How much carbon emission is too much?

The King of Burgers

Robert Baratheon is a huge burger lover. One day he walks into a burger place and finds the menu to be the following. Which burger should Robert choose?

Burgers	No. Sausages	Price	Willingness to Pay
Veggie Burger	0	$4	$5
Cheeseburger	1	$6	$8.5
Double Cheeseburger	2	$8	$11
Triple Cheeseburger	3	$10	$12.5
The Ultimate Cheeseburger	4	$12	$13

Maximize net benefits

Burgers	Price	WTP	Net Benefit
Veggie Burger	$4	$5	$1
Cheeseburger	$6	$8.5	$2.5
Double Cheeseburger	$8	$11	$3
Triple Cheeseburger	$10	$12.5	$2.5
The Ultimate Cheeseburger	$12	$13	$1

Some Algebra

WTP: \(-0.5Q^2+4Q+5\)

The demand for beef sausage:

P = 4-Q

Price for beef sausage

P = 2

Net benefit is maximized when price equals marginal benefit

Q = 2

What are we doing here?

We are essentially evaluating the trade-off between:

• The joy of consuming an ADDITIONAL sausage
• The lost opportunity of using the resource to:
  • Buy 3 apples
  • Subscribe to Netflix
  • Sit on a massage chair for 3 minutes

So, what happens when the good in question is GHG emission?

We need to find:

• A demand curve
  • how much damage will one extra unit of GHG cause to our society?
• A supply curve
  • How much will it cost to reduce one extra unit of GHG emission?
• An optimal level of pollution that equates supply and demand

Climate change leads to societal-wide impacts

• Decreasing agricultural production
• Rising sea level
• Increasing inter-personal conflicts
• Decreasing ability to learning and testing
• Increasing human mortality

…

Economist has been working hard on quantifying these damages

Reducing GHG emission is also costly

• Solar PVs
• Hydro-power
• Electric cars
• Re-forestation / Conservation

…

And also this:

• From mid-March to mid-June 2020, \(CO_2\) emission decreases by ~18% in the United States (Greestone 2020)
  • By the end of the year, ~6-12% reduction for the year 2020
  • RCP 2.0: 8% reduction every year until 2050
• \(PM_{2.5}\) levels decrease by 36% globally (Venter et al. 2020)
• \(NO_{2}\) levels decrease by 60%, also globally (Venter et al. 2020)

Please discuss the following two questions:

1. What did you personally, and the society as a whole, do in 2020 to reduce carbon emission?
2. Is it worthwhile to combat climate change this way? Why?

The US lost ~30% of its GDP in the second quarter

• The best estimate for cost: $3,000-5,000 per tonne of \(CO_2\)

This is using a missile to shot a cow - Michael Greenstone

• Combating climate change is essentially a problem of evaluating trade-offs
  • And find the delicate balance
• An objective look at the benefits and costs is the first step to solve climate change
  • Let science be science
• The invisible hand (laissez-faire economics) is unlikely to solve the climate problem
  • GHG emission is a global externality
  • Private market will underprovide climate mitigation

The impossible three-legged stool

Taiwan’s problem

• Taiwan used to have three nuclear power plants, and are constructing a fourth (Nuclear IV)
  • 20% of total power generation
• Fukushima Daiichi disaster hit in 2011, citizens of Taiwan were terrified
  • What are the risks of a similar nuclear disaster?
  • Massive protests against nuclear power on the street
• The Democratic Progressive Party (DPP, liberals) led the campaign to remove nuclear in the energy balance
  • A failed referendum in 2014
  • Candidate Tsai Ing-Wen ran on a nuclear-free platform in 2016, aim to achieve nuclear-free in 2025

• Tsai, a Harvard and LSE grad, won the election in 2016
• Began to implement her campaign promise of nuclear-free in 2025
• But there is just one problem:
  • Taiwan didn’t have enough power generation capacity to begin with
  • The alternative was coal-fired power plants, which were already under-capacity

The 8/15 power outage

• On 8/15/2017, six generators at the Tatan power plant fully tripped
• With limited backup generating capacity, the entire Taipei city blacked out
• Huge economic losses
• Hospital reported two incidents of stopped respirators, an ongoing surgery was cancelled

It is not only the black-out

• After the blackout, Tsai’s administration began increasing capacity for coal-fired power plant
• That leads to another problem: air pollution (and climate change)
• Increased capacity of coal-fired power plants just exacerbated the problem
• DPP constituents in the Southern part were especially hurt

• The Kuomintang (KMT, conservatives) led a huge anti-pollution campaign in 2017
• Demanding changes in energy and environmental policy
  • More stringent environmental regulation
  • Shifts in the energy balance

Tsai caved in

• Facing political pressure, Tsai walked back on her campaign promise
• A 2018 referendum successfully terminated the nuclear-free 2025 plan
• Nuclear IV is still on hold, but Tsai is facing increasing pressure to resume it

Environmental economics under siege

In my opinion, things are going very wrong in Washington, DC these days. Great EPA career staff, agency scientists in particular, are being hamstrung, silenced, and treated disrespectfully.

-Gina McCarthy, former EPA administrator

• Environmental policy should be armed with objective, verifiable scientific evidences
• Yet science is getting sidelined within the agency
• At the same time, science becomes polarized along political spectrums in the public’s arena

Ways of alternative policy-making

• Exaggerating the cost of environmental protection
  • Jobs, but what jobs? Coal mining provides 50,000 jobs around the US
  • Of course, there needs to be objective evaluations of the labor market consequences from environmental regulations
  • Proper incentives stimulates innovation, which significantly lowers the expected cost of regulation

Ways of alternative policy-making

• Underestimating the benefits of environmental protection
  • Abandon well-established assumptions and guidelines in WOTUS rule, Clean Power Plans, Clean Car Standards, etc.
  • On the Social Cost of Carbon (SCC)
    • Domestic-only effect, ignores global spillovers of CO2 emissions
    • Uses a 7% interest rate, while the economic community recommends 3% or less
    • Found a $1 per ton of carbon, as oppose to $51 in 2016

Ways of alternative policy-making

• Eliminating necessary institutions that safeguard scientific analyses
  • The EPA external advisory board on environmental economics
  • The Interagency Working Group on the Social Cost of Carbon