Department of Economics, Queen s University

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1 Winter 2016 Department of Economics, Queen s University Economics 443 / 891: Economics of Climate Change Professor D. Garvie, 344 Dunning Hall, Office hours: Mondays 1B2pm or by appointment garvie@econ.queensu.ca Climate change is arguably the most complex and pressing environmental problem facing the global community today. At root, climate change is a result of the externality associated with greenhouse gas emissions. Unlike the classic pollution externality problem commonly studied in economics courses, climate change has several unique features which distinguishes it from other externalities. First, it is global in its causes and consequences. Second, the impacts of climate change are large, long-term and persistent. Third, uncertainties and risks in the economic impacts are pervasive. Finally, there is a serious risk of major, irreversible change with non-marginal economic effects. These features shape the economic analysis of climate change: it must be global, deal with long time horizons, have the economics of risk and uncertainty at its core, and examine the possibility of major, non-marginal changes. This course will analyse these features in four units: I. Introduction to the Science and Economics of Climate Change II. Climate Policy: Mitigation and Adaptation III. Cost-Benefit Analysis over Space, Time, and Risk IV. Global Climate Accord Course Requirements and Evaluation Assignment with policy memo 10% Midterm 20% Academic paper presentation with written report 25% Final examination 45% Assignment with Policy Memo and the Midterm The assignment includes problems, a simulation exercise and a policy memo. Collaboration with one other student is permitted on the problems and simulation part of the assignment only; submit one set of solutions for collaborative work. The policy memo is to be independent, individual work; each student is to prepare, write and submit a typed policy memo with proper citations to the onq Dropbox. Uploaded memos will be submitted to the Department turnitin checker. The midterm will examine material covered during the first part of the course including the assignment questions. There is no make-up midterm. If you miss the midterm, provide official documentation that explains your absence to avoid a grade of zero. Only the Queen s University Offcampus Physician s Form is accepted for documentation of medical reasons; self-declaration of illness forms not accepted. When a student has acceptable documentation, the final exam will be worth 65%. Devon Garvie All Rights Reserved 1 P age

2 Academic paper presentation and report Each student will present an approved academic paper to the class. The paper is to be a recently published microeconomics theory paper related to the economics of climate change (a very wide range of possibilities); the paper must be published after Jan 1, 2015 in a respected journal (top tier or top field journal). Students are required to a paper proposal to me for approval before class on Thursday, Jan 26; the should include a paragraph that briefly summarizes the paper topic and explains why you would like to present this paper as well as the proposed paper as an attachment. Presentations will be minutes. Your presentation as well as a typed summary report on the paper are due at class end. Presentation must include the following: Motivation for and key contribution(s) of the paper Brief overview of key results Construction and presentation of simple version of model ( teaching version of model) Discussion of generalized model Critical assessment of paper The list of presentation papers and dates will be posted onq. Papers to be presented are required readings for the course hence are examinable. Practice problems Practice problems covering material taught in the second half of the course will be posted onq. The problems are designed to increase understanding of course material by providing you with an opportunity to work through algebraic problems based on concepts and models learned in class as well as to work with Excel spreadsheet simulations with interactive graphics. Working through these practice problems carefully, alone or with study partners, will improve your performance on the final exam. While these problems will not be handed in or graded, they should be considered mandatory for successful completion of the course. Policy on phone / laptop use in the classroom Phones, laptops, and tablets may not be used at any time during lecture (unless you are writing notes). Please leave them in your bag to avoid time-consuming, and potentially embarrassing, interruptions during lecture. Additionally, you do not have my permission to record or take pictures during my lectures; attempting to do so will be treated as an infringement of my intellectual property and dealt with accordingly. Policy on Sharing Course Materials All materials provided to you in this course, including this document, include the statement Devon Garvie All Rights Reserved. Sharing course materials in any way, either by or by uploading them to websites, will be treated as an infringement of my intellectual property and dealt with accordingly. Devon Garvie All Rights Reserved 2 P age

