Introduction to Economics and Policy of Climate Change: How Will You Design a Climate Policy?

1273.2.Economics and Policy of Climate Change - Minghao Qiu

[00:00:00:10] Hello, everyone. Welcome back to our second session for today's IAP Climate, Science, and Policy talk, and say what I'm going to talk about is a very brief introduction to the economic and policy issues of-- around policy and climate change. And this is also going to be our first talk in the next series of three talks focusing on climate policy.

[00:00:24:02] And before everything, my name is Minghao. I'm a first-year PhD student at MIT Institute for Data Systems Society. My research interest is in the air pollution policy issues made in China. So if are coming to this session, want to learn more about specific United States climate policy, now, we are not going to talk a lot about this in this session. But we are going to talk about that the day after tomorrow.

[00:00:52:24] And today's lecture will mainly be something like a consensual framework of how will you think about environmental policy and what's important in environmental policy and how do we evaluate that kind of policy. And IAP has been running this talk series on climate policy for a long time. And I want to thank the previous contributors, Paul Kishimoto, Michael Davidson, and Sam Houston.

[00:01:18:14] OK. So today, I'm going to talk about 30 or 40 minutes and leave the rest of time for questions. And what we are going to do here in the next 30, 40 minutes is we are going to trying to answer the three questions. And the first is why we need environmental policy, and what is special about public policy environmental domain? And secondly, what are the policy options we have in order to deal with the climate change? And third question is, when we have a climate policy, how we evaluate whether the policy is good or not?

[00:01:52:25] So we start with the very fundamental question of why we need an environmental policy. So we take one more step back when we ask why we need a public policy. Well, the answer might be from different directions. But if you ask why we need a public policy, we basically assume that people cannot achieve to the so-called optimal solution themselves without the rules telling them how to do that.

[00:02:18:26] Well, a very common scenario that people can cannot achieve through the optimal solutions themselves happens when there are lots of people. So a lot of people have different ideas of what is good, what is bad. Different people have different judgment calls. And secondly, when the resources are really limited.

[00:02:41:01] So a lot of the people seated here are PhD students. So when you are coming to a seminar with plenty of free food, there's no policy here. There's no policy here to-- telling you how much food you should take, because there are unlimited food. And everyone takes what they think to be optimal for themselves. So overall, all people on the whole, the whole society, achieve the optimal solution itself. But this is not often the case when there are a lot of people involved in that. The resources are really limited.

[00:03:12:11] And the public policy is very important in the environmental science domain, mainly because people has different understanding of what good environment is. And here's a picture showing that-- this is a chart showing the 10 worst cities with-- 10 cities with the worst air quality in China and the United States. And you can see that because people probably have different judgment calls of what acceptable air quality is. A very toxic, a very dangerous air quality considered by American people might be considered as acceptable by Chinese people.

[00:03:54:01] Well, this is the first point that different people have different ideas of what a good environment. Well, even people have same judgment call, there are still a lot of problems in the environmental science domain. And just what so-called the "tragedy of the commons." I will play a short YouTube video here. It's about one to two minutes. Hopefully--

[00:04:17:27] [VIDEO PLAYBACK]

[00:04:18:09] - This is a model called the-- that has to do with commons. Tragedy is kind of dramatic. Let's say there's some land with grass on it that people use as pasture for their lambs. Nobody owns it, and anyone can come and graze their livestock here. We're assuming that people don't communicate or work together. So we would call this an open access field.

[00:04:36:07] Let's assume the number of animals this field can feed is based on the quantity and the quality of the grass, which is based on the health of the soil. And it can only hold this many animals. This is the carrying capacity. If animals are added beyond this, the grass can't re-grow fast enough to support them all.

[00:04:50:21] Also, the grass protects the soil from erosion. If too many animals are around, the field may decline productivity, lowering the carrying capacity. The animal would be less healthy, provide lesser quality profit, lowering the profit each animal provides. So it's in this group's best interest to keep the number of animals on the field at or below the carrying capacity.

[00:05:09:05] But every herdsman that puts animal on the field will get the direct benefit that that animal provides for them, but they will only share a portion of the cost of the degraded field. If the field were at carrying capacity and a herdsman decides to add an extra animal, the added animal takes in the food that would have gone to the others. This reduces their value. The owner of that additional animal comes out ahead, because even though all his animals are a little bit less healthy, he has more of them.

