will be P0. Suppose that the government wants to reduce the quantity to Q1. Carbon tax: Suppose that a carbon tax T is added into the price. For a given quantity, the supplier’s price will be the old price plus the amount of the tax, and the supply curve will shift up to S*. The new equilibrium is at point B, the quantity is the target Q1, and the price will increase to P1. Note that the price increase will be less than the tax, although if the demand curve is fairly steep (i.e., inelastic, or relatively insensitive to changes in price), the increase in the price will be pretty close to T. Cap-and-trade: Suppose that the government restricts emissions to a level consistent with Q1. The new supply curve—denoted by S*—is now vertical at the target: no matter how high the price goes, supply will remain fixed at Q1. The new equilibrium is again B: the quantity is determined by the cap at Q1, and the price will rise to P1. So as far as prices and quantities go, the two policies are equivalent: as we go from A to B, quantities fall to the target Q1, and prices rise to P1. From the consumer’s point of view, that’s all that matters. What distinguishes the two is what happens to T—the difference between the price the consumers pay at B and what it costs suppliers to produce at Q1. In the case of the carbon tax, the money goes to the government. But if output is capped at Q1, that difference is pure profit: a permit to produce one unit of output allows its owner to collect a a rent equal to to the difference between the selling price and the cost of production. If permits are traded, their price will be bid up so that their price will be equal to T. So where that money goes depends on how the permits are allocated in the first place. If the permits are simply given to existing emitters, then those profits are pocketed by the firms. If the permits are auctioned off, the price will be bid up to T, and the government gets the money. So if permits are auctioned off by the government, then cap-and-trade and a carbon tax are equivalent: same quantities, same prices, and the government gets revenues equal to the area in the green rectangle in the graphs. Critic: The environmental commons are no less threatened, while the proposed answers (such as carbon trading and new environmental technologies) merely propose that we seek to exit the impasse using the same tools of capital accumulation and speculative market exchange that got us into the difficulties in the first place. It is unsurprising, therefore, not only that the poor are still with us, but that their numbers grow rather than diminish over time.
- www.carbonunitsregistry.gov.ua Under the Kyoto Protocol, 36 developed countries are required to reduce greenhouse gas emissions to a certain level. These countries must reduce their emissions to below the emissions cap or participate in emissions trading to compensate for going over the cap. If a country exceeds the cap, they must buy credits from countries that are under their cap. As a heavily industrialized country, Japan has often struggled to reduce its CO2 emission levels in order to meet the objectives under the Kyoto Protocol. While Japan has pledged to reduce emission by 6% between 2007-2012 and 25-40% by 2020, the country has experienced an actual increase of 8.7% in greenhouse emissions from 1990 to 2008. Thus forcing Japan to buy CO2 credits from abroad and significantly investing in alternative energy innovations in order to meet its target in 2012. These measures will not only be beneficial to the environment, but would also boost Japan's economy as it taps into the growing global market of alternative fuels. Japan’s most recent deal had to be concluded by March 31st and includes the acquisition of 30 million tons of greenhouse gases from Ukraine. The transaction is estimated to cost over 30 billion yen ($305 million). Ukraine will benefit from the deal as it is already projected to release fewer green house gases than the amount permitted by the Kyoto protocol in the five years. http://www.asiaecon.org/special_articles/read_sp/12632
- http://photo.unian.net/eng/themes/51717/
- The price for quotas was determined by analyzing the market prices that were proposed by other countries. Price was derived for the indicator value per unit of the quota 10 euros per 1 ton of CO2 reduction. Ukraine was the first country in the world, which at that time made such agreement on sale of gas emission. Indicative price was settled by economists on the basis of Benchmark rate
- https://www.whitehouse.gov/the-press-office/2014/11/11/fact-sheet-us-china-joint-announcement-climate-change-and-clean-energy-c http://www.cnn.com/2014/11/12/world/us-china-climate-change-agreement/index.html http://www.thehindu.com/news/international/world/climate-change-us-china-unveil-ambitious-goals-to-cut-pollution-levels/article6589412.ece
- https://www.youtube.com/watch?v=X5ZZxx2v1No
- But one day free-market economist Ronald Coase decided to do some research, and discovered that in fact lighthouses in Britain had in the past been supplied privately for many years. True, it was impossible to exclude non-contributors from the light of the lighthouse - but it was possible to exclude non-contributors from using the harbor, so the lighthouse fees were simply packaged with the harbor fees Broadcast TV by packaging them with a private good: advertising privatization has sometimes been pursued to achieve narrow goals, rather than as a means to a range of public policy objectives including greater efficiency, wider access, better service, and reduced environmental impact. cap and trade provides the private sector with the flexibility required to reduce emissions while stimulating technological innovation and economic growth. Adam Smith is the founder of all economic branches (was a Scottish moral philosopher, pioneer of political economy. philosopher first of all, there were no such field at that time as economical politics) – founder of economics When he modeled human in moral philosophy he was talking about human as an altruist In economic theory he put – homo economicus (selfish, maximum rational, maximizing profit) Cap and trade, Kyoto protocol to remove the competitive markets ? (cheap aluminum from Ukraine) sanctions, quotas etc. The American Clean Energy and Security Act of 2009 (ACES) was an energy bill in the 111th United States Congress (H.R. 2454) that would have established a variant of an emissions trading plan similar to the European Union Emission Trading Scheme. The bill was approved by the House of Representatives on June 26, 2009 by a vote of 219-212, but was defeated in the Senate.[1] in countries like the USA which didn’t sign Kyoto Protocol Degrowth is a political, economic, and social movement based on ecological economics and anti-consumerist and anti-capitalist ideas. It is also considered an essential economic strategy responding to the limits-to-growth dilemma (see The Path to Degrowth in Overdeveloped Countries and Post growth). Degrowth thinkers and activists advocate for the downscaling of production and consumption—the contraction of economies—arguing that overconsumption lies at the root of long term environmental issues and social inequalities. Key to the concept of degrowth is that reducing consumption does not require individual martyring and a decrease in well-being. Rather, 'degrowthists' aim to maximize happiness and well-being through non-consumptive means—sharing work, consuming less, while devoting more time to art, music, family, culture and community. ресурсы истощаемы и на Марсе мы не скоро жить будем