WHY I LIKE
ENVIRONMENTAL
ECONOMICS
Lecture 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
Global
Departures in temperature (oC) from the
1961_1990 average
0.8
0.4
0.0
-0.4
Data from thermometers.
-0.8
1860
1880
1900
1920
1940
Year
1960
1980
2000
Image by MIT OpenCourseWare.
Expected impact on global climate
SRES A1F1
0.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
SRES A2
Sea-level rise (m)
Temperature change (oC)
5.5
SRES B2
0.4
A2
0.3
A1F1
0.2
B2
0.1
0.0
1900
1950
Year
2000
2050
2000
-0.1
2020
2040
2060
Year
2080
2100
Image by MIT OpenCourseWare.
• Change in global surface
temperature
Source: Hadley Centre (UK) Model 3 – A1F1
• Change in global mean sea
level
Expected impact on U.S. climate
64
62
60
58
56
54
52
50
2000
2020
2040
2060
2080
2100
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
2120
Distribution of Annual Daily Mean Temperatures (F), 1968-2002
40
30
20
10
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 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
Change in Distribution of Annual Daily Mean Temperatures (F)
50
CCSM 3, A2 Scenario
Hadley 3, A1F1 Scenario
40
30
20
10
0
-10
<0
05
5- 10- 15- 20- 25- 30- 35- 40- 45- 50- 55- 60- 65- 70- 75- 80- 85- >90
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
-20
Image by MIT OpenCourseWare.
Estimated Response Function Between Daily Temperature and
Mortality: Females
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
<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
8,000
6,000
4,000
2,000
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
-2,000
-4,000
Daily Mean Temperature (F)
Change in Annual Male Mortality
Change in Annual Female Mortality
Estimated Response Function Between Daily Temperature and Residential
Energy Consumption
0.25
0.20
0.15
0.10
0.05
0.00
-0.05
<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
5.0
4.0
3.0
2.0
1.0
0.0
<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
-1.0
Daily Mean Temperature (F)
Quad BTU
Results from India (Preliminary)
Estimated Mortality Impact of a Day in 20 Temperature (C) Bins on
Log Annual Mortality Rate, Relative to a Day in the 20o - 24oC Bin
+1 std
Log annual mortality rate per 1000
0.04
0.03
-1 std
0.02
log-linear model
0.01
0.00
-0.01
<0
02
24
46
68
810
10- 12- 14- 16- 18- 20- 22- 24- 26- 28- 30- 32- 34- 36>
12 14 16 18 20 22 24 26 28 30 32 34 36
-0.02
-0.03
Image by MIT OpenCourseWare.
Carbon Emissions Projections
Emissions Abatement Pathway
Global GHG emissions GtCO2e per year
70
66
BAU
60
50
-38
Technical measures
<€90 per tCO2e
40
Technical measures
1
28 €80-€100 per tCO2e
-4 (high-level estimates)
-4 Behavior changes
20 (high-level estimates)
30
20
10
0
2005
2010
2015
2020
2025
2030
Peak at 550 ppm, long term stabilization 550 ppm, expected 3oC increase
o
Peak at 510 ppm, long term stabilization 450 ppm, expected 2 C increase
Peak at 480 ppm, long term stabilization 400 ppm, expected 1.8oC increase
Image by MIT OpenCourseWare.
Abatement Cost Curves (McKinsey)
U.S. MID-RANGE ABATEMENT CURVE - 2030
Cost
Real 2005 dollars per ton CO2e
90
Industrial
Residential
process
buildings Active forest
Fuel economy
improvements
Shell retrofits
management
packages - Light
trucks
Residential
Residential
Commercial
Commercial
electrons
water heaters
Nuclear
buildings
buildings newbuild
combined
Control
Residential
heat
and
systems
buildingspower
Lighting
60
30
0
0
0.2
-30
-60
-90
-120
-230
Commercial
electronics
Commercial
buildings LED lighting
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Onshore wind Low penetration
Industry Combined
heat and
power
Cellulosic
Manufacturing biofuels Existing power
HFCs mgmt
plant conversion
Residential
efficiency
buildings improvements
New shell
Conservation
improvements
tilage
Commercial
buildings CFL lighting
Fuel economy
packages - Cars
Commercial
buildings New shell
improvements
Commercial
buildings HVAC
equipment
efficiency
Afforestation
of cropland
Coal power plantsccs rebuilds with EOR
Solar CSP
Distributed
solar PV
2.0
2.2
Residential
buildings HVAC
equipment
efficiency
2.4
2.6
2.8
Onshore wind - Industry High penetration CCS new
builds on
Biomass power carbonConfining
intensive
processes
Coal power plants - CCS
new builds with EOR
Onshore wind - Medium
penetration
Reforestation
Afforestation of pastureland
Natural gas and
petroleul systems
management
Car
hybridization
Coal-to-gas
shift - dispatch of
existing plants
Coal power
plants - CCS
rebuilds
Winter cover crops
Coal mining Methane mgmt
3.0
3.2
Potential
Gigatons/year
Coal power
plants - CCS
new builds
Abatement cost <$50/ton
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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