[00:05:32:26] But each herdsman acts under these incentives and will keep adding animals to their herd or let their animals graze longer, so long as it's profitable for themselves. But really, they're all losing out, kind of like the prisoner's dilemma. Contrast this to a situation where only one person owns it. If they add an extra animal, they're only hurting themselves. So they don't do it.

[00:05:51:10] Since new people can't be excluded from the field, there's almost no point in boycotting the use, because someone else could just come in. None of the herdsmen own the field, and they can see that field may not be around forever. They see no point in conservation and just try to use it before someone else does. OK, so we can go--

[00:06:05:09] [VIDEO PLAYBACK OVER]

[00:06:06:05] OK, and we will stop here. So the whole of this video illustrates a little bit about how-- what is tragedy of the commons in the context, the very traditional context of the grazing animals. So we will briefly summarize a little bit. So there's a open access resource. And here in this context, it's a open pasture land, and everyone can bring the animals in the sun.

[00:06:30:01] And the island has a certain capacity that it can hold certain amount of animals. And if you get above the capacity, you will lose out long term. If this pasture land is really just owned by yourself, you are going to manage the number of your sheeps at the capacity level.

[00:06:53:19] Well, this is not the case when there are a lot of people involving. Why not? That's because that's for everyone. When they got to the capacity of animals, they make a choice between-- they make a choice whether they want to add one more sheep or not. And that's because to add one more sheep, the cost is covered or distributed among other people who are sharing this farmland.

[00:07:21:05] And it is actually more profitable for them to raise one more sheep. And everyone make their own choice driven by their self-interest. And everyone raise one more sheep, and they finally get above the island's capacity.

[00:07:38:16] So economists have been studying this, the tragedy of the commons phenomenon, for a long time. And here, we are going to use two economic terms to describe and analyze the tragedy of the commons. And first, with what I said, so why the tragedy of the commons happens, that's because of the term called "externality."

[00:07:59:09] The definition of externality is very simple. So the externality is present whenever the well-being of one-- a single firm or an individual is influenced by one another section. And in our context of the grazing animals, the benefits of the neighbors are directly influenced by the-- by the actions of another neighbor choosing whether or not to add one more sheep.

[00:08:30:07] And the externality is important, that's-- the externality makes the tragedy of the commons happens because when your cause is offset a little bit by people surrounding you, that you are not really making the social optimal solution for the society. And then the externality can have false positive externality, where your activity brings extra benefits to people, to other people. And can also be negative externalities, where your activity brings extra cost, extra harm to the-- to other people.

[00:09:06:20] For here, I want to add one more word on why positive externality might also be problematic. So here, this couple shows that getting education is an activity that's has positive externality, because getting education, you pay the tuition yourselves, and you take the time to study materials getting down the problem task. But in the point of view of the society, a person with higher education is less likely to commit crimes or is less likely to do something bad to the society. So getting education is something with positive externalities.

[00:09:49:13] But the cost of getting to the education is just paid by the individuals themself. So in order to get a sort of optimal society value of getting education, the society should encourage more people to get more education. And that's what we see in almost every society in the world. And also, people with more education are probably going to have a higher salary, and that's also an encouragement from the society to encourage you to getting more education and to do more-- to offside a little bit of the positive externality.

[00:10:26:06] And in addition to externality, we also talk about the second term, the public good. And the public good, the term of public use is why tragedy of the commons is very difficult to solve. So public use is a good that you pay the cost, but you cannot exclude other individuals from sharing this good.

[00:10:49:13] So in the context of the grazing animals, people cannot-- people cannot include-- exclude their neighbors from grazing animals in the island. And the public use can be some big things, from environmental protection or national security, but it can also be some small things, like common kitchen. The cost is covered by one individual, but the benefits are shared by other people. as well.

[00:11:17:29] So why do we bother to talk about tragedy of the commons? The tragedy of the commons is a very important feature behind all environmental problems. And of course, climate change is a problem itself, and climate change is a tragedy of the commons. And why is that?

[00:11:37:16] Climate change is a commons problem because everyone is sharing the atmosphere. And the greenhouse gases emitting activities have some immediate and tangible benefits, but they also, in the long run, harm the atmosphere, harm the climate system, and harm the human society. But all the negative costs of emitting greenhouse gases are offset by all the other people living in the earth as well. So emitting greenhouse gases has a lot of negative externalities, and that's why we cannot get to a optimal level of greenhouse gases emitting.

