Economics 1490
GROWTH AND CRISIS IN THE
WORLD ECONOMY
with
Professor Dale W. Jorgenson
Lecture 24: November 24, 2015
Environmental Sustainability
Harvard University Department of Economics -- Fall 2015
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Course Outline
A. Introduction
B. U.S. Financial and Economic Crisis.
C. Europe and the U.S.: Convergence and
Divergence.
D. Asian Economic Miracles.
E. Sustainability of Economic Growth.
F. Outlook for the World Economy.
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Sustainability of Economic Growth
21. Comparing Populations: Demographic
Projections.
22. Human Capital: Education and Experience.
23. Fiscal Sustainability.
24. Environmental Sustainability.
24. Poverty and Development.
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ENVIRONMENTAL SUSTAINABILITY: OPTIONAL READINGS
William D. Nordhaus (2013), “DICE 2013R Model as of November 15,” See:
http://www.econ.yale.edu/~nordhaus/homepage/Web-DICE-2013-April.htm
Dale W. Jorgenson (2014), “Time to Tax Carbon,“ Interview with Jonathan
Shaw, Harvard Magazine, Vol. 117, No. 1, September-October.
The White House (2014), “U.S.-China Joint Announcement on Climate
Change, Beijing, November 12. See: http://www.whitehouse.gov/the-pressoffice/2014/11/11/us-china-joint-announcement-climate-change
Lagarde, Christine, and Jim Yong Kim, “The Path to Carbon Pricing,” Project
Syndicate,
October
19,
2015.
See:
https://www.projectsyndicate.org/commentary/carbon-pricing-fiscal-policy-by-christine-lagardeand-jim-yong-kim-2015-10
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CHRISTINE LAGARDE.
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CHRISTINE LAGARD: Biography.
Born: 1 January 1956, Paris.
Education: Paris West University; Nanterre, La Defense;
Institute of Political Studies, Aix.
Law practice: Chair, Global Executive Committee, Baker and
McKenzie, Chicago, 1999.
Political Career: Minister of Commerce and Industry, 2005,
Minister of Agriculture, May 2007; Finance Minister, June 2007.
Managing Director, International Monetary Fund, 2011-
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JIM YONG KIM.
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JIM YONG KIM: Biography.
Born: Born, 8 December 1959, Seoul.
Education: Muscatine H.S., Iowa; University of Iowa; B.A. Brown University, 1982.
M.D.-Ph.D. Program, Harvard Medical School and Harvard GSAS. M.D., Harvard
Medical School, 1991; Ph.D., Anthropology, Harvard, 1993.
Co-Founded Partners in Health, 1987; left as Executive Director, 2003. Established
community-based health care programs, training community members to implement
them in 40 countries around the world.
World Health Organization, 2003-2006.
Harvard Medical School, 1993-2009: Lecturer, Professor, Medicine, Social Medicine,
and Human Rights. Chairman, Department of Global Health and Social Medicine;
Chief, Division of Global Health Equity, Brigham and Women’s Hospital; Director,
Francois Xavier Bagnood Center for Health and Human Rights, School of Public
Health.
President of Dartmouth College, 2009-2012.
President, World Bank, 2012-
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THE PATH TO CARBON PRICING
Carbon taxes and fees, emission trading programs, and other pricing
mechanisms, and removal of inefficient subsidies can give businesses and
households the predictability they need to make long-term investments in climatesmart investments.
At the IMF the focus is on reforming member country fiscal systems to raise more
revenue from carbon taxes and less from taxes that are detrimental to
performance, such as taxes on labor and capital. Carbon taxes should be applied
comprehensively to carbon emissions from fossil fuels. Domestic environmental
benefits include reducing outdoor air pollution which causes 3.7 million premature
deaths per year, according to the World Health Organization.
The World Bank has developed initial standards to guide future carbon pricing
schemes. The principles are based on fairness, alignment of policies and
objectives, stability and predictability, and efficiency and cost-effectiveness.
Before and beyond the climate-change conference in Paris, countries and
businesses around the world should be urged to put a price on carbon.
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GRO HARLEM BRUNTLAND.
Born: April 20, 1939, Oslo, Norway.
Education: M.D.,University of Oslo, 1963. M.P.H., School of
Public Health, Harvard University, 1965.
Director General, World Health Organization, 1998-2003.
Prime Minister of Norway, 1981, 1986-1989, 1990-1996.
Chairman, World Commission on Environment and
Development, United Nations, 1983. Published Our Common
Future (Brundtland Report. Introducing the concept of
sustainable development), 1987.
Anders Behring Breivik drew up detailed plans to assassinate
Brundtland in 2012; missed meeting her and massacred 77
people.
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DEFINITIONS OF SUSTAINABILITY
Sustainable development is development that meets the needs of
the present without compromising the ability of future generations
to meet their own needs. Our Common Future (the "Bruntland
Report"), 1987.