3 Academic Integrity Queen s University s Regulation 1 on Academic Integrity will be strictly enforced. Students are responsible for familiarizing themselves with the regulation and ensuring that their work conforms to the principles of academic integrity. Actions which contravene the regulation will be sanctioned. Attendance This course is NOT a textbook course hence successful completion of the course requires attending lectures. LECTURES WILL NOT BE POSTED. If you miss a lecture, ask to borrow a classmate=s notes. Course in Brief (approximate times) I. Introduction to the Science and Economics of Climate Change (1-1½ weeks) a. Science of climate change b. Impacts of climate change c. Market failure and the theory of externalities II. Climate Policy (4-5 weeks) a. Mitigation Policy i. The Basics Mitigation and damage costs Efficient vs cost-effective target-setting Incentive-based instruments: tax, ETS ii. Uncertainty Dependability, Cost of Use and Hybrid Instruments iii. Time Stock pollutant model (discrete time) Efficient inter-temporal greenhouse gas control and the social cost of carbon Cost-effective inter-temporal greenhouse gas control and the shadow cost of emissions Inter-temporal carbon taxes and carbon trading system Controlling multi-pollutants (designing a multi-pollutant ghg tax schedule/co 2 -eq ETS) b. Mitigation versus Adaptation if time permits III. Cost-Benefit Analysis (4-4½ weeks) a. Valuing climate impacts b. Aggregating climate damages across (i) space, (ii) time, and (iii) risk c. The Stern Review IV. Global Climate Accord (1 week) if time permits a. Institutional failure: Theory of public goods b. Theories of international environmental agreements Devon Garvie All Rights Reserved 3 P age

4 Tentative Reading List (required readings may be added and changed) * required readings; ** required graduate student readings STERN2 STERN1 ECBA IPCC AR5 Nicholas Stern. (2015) Why are we waiting? The logic, urgency, and promise of tackling climate change. MIT Press. Nicholas Stern. (2007) The Economics of Climate Change: The Stern Review. Cambridge University Press. David Pearce, Giles Atkinson, Susana Mourato. (2006) Cost-Benefit Analysis and the Environment: Recent Developments. OECD. Intergovernmental Panel on Climate Change. (2014) Climate Change 2014: Fifth Assessment Report. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA. I. Introduction to the Science and Economics of Climate Change a. Science of climate change * IPCC AR5 Climate Change 2014: Synthesis Report. Topic 1 Observed changes and their causes, and Topic 2 Future climate changes, risks and impacts, * STERN2 Ch. 1, The Science: How it shapes the Economics, Ethics, Politics, and the Possible Prognoses. * Burke, M. et al (2016) Opportunities for advances in climate change economics. Science, * Meyer, R. (Jan 7, 2017) The Atlantic Ocean and an Actual Debate in Climate Science. The Atlantic. * A. Doyle (Jan 6, 2017) World Shatter Heat Records in Scientific American. * Mark Fichetti (Jan 5, 2017) The Arctic is Getting Crazy. Scientific American. IPPC AR5 Working Group 1, Technical Summary. STRONGLY RECOMMENDED. STERN1 Ch. 1, The Science of Climate Change. b. Impacts of climate change * STERN1 Ch. 3, How Climate Change will Affect People Around the World, Ch. 4, Implications of Climate Change for Development, Ch. 5, Cost of Climate Change in Developed Countries. IPCC AR5 Working Group II, Summary for Policymakers. c. Market failure and the theory of externalities * Helfand, G. et. al. (2003) Ch. 6, The Theory of Pollution Policy in Handbook of Environmental Economics, Volume 1, 1-2 (252-8) Devon Garvie All Rights Reserved 4 P age

5 II. Climate Policy a. Mitigation policy i. The Basics * IPCC, 2014: Climate Change 2014: Synthesis Report. SPM 3 Future pathways for adaptation, mitigation and sustainable development, * STERN2 Ch. 2, Building a New Energy-Industrial Revolution, Ch. 3. Policies for Dynamic Change and Transition: Lessons from Economic History and Economic Theory. * Helfand, G. et. al. (2003) Ch. 6, The Theory of Pollution Policy in Handbook of Environmental Economics, Volume 1, (277-80), 6.2 (280-3), (284-5), 7.1 (287-91). Kolstad, C. and M. Toman (2005) Ch. 30, The Economics of Climate Policy in Handbook of Environmental Economics, Volume 3, 2.3 ( ), 3, 5 ( ). Fankhauser, S., et. al. (20210) Combining Multiple Climate Policy Instruments: How Not to Do it. Climate Change Economics, 1, 3, Aldy, J. and W. Pizer. (2016) Alternative Metrics for Comparing Domestic Climate Change Mitigation Efforts and the Emerging International Climate Policy Architecture. Review of Environmental Economics and Policy, 10, 1, STERN1, Ch. 9, Identifying the Costs of Mitigation, Ch. 14, Harnessing markets for Mitigation - The Role of Taxation and Trading ii. Uncertainty * Hepburn, C. (2006) ARegulation by Prices, Quantities, or both: A Review of Instrument Choice.@ Oxford Review of Economic Policy, 22, 2, 226B247. * Goulder, L. and A. Schein. (2013) Carbon taxes versus cap and trade: A critical review. Climate Change Economics, 4, 3, 28 pages. ** Weitzman, M. (1974) Prices vs. Quantities. Review of Economic Studies. 41, 4, ** Roberts, M. and M. Spence. (1976) Effluent charges and Licenses Under Uncertainty. Journal of Public Economics. 5, iii. Time * Johnson, D. (1995) AThe Economics of Stock Pollutants: A Graphical Exposition.@ Journal of Economic Education, 236B44. Fankhauser, S. and C. Hepburn. (2010) Designing carbon markets. Part I: Carbon markets in time. Energy Policy, 38, Devon Garvie All Rights Reserved 5 P age