[00:12:17:24] And secondly, to remove greenhouse-- removal of CO2 emissions is also of public use. A nation or a firm pays the cost to install the [INAUDIBLE], to install the technology to cut down the CO2 emissions, but you can-- but everyone can share the atmosphere with less CO2 and share a climate that this is cooler a little bit. But what climate change is one of the most complex tragedy of the commons in the world, and that's mainly because of these three following reasons.

[00:12:54:09] First, climate change is highly uncertain. And we will talk a lot more on uncertainty the day after tomorrow. In the context of grazing animals, people will understand what the capacity is. And people understand how many sheep would we all have, but in the context of climate change, it's not the case.

[00:13:17:03] We don't really know what the CO2 capacity of earth is. And it is also a very difficult question to figure out how much CO2 emissions we are emitting into the atmosphere every day and how much greenhouse gases we have in the atmosphere. And not to mention, there are still a lot of people suspecting that the whole mechanism.

[00:13:36:26] And secondly, the difficulty of negotiations-- one way to address the tragedy of the commons is to increase more negotiations. But when talking about the climate change, there are just so many countries involved. And different countries have just-- their different values, so it's so hard to negotiate. And we also talk more about this tomorrow on international governance of the global climate change.

[00:14:03:05] And third question is, it's really hard for us to reduce the number of the sheeps. And in the climate change, it's so hard for us to reduce the carbon emissions. Because the Industrial Revolution, we are just so reliant on the greenhouse gases emissions in our lifestyles, in our industrial all sorts of activities.

[00:14:31:18] And we're going to stop here about the discussion on our first question item. So we talked about the tragedy of the commons as the common idea behind all environmental problems and environmental policies. And we will, from now, we will start focusing more on the climate change context.

[00:14:50:06] So what are our policy options in dealing with climate change? And so this is a simplified chart of the human use to climate change. So the human society emits greenhouse gases, and the greenhouse gases emissions increase the concentrations of the greenhouse gases in the atmosphere that gather with other contributing factor of the climate system. The climate is changing. And the changing climate has all sorts of the impacts on the human society.

[00:15:24:00] And so to deal with-- to deal with this problem, what we are really trying to do is we can break either one of those three chains. So we can reduce greenhouse gases emissions from human society, and that is the mitigation/abatement option. We can also reduce-- without making effort to reduce greenhouse gases emissions. We can also decrease the concentrations of greenhouse gases or trying to modify the climate from modifying the solar radiation, or surface land cover, or things like that.

[00:16:04:15] And if we agree to not do anything about the climate, so we take the climate [INAUDIBLE]. We can also try to minimize the negative impact of the climate change on human society, and that's what the adaptation policy comes in. And if we choose not to do anything, we can still have one more option, and we can suffer from the climate change.

[00:16:28:12] So we'll talk about it in reverse order. So we first talk about suffering. And this might looks a little funny at the beginning, but this is also something very serious and under investigation. So suffering simply means to accepting the all-- all effects from the climate change.

[00:16:47:18] And so this [INAUDIBLE] including sea level rise, including the short on food production, including extreme weathers, wildfires, and the loss of biodiversity. What we also need to analyze the suffering as a policy option. Well, first of all, this is a bottom line for our policy evaluation. So if we come up with a policy option that is even worse than suffering, we may probably want to take that policy option out.

[00:17:20:18] [INAUDIBLE] climate scientists, climate policy analysts analyze the suffering option so we have a "business as usual" scenario, almost all sorts of climate modeling. And the "business as usual" scenario, assuming that people will not change the way-- how-- the way they are going to use fossil fuels, do not change the ways they deal with the climate. So "business as usual" scenario, which is almost in every climate model, is a scenario of suffering.

[00:17:54:13] And a little bit better, we can-- we have an adaptation policy. And adaptation is trying to minimize the negative impacts of climate change on human society and maximize the positive impact, if there's any, of the climate impacts. And the adaptation is very context and location-specific. Here in this map, showing that the different states of the United States face-- actually face different impacts from climate change. So for different states in order to adapt-- again, adapted to a climate change, they have-- they should have their location-specific adaptation costs.

[00:18:36:04] So adaptation is something that probably always carry out at a local scale. And to carry out at a local scale is something good, because we don't need to-- we don't need complex international negotiations to agree on-- to agree on carrying out the adaptation policy. But adaptation policy is like human beings are really trying to get adapted to the climate. And it's is just like a evolution process. So we really need to make sure that the climate is not changing too fast so that we can catch up the pace on how to get adapted to that. But unfortunately, the climate is now changing very fast.

