Slide 0 - Applied Economics

Economics, Mitigation, and Adaptation:
Decision-Making for
Climate Change and Sustainability
Susan M. Capalbo
Professor and Head, Applied Economics
Oregon State University
[email protected]
November 2013
ATS 320
support from USDA, NNF and REACCH
The history of life on earth has been a history of interaction
between living things and their surroundings. To a large
extent, the physical form and the habits of the earth’s
vegetation and its animal life have been molded by the
environment. … Considering the whole span of earthly time,
the opposite effect, in which life actually modifies its
surroundings, has been relatively slight. Only within the
moment of time represented by the present century has one
species acquired significant power to alter the nature of his
from Rachael Carson’s Silent Spring, (1962)
Challenges Facing
Agriculture in the
21st Century
• 25% of Earth’s lands are already
• More than ¾ of the 70%
increase in global food
production needed by 2050 will
have to come from the
‘sustainable intensification’ of
existing agricultural lands.
• A global issue, requiring
responses internationally and
Flow of presentation:
I. Defining Terms
• Sustainability
• Externalities
• Examples with Climate Change
II. Tools of the Trade: Economic Framework for Decision-Making
• Cost-benefit analysis
• Discounting
• An Efficient Climate Change policy
III. Different Approaches for Climate Policy
• Taxes, Permits, command and control
IV. Some Challenges: Dealing with Irreversibility, long time horizons
Nov 2013
Susan M. Capalbo
TAKE-HOME Messages
(1) Economic forces, economic decisions are driving phenomena
such as global warming and biodiversity loss
(2) To change unsustainable behavior, need to develop
economic environment within which they are no longer
attractive– incentives matter
(3) Climate change is a global externality – very difficult to tackle
from an economic point of view
February 13, 2015
Susan M. Capalbo
Defining terms
• Sustainability and Resilience
• "Sustainable development is development that meets the needs of the present
without compromising the ability of future generations to meet their own
World Commission on Environment and Development, 1987
• Essence of sustainability (three axioms):
• (1) a treatment of the present and the future that places a positive value on the very
long run (discount issue)
• (2) Recognition of all of the ways in which environmental assets contribute to
economic well-being (valuation issue) and how economic incentive and decisions
impact global warming, biodiversity etc (economic issue)
• Recognition of externalities: spatial and temporal dimensions (economic issue)
• (3) Recognition of the constraints implied by the dynamics of environmental assets
(science issue)
• Reference: Resilience Thinking by Brian Walker and David Salt (2006)
January 13, 2011
Susan M. Capalbo
Defining terms
• Externality, spillover
• Examples (local and global)
Susan M. Capalbo
Role of Economics in Climate Change Research
• Mitigation: How to limit CO2 and GHG emissions
2 ways to think about Economic contributions:
(1) Set CO2 levels in atmosphere that minimize costs (SR and LR)
(2) determine the least cost means to achieve (1)
7 ways to reduce carbon:
• Adaptation: What are the economically feasible options? What
are the economic costs of adaptation?
• My areas of research: agriculture and energy
Susan M. Capalbo
Climate Change Policy
• International Policies addressing a Global
• United Nations Framework Convention on
Climate Change: Background
• Europe Let’s Close the Gap
• National and State Policies: A Second-Best
Take-home messages:
Climate change is a global externality currently
beyond the scope of a comprehensive
international policy
National and state level policies are a secondbest solution to tackle a smaller piece of the
global issue
February 13, 2015
Economics of Climate Change
• Economic concepts at play:
• scarcity, discounting, tragedy of
the commons, intergenerational
equity, opportunity cost
• Stern Review: Economics of
Climate Change
• Economic Instruments
• taxes
• markets
• Financial Times Op-Ed
• command and control/ best
management practices
Take-home message: Economics offers a framework to be used to solve the
issues arising from climate change rather than a one-track solution
February 13, 2015
Cap and Trade (market)
• Modeled after SO2 program
• Create a ‘market’ (tradeable allowances)
• Advantages: cost effective way to reduce CO2 emissions (in theory)
• Leads to strong incentives to develop pollution control technologies
• Ag sector may be able to provide carbon offsets – next slide
Carbon Credits vs. Carbon Offsets
Carbon Credit
Refers to any tradable certificate or permit representing the right to
emit one ton of carbon dioxide or the mass of another greenhouse
gas with a carbon dioxide equivalent of one ton of carbon dioxide
Carbon Offsets
Refers to a ton of carbon dioxide equivalent. An offset negates the
effects of carbon emitted in one place by avoiding the release of a
ton of carbon elsewhere or absorbing/sequestering a ton of CO2
equivalent that would have otherwise remained in the atmosphere.