6 Yates, A. and M. Cronshaw. (2001) Pollution Permit Markets with Intertemporal Trading and Asymmetric Information. Journal of Environmental Economics and Management. 42, 104. b. Mitigation versus adaptation TBA STERN1 Ch. 18, Understanding the Economics of Adaptation. * IPCC, 2014: Climate Change 2014: Synthesis Report. SPM 4 Adaptation and mitigation, III. Cost-Benefit Analysis a. Valuing climate impacts * Russell, C. S. (2001) ADamage and Benefit Estimation.@ Ch. 6 in Applying Economics to the Environment. ** Brookshire, D., A. Randall, and J. Stoll. (1980) AValuing Increments and Decrements in Natural Resource Service Flows.@ American Journal of Agricultural Economics, 478B488. ECBA Ch.2 Foundations of Cost-benefit Analysis and Ch. 11 Willingness to Pay vs Willingness to Accept. b. Aggregating climate change damages * STERN2 Ch. 5, The Ethics of Intertemporal Values and Valuations. * STERN1 Ch. 2, Economics, ethics and climate change and Ch. 2, Technical Annex, Ethical Frameworks and Intertemporal Equity (more rigorous treatment than STERN2) * Stern, N. (2016) Current climate models are grossly misleading. Nature, 530, i. Space Metcalf, G. and J. Stock. (2015) Integrated Assessment Models and the Social Cost of Carbon: A Review and Assessment. * Fankhauser, S., R. Tol and D. Pearce. (1997) AThe Aggregation of Climate Change Damages: A Welfare Theoretic Approach.@ Environmental and Resource Economics, 10, 249B66. ECBA Ch.15 Equity and Cost-benefit Analysis. ii. Time * Perman et. al. (2003) ACost-benefit analysis@ Ch. 11, Natural Resource and Environmental Economics, 3 rd Edition. Dasgupta, P., K. Mäler, and S. Barrett. (2000) AIntergenerational Equity, Social Discount Rates and Global Warming.@ Devon Garvie All Rights Reserved 6 P age

7 ECBA Ch.13 Discounting. iii. Risk * Kolstad, C. (2000) ARisk and Uncertainty@ Ch. 12 in Environmental Economics. * Weitzman, M. (2014) Fat Tails and the Social Cost of Carbon. American Economic Review, 104, 5, * Hope, C. And D. Newbery. (2006) ACalculating the social cost of carbon.@ University of Cambridge mimeo. ** Weitzman, M. (2009) On modeling and interpreting the economics of catastrophic climate change. Review of Economics and Statistics, 91, 1, Perman et. al. (2003) AIrreversibility, risk and uncertainty.@ Ch. 13 in Natural Resource and Environmental Economics, 3 rd Edition. c. The Stern Review * STERN1 Ch. 6, AEconomic Modelling of Climate-Change Impacts,@ and Ch. 13, Towards a goal for climate change policy. * Hope, C. (2006) AThe Marginal Impact of CO 2 from Page2002: An Integrated Assessment Model Incorporating the IPCC=s Five Reasons for Concern.@ The Integrated Assessment Journal, 6, 1, 19B56. * Dietz, S. et. al. (2007) ASome economics of >dangerous= climate change: Reflections on the Stern Review.@ Global Environmental Change, 17, IV. International collective action (If time permits. Readings TBA) Devon Garvie All Rights Reserved 7 P age