[00:19:20:15] And we can also have the geoengineering option. So geoengineering option is we don't care about the greenhouse gases' emissions. We try to either modify the greenhouse gases' concentrations or modify the other factors in the climate system.

[00:19:35:19] So mainly, there are two main categories of the geoengineering options. We have solar radiation management. And we are trying to modify the solar radiation. And obviously, this has nothing to do with greenhouse gases.

[00:19:50:25] We can also remove all of the greenhouse gases already in the atmosphere. And the geoengineering options-- there are a lot of options here. And some of them might be very expensive, like putting a-- putting mirrors into space to reflect more solar radiation from getting into the earth. And some of them might be very cheap, like growing more trees. But the key point here is that there are really a lot of geoengineering options that we don't really know what the side effects-- what the side effects are.

[00:20:27:00] For example, we can inject more stratospheric aerosols into the stratosphere, which add a aerosol layer to reflect more. Solar radiation is bad, but we don't really know whether the aerosols will also influence a precipitation pattern or will act as a new source of air pollution or throw off the cycle.

[00:20:52:29] And whilst we have the ability to modify the climate, a more fundamental question comes into that. What is the right climate, and how much we should modify the climate into? And that's the sort of question probably cannot be solved very readily.

[00:21:10:27] So finally, we arrive at the mitigation/abatement policy option. So we can reduce greenhouse gases emissions through a lot of ways. And three main categories are we can reduce greenhouse gases emissions through conservation. We can also increase the efficiency of certain industrial activities, and we have, of course, substituted the fossil fuels to renewable energy for and [INAUDIBLE]. To make the firms or indivuals really cutting down greenhouse gases emissions, we need also a policy instrument, including a command and control policy and two other market-based policies, which we are going to talk about next.

[00:22:02:10] So the main category today of climate policy is through the Command and Control policy. So Command and Control policy, the government set a certain rule or a certain standard regulating a certain industry or certain firms to only meet a certain-- a specific quantity of greenhouse gases emissions or to-- or to follow a specific performance level. And this is still a major part of our environmental policy today.

[00:22:34:02] So there are a lot of examples here. We have clean power plants in the United States. And there are also all sorts of fuel standards and energy standards. One key advantage of a Command and Control policy is the Command and Control policy is very simple in terms of the decision-making process.

[00:22:57:12] Well, the administrative EPA or other administrative [INAUDIBLE] come up with-- will do some research and come up with a sort of optimal standard they should be optimal and just give that-- and give a standard to other-- to the industry and to the firms. And that's everything. And if there's a market-based policy, you still have to come up with some marketing mechanisms and all sorts of very complex-- complex things.

[00:23:34:24] Well, there are still a lot of drawbacks. The key drawbacks here is it might be very efficient in terms of there is little taxability and you just keep the standard to all the firms in that industry. There is little space allowing them to change or modify their behaviors themselves.

[00:24:03:06] Second, the market-based carbon policy here, we talk about the carbon tax policy. A carbon tax policy is we-- for every unit of the greenhouse gases a firm is going to emit, we charge them a certain amount of the carbon tax, which hopefully, it goes to the social cost of greenhouse gases. We'll talk about social cost later in the third part.

[00:24:30:25] Well, from this chart-- so on the x-axis, we have the quantity of the output that that firm chooses to produce. And on the y-axis, we have the prices and the cost. So the blue curve here, the downward blue curve-- so for the malfunction-- showed the how prices changes through the changes of the quantities. And the green line here is the private cost of the firm. So the firm will choose to produce at the quantity of [INAUDIBLE] market, but the private cost equals to the price they got.

[00:25:08:02] The-- however, because of the negative externality of greenhouse gases-- this doesn't consider the social costs, the cost of the greenhouse gases the damage of greenhouse gases to the society. So the social cost curve, the yellow curve here, must include the private cost and the damage of the greenhouse gases to the atmosphere. So what the current tax is going to do here is we charged every firm a third amount of tax, just the amount between the yellow line and the green line. So the cost function of the firm will become the social cost function themselves. And they will choose to produce the quantity of the social optimum finding the coefficient here.

[00:25:56:08] And we also have-- the third option is called "cap and trade." So cap and trade is the instead of fixing the unit-- instead of fixing the cost of certain unit of greenhouse gases, we make a cap of how much CO2 emissions a certain industry or a certain region can emit. And here in this graph, we'll show that this is a comparison between-- on the right hand side is the cap and trade approach, and on the left hand side is a traditional approach, say, Command and Control policy.