Carbon Markets
Carbon markets are
based on a
CAP and TRADE Program
(similar to the program enacted by
the Clean Air Act of 1990, used to
reduce sulfur emissions)
• Government sets a yearly CAP on the amount of allowable
greenhouse gases (in terms of carbon equivalences)
• Permits or allowances equal to the CAP are then allocated or
auctioned off to each emitter
• Each emitters emissions are measured and at the end of the year
each emitter must provide a permit for each ton of carbon emitted
• Emitters that don’t reduce emissions enough must buy credits
(or offsets) and emitters that reduce emissions more than
required can sell excess credits
Carbon Prices Fluctuate (2013)
• January 14th California Carbon Allowances sold for about $15/ton
• Jan 24th Prices in the EU's Emissions Trading System dropped to
€2.81/metric tonne and later climbed back above €4. ($4.18-$5.96/US
• Feb 5th EU sold 3.47 million CO2 permits for € 4.10 each ($6.10/US ton)
• According to the Climate Exchange, prices for offsets are determined by
the particular project and current market conditions. An important
indicator of price is related to the type of standard the project meets.
• Air Resources Board projects are going to take the highest prices (currently
around $8-11/ton)
• Verified Carbon Standard (VCR) projects are generally taking the lowest prices
(currently around $0.25 - $1/ton).
• There can also be a lot of variability based on project type, location,
and various other features.
Keys to a Successful Cap and Trade Program
• Setting a realistic cap on CO2 emissions
• if set too low, CO2 allowances/credits will not be valuable
• if set too high, emitters will have to increase output prices
significantly (causing unwanted ripple effects in the
economy) or close down their operations
• Ability to measure and monitor emissions
• Ability to set up a relatively low cost means of trading
• If offsets are used, these also need to be measured and
Potential Sources of Carbon Offsets
“Studies in Canada and the United States have shown that
increased amounts of atmospheric C02 can be sequestered
in soil by the use of agricultural conservation practices.”
•Retire land from agricultural production and replanting perennial cover
(such as trees or perennial grasses)
•Eliminate bare fallowing and add cover crops to standard cropping systems
•Use of perennials in rotations
•Use of reduced/no tillage to increase the amount of soil organic matter and
carbon sequestration in the soil
•Improved fertilizer management or use of composted animal manures
which eliminates the emissions from the production and transportation of
synthetic fertilizers
•Grazing land management
•Biofuel substitution (use of crop residues for biofuel)
Freedman et al. 2009. Credits and the conservation of natural areas.
Schahczenski and Hill 2009. Agriculture, Climate Change and Carbon Sequestration
Potential Challenges to Agricultural Offsets:
• Additionality: Is the offset truly an offset if the reduction would have happened
anyway? For example, an emitter purchases an offset from a farmer which simply
subsidizes a farmer to plant cover crops, when this is something they have been
doing for a while anyways.
o Potential Remedy: Adjust credits so they are not 1-1.
• Leakage: carbon sequestration gains from offsets could be shifted to another source
that results in increased emissions overall.
o Potential Remedy: Adjust credits so they are not 1-1.
• Permanence: When carbon is built up in the soil through reduced tillage or other
practice, carbon can be released if the practice is not continued, making the GHG
reductions only temporary.
o Potential Remedy: write a contract that address this problem.
• Measuring and Monitoring Costs: Difficult to measure accurately because
GHG emissions from farm fields are a non point source of pollution.
oPotential Remedy: measure the amount of soil carbon sequestered by sampling and
estimate the average carbon accumulation of each practice.
Or use remote sensing, aerial photography, or drive-by inspections
to ensure that farmers are using an eligible practice.
Oregon Carbon Credits
Oregon has adopted power plant carbon
dioxide (CO2) emission requirements that
allow compliance through offsets.
The Climate Trust is the only qualified organization which
manages funding from Oregon-based utilities with a statutory
requirement to acquire carbon credits. This program currently
has $6 million available to purchase carbon credits.
One of the areas the Oregon program is targeting is innovative
sequestration projects like aggregation of small-scale forestry
projects or soil carbon sequestration.
Climate Trust
5 SW Yamhill Street, Suite 400; Portland, Oregon 97204 503.238.1915
Soils provide the largest terrestrial store of
carbon on Earth, with twice the carbon
stored in shallow soil than in all the
vegetation aboveground.
TRADEOFFS exist: the most financially
viable use of land often favors increasing
development, leading to loss of habitat for
native species, valuable soil carbon and
an estimated 35 M tons of greenhouse gas
emissions annually in the U.S.
Climate Trust is currently collaborating with Ducks Unlimited to develop
and apply a new Avoided Grasslands Conversion methodology across the
Northern Great Plains – an area where more than 770,000 acres of grasslands
were converted to cropland between 1997 and 2007. Financial incentives will help
preserve 50,000 acres of grasslands across the Prairie Pothole Region, and
provide economic benefits to around 100 landowners.
Carbon Tax (another market-based policy)
How carbon is priced – directly, not thru markets
Less variability from year to year
Reduces the uncertainty in pricing – tax sets a price
Optimal tax policies represent the lowest expected NPV of
abatement across all policies considered for the given
cumulative emissions goal.
