WHY I LIKE

ENVIRONMENTAL

ECONOMICSLecture 1

14.42/14.420

Hunt Allcott

MIT Department of Economics

What is Environmental Economics?

• Economics is the study of the allocation of scarce

resources.

• This helps us understand how much money society

should spend on environmental quality and how

environmental policies should be structured.

• Why not have zero pollution?

• Specifically, economics helps us to understand:

• The value of pollution abatement.

• The costs of pollution abatement.

• The welfare effects of different policies to control pollution.

Example: Using Economics to Reframe

Climate Change• Trends

• Damages

• Abatement Costs

Variation in Global Surface Temperatures

0.8

0.4

0.0

-0.4

-0.81860 1880 1900 1920 1940 1960 1980 2000

Year

Dep

artu

res i

n te

mpe

ratu

re (o

C) f

rom

the

1961

_ 1990

ave

rage

Data from thermometers.

Global

Image by MIT OpenCourseWare.

Expected impact on global climate

• Change in global surface

temperature• Change in global mean sea

level

Source: Hadley Centre (UK) Model 3 – A1F1

0.5

0.4

0.3

0.2

0.1

0.0

-0.12000 2020 2040 2060 2080 2100

Year

5.55.04.54.03.53.02.52.01.51.00.50.0

-0.5 1900 1950 2000 2050

Tem

pera

ture

cha

nge

(o C)

YearSe

a-le

vel r

ise

(m)

SRES A1F1

SRES A2

SRES B2

B2

A2

A1F1

Image by MIT OpenCourseWare.

Expected impact on U.S. climate

50

52

54

56

58

60

62

64

2000 2020 2040 2060 2080 2100 2120

Year

Average Daily Mean Temperature (Annual)

Poly. (Average Daily Mean Temperature (Annual))

Source: Author’s Calculations From National Center for Atmospheric Research,

Community Climate System Model (CCSM) 3 A2

Distribution of Annual Daily Mean Temperatures (F), 1968-2002

0

10

20

30

40

<0 0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 80-85 85-90 >90

Daily Mean Temperatures

Days Per Year

Note: Population-weighted average over all counties

Changes in Distribution of Daily Temperatures Under

Hadley 3 A1FI and CCSM 3, A2

<0 0-5

5-10

10-15

15-20

20-25

25-30

30-35

35-40

40-45

45-50

50-55

55-60

60-65

65-70

70-75

75-80

80-85

85-90

>90

50

40

30

20

10

0

-10

-20

CCSM 3, A2 ScenarioHadley 3, A1F1 Scenario

Change in Distribution of Annual Daily Mean Temperatures (F)

Image by MIT OpenCourseWare.

Estimated Response Function Between Daily Temperature and

Mortality: Females

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

<0 0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 80-85 85-90 >90

Impact of a Day in 20 Daily Mean Temperature (F) Bins on Annual Female Mortality Rate,

Relative to a Day in the 65° - 70° F Bin

Annual Deaths Per 100,000 Poly. (Annual Deaths Per 100,000)

Note: Population-weighted sum of age-specific response functions

Predicted change in annual female and male

mortality

-4,000

-2,000

0

2,000

4,000

6,000

8,000

<0 0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 80-85 85-90 >90

Daily Mean Temperature (F)

Change in Annual Male Mortality Change in Annual Female Mortality

Estimated Response Function Between Daily Temperature and Residential

Energy Consumption

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

<0 0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 80-85 85-90 >90

Impact of a Day in 20 Daily Mean Temperature (F) Bins on Annual Residential Energy Consumption,

Relative to a Day in the 65° - 70° F Bin

Quadrillions of BTUs Poly. (Quadrillions of BTUs)

Predicted change in annual residential energy consumption

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

<0 0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 80-85 85-90 >90

Daily Mean Temperature (F)

Quad BTU

Results from India (Preliminary)

0.04

0.03

0.02

0.01

0.00

-0.01

-0.02

-0.03

Log

annu

al m

orta

lity

rate

per

100

0

Estimated Mortality Impact of a Day in 20 Temperature (C) Bins onLog Annual Mortality Rate, Relative to a Day in the 20o - 24oC Bin

-1 std

+1 std

log-linear model

<0 0-2

2-4

4-6

6-8

8-10

10-12

12-14

14-16

16-18

18-20

20-22

22-24

24-26

26-28

28-30

30-32

32-34

34-36

36>

Image by MIT OpenCourseWare.