[00:26:32:29] So we have the same cap of 30% reduction of greenhouse gases emissions. So Plan A had to use 180 pounds. And Plan B had to reduce 120 pounds. So overall, they had to reduce 300 pounds.

[00:26:48:12] Well, in the cap and trade, we set the cap at-- for the whole industry-- we set the cap to let them reduce their carbon emissions of 300 pounds. Now, what the benefits of the cap and trade policy is, we set the cap for the whole industry, but we allow the firms in that industry to trade between each other. So what happens here is Plan B has a lower cost of abatement CO2 emissions. So the Plan A will transfer above 80 pounds of their-- of the CO2 permits. They have to abate to Plan B.

[00:27:34:06] And so Plan B had regulate this 80 pounds of CO2 in a cheaper way. So the overall industry still saves like 300 pounds of CO2 emissions, but the cost significantly decreases. We will probably skip that part.

[00:27:55:01] So the difference and connections between the cap and trade and the carbon tax-- so the carbon tax is we fixed cost of greenhouse gases per unit. And so each firm had their understanding of the cost of the greenhouse gases, but they still choose how much output they produce themselves. Now, for cap and trade, we have a fixed emission cap, and under this cap, we will have the firms to transfer the permits-- and sell the carbon permits. And they determine the carbon price themselves.

[00:28:31:21] And the connections between those two policies, first, they are all market-based policy, which are considered as more efficient than the command and control policy, because there are more flexibility to allow the firms to make the choice. And secondly, if the tax rates happens to be associated with the-- with the amount of the-- amount of the cap, they actually achieve at the same effects.

[00:29:04:07] I will use the rest of the 10 minutes to talk about the third part. And so the third part is, when we have a policy, how do we evaluate a policy's [INAUDIBLE]? So the general framework here the cost-benefit analysis, which a lot of people are familiar with.

[00:29:23:06] Well, cost-benefit analysis is we're trying to consider the cost and the benefit of a certain policy into monetary terms. And because the benefits and the cost of that policy can happen through the time, we try to convert the money at different times using discount rate-- discount factor to owe to the right kind of value. And we evaluate whether the benefits is lower than the cost or not.

[00:29:53:27] So in terms of the climate policy, how do we how calculate the benefits of climate policy? If we are going to-- if we talk about a mitigation policy, we've got benefits from reduced CO2 emissions. And the reduced CO2 emissions-- and the question here is, how much reduce of CO2 emissions can convert into the monetary values? And if we are to talk about adaptation policy, it's more like an analysis of conventional policy [INAUDIBLE] either on food production or around energy conservation or around human health. So we'll more talk about the mitigation policy.

[00:30:35:28] So mitigation benefits-- in order to calculate the mitigation benefits of a certain carbon policy, we really need to answer these two question. First, how much CO2 emissions can a policy reduce? And secondly, how much value is a unit of CO2 emissions worth?

[00:30:53:18] And here, we talk about the term of "social cost of carbon." So social cost of carbon is the economic cost of an additional ton of CO2 emissions and how-- what the economic value of it. And in real, to calculate social cost is very difficult, as you can-- as you can imagine that the CO2-- the CO2 contributes to the global warming in a very sophisticated way. The worrying is also damaging the human society from all perspectives.

[00:31:29:09] And what I'm going to tell here is-- I'm going to introduce a typical way to calculate the social cost of carbon, and that's through the so-called integrated assessment model, which goes to talk-- talks about MIT's use integrated assessment model. Here, it's going to be a [INAUDIBLE] [? ?] from Yale's model.

[00:31:53:25] So the [INAUDIBLE] to calculate the social cost is very simple. So you first have a definition of the social utility. And the social utility here, really, only depends on the consumption, that the more consumption you can make, you are here. And also that this is a process happening through the time, so we also have discounting factors. And we also have the population playing a part in the analysis.

[00:32:27:12] So the, as I said, the social utility is-- really depends on the consumption. And the consumption is how much we produce through the industry activities, while minus the damage from the climate. So we assume that the climate is having a economic damage from all sorts of perspectives. And we are going to calculate the damage function in a very m or probably a little bit unrealistic way, that we are assuming that the damage of climate is a function of the global average temperature. And we are going to evaluate how the greenhouse gases is contributing to the temperature through some simplified geophysical equations.

