Discussion on Designing Climate Change

I. Why do the author's believe that climate change is an "enormously complex problem?"

A. What horizons do they want to study policy for in terms of "GHG" control? What two approaches exist to this question?
B. What is meant by the cost effective approach? What issues do people tend to study using this approach?
C. What is meant by the "cost-benefit approach?" What highly con- tentious issues does this approach introduce?
D. What issues in administration come up regardless of the choice of approach?

II. What issues can we learn about in terms of cost-effective policies de- signed to stabilize the climate?

A. What technologies do these modelers consider for producing en- ergy/emissions? How do these models handle potential technolo- gies that do not exist yet?

B. What "participation" constraints may exist on these models? How do economists analyze models that face no constraints? What do such models produce as estimates of climate costs?

Teacher's note: A Participation (or incentive constraint) is the most rigourous economists deal with cases where Pareto Optimal- ity is not possible, for example because the only taxes allowed are distortionary. The maximum of social welfare (in this case the minimum of social costs) can be taken with this additional limit implied on the possible policies. The difference between the maximization with such a constraint and without a constraint cap- tures the deadweight loss that policy makers should be willing to pay. Economists call this constrained pareto optimal or sometimes "second best".

C. What do the authors see as the biggest issues in handling these types of questions?

D. What does Figure 1 represent in terms of this type of analysis? Why are there multiple curves on it? How does Table 1 relate to Figure 1? What observations from this figure do the authors consider striking?

Teacher's note: We skipped this question in class but please do read, this a statement about uncertainty.

E. In general, the authors do report some estimates the cost of meet- ing certain carbon targets as being in the same ballpark. What are those targets and the facts against them?

1. How does the price of carbon the authors find as necessary to meet a target relate to estimates of the cost of climate change?

F. The above relies on least cost pricing What big deviations from this (in terms of pattern of CO2 reductions across economies) do the authors think of likely? How should these affect the cost of reducing emissions?

III. What are the uses and implications of marginal damage assessment?

A. What is the relationship between marginal damages and total damages in theory and in measurement? Why estimate marginal damages?

B. What empirical results do the authors find from the total damage estimates in these papers? How are we going to use them to find marginal damages?

C. What is the big missing types of damages that are mostly not included in the above? The authors mention two papers which do include this. Quantitatively what do they find?

D. How do economists derive estimates of marginal damages from estimates of total damages? Why is a discount factor used in these calculations? What results do they find?

E. How do economists generally think about discount rates in cost benefit analysis? How do they pick specific rates for this analysis?

F. What critique do the authors offer for models of catastrophic risk? How can they be fixed? Why does it matter if climate risk models have thin vs flat tails? What other ways could catastrophic risk models be justified?

G. What categories of not catastrophic risk have been quantified? How can you see this in Box 1? Which are speculative?

H. How does irreversibility and learning effect these measures?

IV. How do the models of cost/benefits of climate stabilization compare?

A. What do the author's consider their lower bound on the appro- priate target for a price on climate? How do they justify higher numbers?
B. What conclusions do the authors draw from these numbers? How do they think future research should evolve on these subjects?

Article: Designing Climate Mitigation Policy Joseph E. Aldy, Alan J. Krupnick, Richard G. Newell, Ian W. H. Parry and William A. Pizer.