Relevance for this discussion: taxes are a clear, consistent price
for carbon
Command and Control
Performance standards or best practices
How carbon is priced: indirectly (shadow price on carbon)
This policy instrument makes it difficult to directly price carbon –
one needs to know cost of alternative production process and
the cost of the carbon constrained process
Let’s get real: Options for US Climate Policy
Absent from 2012 Campaign
Three major tracks:
• USE the Clean Air Act (Supreme Court Ruling: Mass vs EPA) – GHG covered
under Clean Air Act
• Carbon tax: way of of federal budget deficits
$20/t tax yields $100B annually
Issues: impacts on HH, economy? Competitiveness issues – trade impacts
Clean Energy Standard (CES)(example: goal of 80% clean electricity by 2035)– sets
minimum threshold on share of energy generation that must come from clean
Source: RFF
Energy: A Technological Approach to Adaptation and
• Technological approaches
• carbon capture and storage, natural gas-shale
technology, combined heat, cooling, solar hot
water heating, distributed solar photovoltaics,
feed-in tariff, ethanol, nuclear power, LED
lighting, batteries for electric vehicles, energy
• The Future of Coal, MIT Study
Take-home message: Energy technology can
cross the line between adaptation and
mitigation; economic feasibility is a key criteria
for the success of new technologies
February 13, 2015
Current Dominance of Fossil Fuels
Energy Consumption (USA, 2001)
GHG Emission Sources (USA, 2003)
Source: EIA Energy Information Administration , 2001, 2005
Data Source: Energy Information Administration;
Fossil Fuel Resources – Not Running Out
bnboe = billion barrels of oil equivalent
Source: BP, Stat. Review 2005
•USA Total Oil Consumption: 7.5 billion barrels per year
Coal Drives CO2 Emissions
Source: International Energy Agency 2004
The CO2 Stabilization and Wedges Framework
Source: Princeton Carbon Mitigation Initiative
Seven possible wedges (these are the easy ones!)
• Replace 1400 coal-fired plants with gas-fired plants
• Increase fuel economy of 2 billion cars (30-60mpg)
• Add twice today’s nuclear power to displace coal
• Drive2 billion cars on ethanol (1/6 cropland for fuel)
• Increase solar power 700-fold
• Cut electricity use in homes, offices, stores by 25%
• Capture the CO2 at 800 large coal-fired plants
Tools of the Trade: Economic Framework for Decision-Making
• Cost-Benefit Analysis
• Commons sense: Benefits/costs > 1 (good) Benefits-costs >0 (good)
• Can be measured in dollars: compares the value of costs vs. value of
benefits and clarifies trade-offs
• Attempts to incorporate future costs and future benefits -- now
controversy sets in!
• Need to compare benefits and costs that occur in different time periods
• Like comparing price of hotel room in US and price of hotel room in Canada –
need exchange rate!
• Measuring "value of benefits" in dollars has its challenges:
• Can we quantify the value of saving the Northern Spotted Owl?
• Use value vs. option value and nonuse value
January 13, 2011
Susan M. Capalbo
Tools of the Trade: Economic Framework for Decision-Making
• Discounting:
• Future value (FV) of $100 at an interest rate of 10% = $110 in 1 yr, $121 in 2 years, $1,745 after 30 yrs
• Present Value:
amt today that is equivalent to given amt in the future
• Example: PV of a promise to pay $100 one year from now is worth only
$90.91 when r=10%.
PV=$82.64 in two years when r=10% (drops
• Net Present Value:
• Compares future vs. present costs and benefits: future B and C are
given less weight than present B and C
January 13, 2011
Susan M. Capalbo
Today vs. Tomorrow: Dealing with Irreversibility
• Uniqueness—some stocks cannot be replenished or
substituted (coal, petroleum, clean air, etc.)
• Permanent loss of a particular stock is considered regrettable
• “Sustainable usage”—may involve protecting some unique
stocks at the expense of others
January 13, 2011
Susan M. Capalbo
Risks: Dealing with Uncertainty
• Uncertainty versus variability?
• Climate change, pollution costs, health impacts
• We deal with uncertainty all the time? (2013 is year of
• What will the world look like in 100 years?
• What technologies will we have? Can they compensate for
current damages?
January 13, 2011
Susan M. Capalbo
Challenges to supersizing CBA:
Example from Climate Change
Large changes – can we use prices to approximate value of the changes
Large amounts of uncertainty that cascades
• GHG concentrations and temp and climate patterns – inherently
• Resulting economic and social impacts
Three important complications:
• Costs and benefits are highly nonlinear (thresholds, tipping points)
(invoke precautionary principle)
• Irreversibilities
• Policies impose costs on society (investments in capture) – should
we wait for better info
• Environmental damage is irreversible – GHG accumulate – many
years to undo
• Long time horizons: What discount rate to use

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