[00:33:11:29] So to recap a little bit, we are going to-- so this is what we have in that model. So we have all sorts of economic outputs from the industrial activities. And the economic output has a certain mix with greenhouse gases emissions and the emission factors or the energy consumptions we consume. And the greenhouse gases emissions can be modeled-- is modeled using the geophysical equations about how much temperature the greenhouse gases emission's changing.

[00:33:48:26] And the temperature is associated with economic damage through this damage function. And the damage plus the overall economic output is going to be our consumption in that society. And the consumption determines how much-- determines our activity.

[00:34:05:01] So this is going to be a model that optimizes the social utility, and what we are going to determine is the economic output here. The social cost of carbon is determined by the ratio of marginal-- marginal are changes of the social utilities per unit of greenhouse gases emissions divided by the marginal changes of the social utility per unit of the consumption. So for example, if the social cost of carbon is $50 per ton of CO2 emissions, what we are going to say here is, the damage of a ton of CO2 emissions to our social utility can be compensated by consumption of-- extra $15 more.

[00:34:54:16] And here, the graph shows the recommended social cost value of the recommended by United States government. And there are also a lot of criticism on this term, and we are only talk about the first term. First, the drawbacks for social cost of carbon is that the-- so criticizers criticize that the social cost of carbon is not capturing the feature that the current system is a highly non-linear system. And there might be a tipping point that beyond this tipping point, say, if we-- if the global average temperature increases more than five degrees, we will probably face a catastrophe event. And we will probably have economic damage that just cannot be calculated. But while-- however, as we can see here, the damage function is a well-behaved function. This is very continuous, and we don't capture a tipping point here.

[00:36:00:00] So in terms of the second question, how much CO2 can a policy cut off? This is really determined by what type of policy we are talking about. So if there's a policy that's specifically focused on a certain industry, we need to figure out how CO2 is emitted in that industry.

[00:36:20:08] So for example, if there's a public sector and we need to figure out whether the policies is making some regulations on the call it's going to consume, or whether it's going to regulate on the [INAUDIBLE] cost. And that will all determine how much CO2 benefits we can contain.

[00:36:42:22] The more difficult question is if there's a more general economic policy, like a current tax policy, and we tried to estimate how much CO2 we can cut down from a carbon tax policy, we are also-- we are still going to take advantage of the integrated [INAUDIBLE] the EPPA model from MIT community. And what it's going to do is, there are some basic assumptions on the economics, and we're trying to balance the demands from the-- demand from the supply. And we've got a third of price of all the other problems. And the firms are going to solve these problems.

[00:37:25:18] And there are also-- there will also be trade flows between different regions and different industries. And what we will do here is we're trying to run a stimulation without any carbon tax. And so that's a phase one.

[00:37:40:25] And then, we're also going to add the carbon tax to the specific industries. In the model, the firm will be facing a higher cost. And according to those assumptions, according to the demand meets supply function, the firm will change the production they produce, and that's how we're going to capture how much CO2 emissions that that policy will contribute to.

[00:38:08:11] So after talking about the benefits, we will very briefly talk about what the cost of a policy. Well, in terms of the cost of a policy, this is really very complex. It includes a lot of pop-up costs. So if there's a Command and Control clause, Command and Control clauses are-- we'll have a regulation cost.

[00:38:29:23] We'll have to design the mechanisms. And then, we'll have to send officials to the firms to really make sure they are following our standards. So there are certain costs associated with that part

[00:38:42:05] And we also have an economic impact, which is more complex. Say we charge a carbon tax on the oil industry. A carbon tax increases their costs, and in the point we are the firm, what they have higher cost, they will probably decrease-- they will probably cut down their employment, which have a lot of complex social impacts here.

[00:39:15:20] So unfortunately, these two types of cost are really not well-understood by the science community yet. While this economic impact can be understood through what we call the integrated assessment model, we talked before, but the regulation cost is something-- something still poorly understood. And what the scientist is doing here is the policy we are going to evaluate, some moderate policy. Like if it's a carbon tax, the tax rate will be, first off, very low. And the scientists will generally assume that because of the tax rate is very low, the cost-- the economic impact on the society will probably be low as well and will probably become even more.

[00:40:06:11] But this is something that scientists are trying to do, trying to learn more about. And we can talk more about the technology cost. So if there is a Command and Control policy, it's regulated the firm's, say public sector, to decrease its CO2 emissions by 20%. And what the firms will do is, the firm will try to find the most economically-efficient technologies that tries to reduce the CO2 emissions.

