Fundamentals of Environmental Economics

A PARTNERSHIP PROGRAM OFFERED BY

THE FOUNDATION FOR TEACHING ECONOMICS

IN PARTNERSHIP WITH THE FRASER INSTITUTE

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

1

10/26/2022

Lesson 3

ADDRESSING CLIMATE CHANGE

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/26/2022

Discussion Objectives

• Understand the concept of climate change
• Understand concerns related to climate change policies
• Introduce current policies designed to deal with climate change
• Review strengths / weaknesses of policy alternatives
• Understand the importance of scientific data collection when considering policy alternatives
• Understand the importance of determining 'expected’ marginal cost / benefit related to climate change alternatives

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/26/2022

Key Question to be Answered:

• Do we (country/global community) want to establish policies to address climate change?

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/26/2022

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

5

10/27/2022

UN Climate Change Report:�Sixth Assessment Report - Climate Change 2021-2023: The Physical Science Basis

• The Full Report:
• https://www.ipcc.ch/assessment-report/ar6

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• A Summary for Policy Makers:
• https://www.ipcc.ch/sr15/

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/26/2022

Key Questions to be Answered:

• Who are the key players in developing environmental policy decisions?

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• What is the basis/criteria for making decisions related to the environment?

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Key Players

• Scientists
• Economists
• Politicians/Policy Makers per Nation
• Developed Nations
• Developing Nations
• Interest Groups

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Basis for Decision Making

• Scientists:
• Scientific factual evidence over time.

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

9

10/27/2022

Basis for Decision Making

• Economists:
• Scientific factual evidence over time based on expected marginal cost/expected marginal benefit of a policy

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

10

10/27/2022

Basis for Decision Making

• Politicians/Policy Makers per Nation:
• Evidence along with political considerations

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• Developed vs. undeveloped nation considerations

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Basis for Decision Making

• Interest Groups:
• Evidence as provided by their sources

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

12

10/27/2022

The Problem

• How to get agreement from all groups related to a specific policy.

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

13

10/27/2022

NASA

• The Earth's climate has changed throughout history. Just in the last 650,000 years there have been seven cycles of glacial advance and retreat, with the abrupt end of the last ice age about 7,000 years ago marking the beginning of the modern climate era — and of human civilization. Most of these climate changes are attributed to very small variations in Earth’s orbit that change the amount of solar energy our planet receives.
• Data compiled by NOAA – Mauna Loa CO2 data. http://climate.nasa.gov/evidence/

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Conclusion

• We know carbon levels have risen in recent years, but what is the best, most efficient way to deal with this?

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Three Policy Considerations:

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Three Policy Options

1. “Business as Usual” (Do nothing)�
2. Incentive-Based Policies (Cap and Trade)�
3. Command-and-Control (Taxation)

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

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1/6/2023

Nations where carbon is priced.

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https://www.imf.org/en/Blogs/Articles/2022/07/21/blog-more-countries-are-pricing-carbon-but-emissions-are-still-too-cheap

Policy Consideration 1:

• Ignore and do nothing

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Policy Consideration 2:

• Cap and trade
• Cap the amounts of greenhouse gasses such as water vapor,
• carbon dioxide, methane, nitrous oxide, ozone and
• chlorofluorocarbons.….and develop a market for trading,
• if possible.

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Policy Consideration 3:

• Taxation
• Establish a tax per ton placed on greenhouse gas emission.

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

23

10/27/2022

Greenhouse Gasses

• Greenhouse gases trap heat in the Earth's atmosphere. Cars, planes, power plants and factories all emit GHG. The Kyoto Protocol, an international GHG agreement, defines six troubling types of emissions:
• Carbon dioxide (CO2): When fossil fuels, waste and plant matter burn, they emit CO2, the most common GHG emission.
• Methane (CH4): Landfills, livestock, agricultural activities and the production of coal, natural gas and oil all generate CH4, an emission far more powerful than CO2.
• Nitrous oxide (N2O): Sewage treatment and the combustion of fossil fuels both produce N2O. However, fertilizer and agricultural soil management release the majority of this potent emission.
• Sulfur hexafluoride (SF6): The electric power industry uses this man-made compound for insulation and current interruption.
• Hydrofluorocarbons (HFCs): Solvents, refrigerants, firefighting agents and propellants for aerosols use HFCs as a replacement for ozone-depleting chlorofluorocarbons (CFCs).
• Perfluorocarbons (PFCs): There are relatively low amounts of PFCs in the atmosphere,­ but they're hard to get rid of. The estimated atmospheric life of this solvent and component of aluminum production ranges from 10,000 to 50,000 years.

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

How Do These Policies Work?