Carbon Emissions Projections

BAU70

60

50

40

30

20

10

02005 2010 2015 2020 2025 2030

66

28

20

Technical measures<€90 per tCO2e

Technical measures€80-€100 per tCO2e1

(high-level estimates)Behavior changes(high-level estimates)

Emissions Abatement Pathway

Glo

bal G

HG

em

issi

ons G

tCO

2e p

er y

ear

Peak at 550 ppm, long term stabilization 550 ppm, expected 3oC increasePeak at 510 ppm, long term stabilization 450 ppm, expected 2oC increasePeak at 480 ppm, long term stabilization 400 ppm, expected 1.8oC increase

-38

-4-4

Image by MIT OpenCourseWare.

Abatement Cost Curves (McKinsey)

0

-30

-60

-90

-120

-230

30

60

90

3.23.02.82.62.42.22.01.81.61.41.21.00.80.40.20

CostReal 2005 dollars per ton CO2e

Residentialelectrons

Residentialbuildings-Lighting

Fuel economy packages - Light trucks

Commercial buildingscombinedheat and power

Industrial processimprovements

Residentialwater heaters

Coal mining - Methane mgmt

Commercial buildings - Control systems

Residentialbuildings - Shell retrofits

Nuclear newbuild

Active forest management

Distributed solar PV

Coal power plants-ccs rebuilds with EOR

Afforestation of cropland

Commercial buildings - HVACequipmentefficiency

Solar CSP

Residentialbuildings - HVACequipmentefficiency

Commercial electronics

Commercial buildings - LED lighting

Fuel economy packages - Cars

Commercial buildings - CFL lighting

Commercial buildings - New shellimprovements

Residentialbuildings - New shellimprovements

Cellulosicbiofuels

Conservationtilage

Existing power plant conversionefficiencyimprovements

Industry - Combinedheat and power

Manufacturing - HFCs mgmt

Onshore wind - Low penetration

Natural gas and petroleul systemsmanagement

Afforestation of pastureland

Reforestation

Winter cover crops

Onshore wind - Mediumpenetration

Coal power plants - CCSnew builds with EOR

Biomass power - Confining

Onshore wind -High penetration

Coal powerplants - CCSnew builds

Coal powerplants - CCSrebuilds

Industry - CCS newbuilds on carbon-intensiveprocesses

Coal-to-gasshift - dispatch ofexisting plants

Car hybridization

Potential Gigatons/year

U.S. MID-RANGE ABATEMENT CURVE - 2030U.S. MID-RANGE ABATEMENT CURVE - 2030

Abatement cost <$50/ton

0.6

Image by MIT OpenCourseWare.

The Economics of Climate Change

• What costs of climate change?

• What forms of costs?

• How should we value environmental amenities?

• What costs of greenhouse gas emission abatement?

• How do we abate emissions? Fuel switching, changes in demand patterns, energy efficiency, sequestration

• Present-future tradeoffs:

• What discount rate to use?

• Irreversibility/option value

• How to design policy?

• Taxes? Trading? R&D subsidies? Clean Development Mechanism offsets?

• Equity

• How to decide which policy option?

Syllabus

Course Modules:

1. Social Choice and the Role of Government

2. Economic Efficiency and Benefit-Cost Analysis

3. Externalities and Public Goods

4. Optimal Regulation of Pollution

5. Risk and Uncertainty

6. International Trade

7. Environment, Growth, and Development

8. Measuring Benefits

9. Natural Resource Economics

10. Policy Application: Airborne Particulates

11. Policy Application: Climate Change

12. Policy Application: Energy Efficiency

How I Teach

• Name cards

• Interactive

• Class participation matters

• Goal: prepare you to think about environmental

economics in:

• Econ PhD programs

• Consulting or industry jobs

• Policy analysis/think tank jobs

• Government

• Tools:

• Theory

• Stata

Innovating

• Teaching this class very differently this year

• Different learning modes:• In-class participation

• Business school cases

• Theory

• In-class simulations

• Empirical exercises in problem sets

• New class modules:• Energy efficiency

• Climate change policy

• Theory of natural resource extraction

• Environmental issues in developing countries

• Pursue feedback throughout the semester

Questions for the Class

• Background

• Why interested in environmental economics?

• What environmental problems most of interest?

• Background on me.

Big Questions

• Why did the environmental movement take off in the 1960s?

• Is it really possible to create a market for pollution? How well do these markets work?

• Are pollution taxes better or worse than cap-and-trade programs?

• Is there a “race to the bottom” in environmental regulation?

• How does international trade affect the environment?

• What is the relationship between economic development and environmental quality?

• Are poor countries “under-polluted,” as Pritchett/Summers have claimed?

Big Questions

• Are we running out of resources?

• What does “sustainability” mean in economic terms?

• How do you measure the value of a polar bear?

• Is there an Energy Efficiency Gap?

• Get ready to answer these questions on Thursday

Answers to Big Questions

• Get ready to begin answering these questions on

Thursday.

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14.42 / 14.420 Environmental Policy and Economics

Spring 2011

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