[00:40:37:01] And here, this graph shows abatement cost curve of the CO2 emissions. So here, we mainly, we have three type of technologies. We have energy-efficiency technology. This is probably the technology focusing on the land use cover. And we also have a technology that's focused more on a cleaner power.

[00:40:59:06] So analysts have been analyzing that the technology with the highest cost is the technology that we're trying to transfer into a cleaner energy form, and that's probably very expensive. Well, some technologies can be achieved with no cost. That's the energy efficiency. That's the economic benefits you gain from reduce your energy consumption is high enough. and you don't need to consider about the greenhouse gases benefits of these sort of policies.

[00:41:40:11] So we'll close the discussion very soon, and we will focus on real life cases of how cost-benefit analysis analyzes specific policy. And the CBA, the cost-benefit analysis has already been widely used almost in every policy making in the EPA. And if you go to the EPA website, you can check their analyzed report for the policies in the last 5, 10 years. But things might change. Who knows?

[00:42:14:21] We will, here, talk about a case about a vehicle's greenhouse gases emissions standard. And the potential cost of this standard policy comes from-- so there are compliance costs, which includes the technology installation costs. And because of that the cars are made more fuel economy, and people can generally driving a lot more time using their vehicles. And there are accidents and noises and congestion costs associated with longer use of the vehicles.

[00:42:49:09] And we also have potential benefits, which comes from the fuel saving and the greenhouse gases benefits, air pollution benefits, and the reduce of refuel and [INAUDIBLE]. So here, the graph shows the first two rows are the economic cost of the policy. So here at the compliance column, there is actually a congestion associated with a longer time use of the cars.

[00:43:19:06] These rows talk about the benefits of the policy. So we have social cost of carbon. And as you can see, this is very uncertain based on what discount rate you are using and what climate scenario you are considering. And so there also air pollution [INAUDIBLE]. And as we can see here, the main benefit of this policy is from the fuel saving. So where you make the vehicles more fuel economy, the benefits of saving more fuels can actually be large enough than the true costs.

[00:44:00:06] So this policy will pass the cost-benefit analysis when you include all benefits, especially the benefits from the fuel saving. But if you do not care about other benefits, you don't really care about the greenhouse gases benefits, this policy will probably fail the CBA, because the benefits from the greenhouse gases reduction is not enough to cover the cost of this policy.

[00:44:30:12] And finally, we will talk-- the climate policy also have other benefits, other domains in addition to the greenhouse gases, and that's what I call benefits. Us Well, here, we talk about air pollution for benefits of climate policy. So a coal-fired plants in combustion-- in combustion, and operating is, well, emits greenhouse gases. But on the other hand, it will also emit a lot of other air pollutants. By making the regulations on the public sector, we can make them cut down the greenhouse gases emissions. At the same time, we can also fathom-- cutting down the emissions of certain air pollutants.

[00:45:20:15] Well, one message take away is-- when we talk about local benefits-- is always a lot more certain than when we talk about the benefits of the climate. So when we have are configuring our policies, well, the policies, it absolutely will do good to the greenhouse gases emissions, but we are quite certain how much benefits we can get. If the [INAUDIBLE] from that policy is already large enough, we should probably consider to take that policy.

[00:45:54:16] And after talking a lot about the cost-benefit analysis, there are still a lot of problems with that. So as I mentioned before that, the cost-benefit analysis is still not very good at analyzing the low probability but huge damage catastrophe event. And secondly, there's also a lot of discussion and disagreements of, how do we evaluate a house of human beings? The general conclusion here is $6 million is how much a life of a human being worth. But you may disagree with that.

[00:46:40:01] And thirdly, as you can see, the economic part of the integrated assessment model is still very crude, and we also have a lot of uncertainties in the climate projections and in the climate analysis. So we will still have a lot of uncertainties in the cost-benefit analysis as well. And we also have, at the tragedy of the commons, the climate change is a problem of all of the world. But the policy we are going to evaluate is always going to be domestic policies.

[00:47:12:14] OK, we will stop here, and we will have just a very brief summary. So the first question, we asked what we needed from the policy. So we need a policy where people are different, and the resources are limited. And as for the environmental policy, we used the term, "the tragedy of the commons" to capture the features of the environmental problems. And this, is, of course, also the case of climate change. And we also have externality and public use to analyze and describe these things.