In the framework presented here, the underlying elements of
intertemporal social welfare are consumption (broadly defined)
and utility. Then the intertemporal social welfare V(t) at time t can
be defined as the present discounted value of the flow of utility
from consumption from the present to infinity, discounted using
the constant rate delta (>0). Here we take sustainability to mean
that intertemporal social welfare V must not decrease over time.
Thus, we will say that the sustainability criterion is satisfied at
time t if dV/dt > 0. Arrow, et al., 2004, Are We Consuming Too
Much?
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WILLIAM D. NORDHAUS.
Born: May 31, 1941, Albuquerque, New Mexico.
Education: B.S., Yale University, 1963; Ph.D., M.I.T., 1967.
Professional Career: Yale University, 1967-; Provost, 19861988; Vice President for Finance and Administration, 19921993; Sterling Professor of Economics, 2001-.
Government Service: Member, Council of Economic Advisers,
1977-1979; Chairman, Federal Reserve Bank of Boston, 2013-.
Author and editor of 20 books, including 19th edition of
Economics with Paul A. Samuelson, 2009; published in 16
languages, in addition to English.
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ECONOMICS OF CLIMATE CHANGE: A PRIMER
The Base Case Projection of the World Economy without
Climate Policy.
The Optimal Policy Maximizes a Social Welfare Function
The Optimal Policy Can Be Evaluated with Climate
Constraints and Constraints on Global Temperature
The Kyoto Protocol Is an International Agreement Signed by
the U.S. Delegation in Kyoto, But Not Ratified by the U.S.
Senate
More Ambitious Proposals Have Been Suggested by Al Gore
and Lord Nicholas Stern. These Can Be Compared with the
Optimal Policies.
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AL GORE: Biography.
Born: March 31, 1948, Washington, D.C.
Education: A.B., Harvard College, 1969.
Military Career: U.S. Army, 1969-1971, included Vietnam.
Public Service: U.S. House of Representatives, Fourth and Sixth Districts of
Tennessee, 1977-1985.
U.S. Senator from Tennessee, 1985-1993.
Vice President of the United States, 1993-2001. Received majority of votes for
U.S. President in 2001, lost in the Electoral College to George W. Bush.
Nobel Peace Prize, 2007.
Net Worth, 2015: $300 million.
Book: An Inconvenient Truth, 2009. Also TV documentary.
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LORD NICHOLAS STERN: Biography.
Born: April 22, 1946, Hammersmith, London.
Education: B.A., Cambridge University, 1968: Ph.D., Oxford University,
1972.
Academic Career: Lecturer in Economics, Oxford, 1970-1977; Professor
of Economics, Warwick University, 1978-1987. Professor, and John Hicks
Professor of Economics London School of Economics, 1986-1993. I.G.
Patel Professor of Economics, 2007-; Chairman, Grantham Research
Institute on Climate Change and the Environment, 2007-
Public Service: Chief Economist, European Bank for Reconstruction and
Development, 1994-1997. Chief Economist and Vice President, World
Bank, 200-2003. Second Permanent Secretary, U.K. Treasury, and Head,
U.K. Government Economic Service, 2003-2007.
Baron Stern of Brentford, 2007. President, British Academy, 2013- .
Book: Stern Review on the Economics of Climate Change, U.K.
Government, 2006.
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QUOTATIONS FROM THE STERN REPORT
Climate change would be so damaging to the world's
economies it could reduce global GDP by as much as 20
percent.
Melting glaciers would cause water shortages for one sixth of
the world's population.
Wildlife would be so devastated that up to 40 percent of the
world's species might become extinct.
Up to 200 million people could become refugees as their
homes were hit by drought.
By 2200 the annual cost of dealing with extreme weather
events caused by "climate change" would be $23 trillion.
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DISCOUNT RATES
In choosing among alternative trajectories for emissions
reductions, we need to translate future costs into present
values. We put present and future goods into a common
currency by applying a discount rate on future goods.
In general, we can think of the discount rate as the rate of
return on capital investments.
The choice of an appropriate discount rate is particularly
important for climate-change policies because most of the
impacts are far in the future.
The estimated market return on capital averages 4 percent per
year over the next century.
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DOUBLE DIVIDEND
In Environmental Economics the Standard Approach to Policy
Evaluation Is to Rank Policies by Differences between Benefits
and Costs. This Has Led to a Search for Benefits, For
Example, in the Widely Cited Stern Review of the Economics of
Climate, for the British Government.
In the Contentious Debate that Has Followed, the Most
Persuasive Argument for Climate Policy Has Been Overlooked:
Careful Design of Climate Policies Makes It Possible to Attain
Environmental Goals, Slowing Climate Change, while
Improving Economic Performance, the Double Dividend of the
Title. For the United States This Could be Achieved by
Substituting a Carbon Tax for Capital Income Taxes.