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Cap and Trade: How it Works

1. Government (e.g. EPA) sets overall limit on the amount of emissions in the nation, which changes yearly.
2. Individual firms are ‘given’ permits yearly, each conveying the opportunity to emit 1 ton of greenhouse gas. If they choose not to ‘use’ the permit, they may trade it to another company or entity. Permits may be valid for only a limited number of years.
3. Firms exceeding their emission limit and not having enough permits, either through the amount provided by government or via purchase, would be subject to a fine per ton for their excess emissions.

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

26

10/27/2022

Cap and Trade: Questions to Consider

• What is the goal of cap and trade?
• Who benefits from cap and trade?
• How does cap and trade internalize a previously external cost?
• Who pays for internalizing this cost?
• Are there losers in cap and trade? If so, who? Why?
• Under what conditions would trade not necessarily take place or be needed?
• By what methods could allowances be issued?
• Who benefits / loses from each allocation method?

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

27

10/27/2022

Taxation: How it Works

1. A carbon tax is a tax levied on the carbon (in reality, CO2) content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel (coal, petroleum, and natural gas) and is released as carbon dioxide (CO 2) when burned by electric utilities, industrial/residential/commercial users and transportation companies.
2. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not convert hydrocarbons to CO 2.

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Taxation: Issues to Consider

• Economic
• Emissions Reduction
• Energy Markets
• Tax Structure
• Coordination with Federal Laws / Regulations

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

29

10/27/2022

Taxation Questions: ECONOMIC

• What will be the effect on employment?
• How much revenue will be raised?
• How will revenue be used?
• Will there be an impact on economic growth?

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

30

10/27/2022

Taxation Questions: �EMISSIONS REDUCTION

• Target objective in yearly emissions.

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• Unintended consequences that might occur:
• - Development of clean technology
• - If Canada is only nation to implement the tax

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

31

10/27/2022

Taxation Questions: ENERGY MARKETS

• Impact on energy markets?
• Impact (uneven) across the U.S.?
• Impact per household in U.S.?
• Impact on fuel portfolios for utility companies?
• Impact on natural gas market?

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

32

10/27/2022

Taxation Questions: TAX STRUCTURE

• How is the rate to be set?
• How is tax to be implemented:
• At source (refineries, coal mines, natural gas operators). Approximately 2,000.
• Downstream (gasoline and home heating oil distributors, distributors, major industrial facilities). Approximately 13,000.

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Taxation Questions: �FITTING WITH CURRENT REGULATIONS

Should there be exceptions / exemptions:

• If case by case, under EPA fleet fuel economy standards.
• EPA only regulates sector by sector.
• If uniform tax, this would be a legislative action and cut across all industry.

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

34

10/27/2022

Taxation: Issues to Consider

• Economic
• Emissions Reduction
• Energy Markets
• Tax Structure
• Coordination with Federal Laws / Regulations

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

35

10/27/2022

Where does this leave us?

Where Does Carbon Taxation Stand Now?

• E.U. Set to Unveil First-Ever Carbon Border Tax
• The proposed tax places a fee on planet warming emissions embedded in goods produced outside the union.
• Scientific American – July 13, 2021

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Went into effect in 2023.

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

37

10/27/2022

Nations where carbon is taxed.

Source: World Bank 2015

ETS: Emission Trading Scheme (Cap and Trade)

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https://www.carbontax.org/where-carbon-is-taxed-overview/

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

38

10/27/2022

Where Does Carbon Taxation Stand Now?

• As of 2019, carbon taxes have been implemented or scheduled for implementation in 25 countries, while 46 countries put some form of price on carbon, either through carbon taxes or emissions trading schemes.

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• https://www.worldbank.org/en/programs/pricing-carbon
• https://taxfoundation.org/carbon-tax-to-make-the-tcja-individual-provisions-permanent/

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

41

10/27/2022

Reality Check

• If a carbon tax is implemented, many difficult decisions must be made related to each of the previous five areas – none of which can be decided quickly or easily.

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

42

10/27/2022

New Jersey Energy Facts 2021:

• https://www.eia.gov/state/rankings/#/series/28

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• https://www.eia.gov/state/?sid=NJ

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Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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10/27/2022

Valuable Instructional Websites

• http://www.ncsl.org/research/energy/renewable-portfolio-standards.aspx
• https://www.eia.gov/state/rankings/#/series/28
• https://www.eia.gov/environment/emissions/state/analysis/
• http://www.ncsl.org/research/energy/renewable-portfolio-standards.aspx
• https://www.eia.gov/state/?sid=OK
• https://data.worldbank.org/indicator/EN.ATM.CO2E.PC?end=2014&start=2014&view=map
• https://www.statista.com/statistics/271748/the-largest-emitters-of-co2-in-the-world/
• https://www.worldatlas.com/articles/us-states-by-carbon-dioxide-emissions-per-capita.html
• https://www.energy.gov/maps/renewable-energy-production-state

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

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