[00:47:46:21] And for the second questions, we have basically four options-- suffering, adaptation, geoengineering, and mitigation, and we also have a different policy instruments on mitigations as well. And thirdly, how are we-- we are going to use the cost-benefit analysis to evaluate whether a climate policy is good or not. And we are going to calculate the benefit of climate policy using the social cost of carbon. And the cost of the policy will be captured by using the term of the CO2 abatement cost curve.

[00:48:27:09] And the key tool here is we are going to use the integrated assessment model, which had a economic process in there. And the model might also be linked to-- or assist the model to try to understand what's going on in the atmosphere, while this tool still has a lot of things to improve, but this is the key tool here we use to evaluate the policy. And I will stop here to see if you have any questions.

[00:48:55:17] I have a question. What is the [INAUDIBLE] convention EPA, [INAUDIBLE]. My question is isn't the government-- you were talking about our policies. Since the government-- the new government doesn't support science of climate, what is the future of all this policy? What's going to happen in the next 40 years?

[00:49:25:11] Yeah. So I get this is really a heated topic, especially at that time. And we will have a special session tomorrow totally focused on what the climate policy will be. We'll look at-- we'll be-- will be like in the new-- in action of the President. But my personal idea here is while the newly elected President is taking some step backs in the climate change evaluations.

[00:49:58:16] Well, as an international student, I really feel like I have a lot to say about that. But what I can say here is that policy analysis scenario will have talked-- what I talked a lot in this talk will probably be the same. But the contents they will evaluate, the content they will analyze will probably be a lot more different. And you can expect to hear more about that in tomorrow's session. Yeah?

[00:50:31:06] Do you have any examples of successful cap and trade deals that have happened and how they allocated who's allowed to produce what?

[00:50:41:23] Yup. So this is a skipped twice. And so cap and trade is-- cap and trade is a very complex mechanism, because you have to first, come up with a cap. And you have to have different mechanism to allocate the permits and to set up a market to let them transfer their permits.

[00:51:06:24] Well, this example is-- shows how California is doing a cap and trade program inside California. And so this program is probably only launching in 2030, if I've got it right. So there are still not enough analysis on whether cap and trade will really, really be effective or not. But we can take a look of how California do that through its cap and trade programs.

[00:51:34:03] So it set its cap. So it says a cap is on the annual goal of minus 2%-- minus 2% minus 3%. And they also have were a complex register system that if you're a firm, you can register online. And you can attend three-- they have three option sessions in the year. And this gives-- at these three sessions that the carbon [INAUDIBLE] something, you'll have in dollars per ton of CO2. And then that also give them out their-- how much permit they also-- they sell.

[00:52:13:08] And in terms of the market transfer, this is a chart showing-- summarize in 2030 and 2040 how much permits are transferred between each firms in that cap and trade program. So I guess what I'm going to say is cap and trade program is really complex and is-- there are just very, very little real life cases already-- already in its way of the cap and trade program. But we can keep focusing on that, while the carbon tax, on the other hand, is just a little more-- a little more mature. And a lot of countries and states are trying to test out-- test out the carbon tax as well.

[00:52:59:27] Was it in this example-- was it that if I am producing cars and this guy here has cattle, he's producing 100 tons of CO2, and I'm producing a thousand tons of CO2, is the price of carbon the same for everybody in most cap and trade deals?

[00:53:21:19] Their program is, first, specifically focused on a certain type of industries, so like they all sort of have similar manufacturers, and they have similar products. And that's how they're going to transfer their permits. So in your case is, if our CO2 emissions-- if our CO2 is emitted through agricultural emitters, and the abatement cost of CO2, really, is totally different from agriculture sector and the industry sector. And you guys probably cannot agree on a price that you set for each other.

[00:54:06:02] So the point of cap and trade is that everyone decides the carbon price themselves. This is more like economic problem, whereas if you are small enough, you take that price as given. But If you large enough, you really have the power to set the price.

[00:54:24:11] Yeah. If I may add on that-- so depending on the carbon pricing programs, different industries that are included or not included, and if you're really interested in that, you should come-- there's a talk on Wednesday on cloud pricing and globally, around the world, what efforts are out there, what has been working. And so that could really be interesting.

[00:54:43:24] On that note, and kind of an answer to your question is that even though, we're not in the best place federally right now, a lot can be done at the state level. So I know that there are a lot of bills out there. There's two carbon pricing bills that have been filed in Massachusetts, along with a number of other climate action bills. So looking up on those, seeing what you believe in, and calling your state legislators can go a long way.