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CARBON PRICE REGIME
Covers the Six Major Greenhouse Gases – Carbon Dioxide, Methane,
Nitrous
Oxide,
Hydrofluorocarbons,
Perfluorocarbons,
and
Sulfur
Hexafluoride – All Expressed in Terms of Metric Tons of Carbon Dioxide
Equivalents in Global Warming Potential.
Carbon Taxes Are Expressed in 2005 Dollars in 2020 and Are Discounted
Backward and Forward at a 5% Real Rate of Interest.
After 2050 Carbon Taxes Are Held Constant at 2050 Levels, Relative to
the Deflator of GDP.
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The Carbon Tax Scenarios
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EMISSIONS ABATEMENT
Carbon Taxes Are Effective in Reducing Greenhouse
Gas Emissions.
Carbon Dioxide Abatement Is the Most Sensitive to
the Price of Carbon.
Levels of Emissions Abatement Are Insensitive to
Revenue Recycling.
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Total GHG Emissions Abatement
Under Lump Sum Redistribution
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ECONOMIC IMPACTS
Social Welfare Changes Incorporate Economic
Impacts on Both Efficiency and Equity.
Economic Impacts Differ Widely Among Alternative
Methods for Revenue Recycling.
Substituting a Carbon Tax for Capital Income Taxes
Increases Social Welfare and Creates a Double
Dividend.
The Double Dividend Is Unaffected by Differences
in Aversion to Inequality.
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Social Welfare Changes, Egalitarian View $(2005) Billions
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Social Welfare Changes, Utilitarian View $(2005) Billions
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SUMMARY AND CONCLUSION
The Case as of 2014 for a Global Carbon Price Regime Is
That Careful Policy Design Can Produce a Double
Dividend: Emissions of Greenhouse Gases Can Be
Reduced Substantially While Improving Economic
Performance.
Revenues Are Best Collected by Participating Countries
and Recycled According to the Priorities of These
Countries.
The Performance of the U.S. Economy Can Be Improved
and Carbon Emissions Can Be Reduced Substantially by
Substituting a Carbon Tax for Capital Income Taxes.
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CARBON TAX VERSUS QUANTITATIVE CONTROLS
An Internationally Harmonized Carbon Tax Is the Simplest
Approach for Coordinating National Climate Policies.
The Tax Proceeds Can Be Collected by Individual Countries
and Recycled by Reducing Other Taxes. This Reduces or
Eliminates Efficiency Losses from Carbon Taxation.
Non-Participants Would Face Compensating Tariffs on Their
Exports and the Proceeds Would Be Collected by the
Importing Countries. No Other Sanctions Would Be Required.
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THE COPENHAGEN ACCORD
The 2009 Copenhagen meeting was designed to negotiate
a successor agreement for the post-Kyoto period.
The “Copenhagen Accord” adopts a target of limiting the
increase in global mean temperature, “recognizing the
scientific view that the increase…should be below 2
degrees Celsius.”
Participants agreed to “communicate” their “nationally
appropriate mitigation actions seeking international
support efforts,” but no binding targets for developing
countries were set.
Even if the high-income countries fulfilled their
commitments, these would probably not achieve anything
close to the 2°C target.
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SUSTAINABILITY AND THE ENVIRONMENT: SUMMARY
Climate Change Policy Involves the World Economy, While
Other Issues of Environmental Sustainability Are Specific to
Individual Countries.
The Economic Approach to Climate Policy is to Maximize
the Difference between Costs and Benefits.
This Could Be Implemented by Means of an Internationally
Harmonized Carbon Tax
An Optimal Policy Could be Chosen under Climate and
Temperature Constraints.
Ambitious Policies Like Those of An Inconvenient Truth and
the Stern Review Are Very Costly and Should Be Avoided.
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SUSTAINABILITY AND THE ENVIRONMENT: CONCLUSION
The Economic Concept of Sustainability Has Proved to Be Vacuous. Under any of
the Scenarios, Including the Base Case of No Policy Intervention or Doing Nothing,
Consumption Will Continues to Increase.
International Negotiations Like Those Underway in Warsaw Appear to Be on the
Wrong Track, at Least Since the Copenhagen Consensus that Global Warming
Should be Limited to Two Degrees Centigrade. By Adding Half a Degree We Could
Achieve the Optimal Policy.
Among the Many Caveats to the Nordhaus’ Calculations, Over-Looking the Use of
the Revenue from a Carbon Tax Is the Most Important. Last Friday I Published a
Book on This with Three Colleagues Called Double Dividend, Showing that Climate
Goals Like Those Considered by Nordhaus Can Be Achieved with No Reduction in
Consumption by Using the Revenue to Reduce Other Taxes.
The Economic Approach to Climate Policy is to Maximize the Difference between
Costs and Benefits.This Could Be Implemented by Means of an Internationally
Harmonized Carbon Tax An Optimal Policy Could be Chosen under Climate and
Temperature Constraints. Ambitious Policies Like Those of An Inconvenient Truth
and the Stern Review Are Very Costly and Should Be Avoided.
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