1. Climate Change: The Move to Action (AOSS 480 // NRE 501) Richard B. Rood 734-647-3530 2525 Space Research Building (North Campus) rbrood@umich.edu http://aoss.engin.umich.edu./people/rbrood Winter 2008 March 11, 2008

2. Class News A ctools site for all –AOSS 480 001 W08 This is the official repository for lectures Email climateaction@ctools.umich.edu Class Web Site and Wiki –Climate Change: The Move to ActionClimate Change: The Move to Action –Winter 2008 TermWinter 2008 Term

3. Readings on Local Servers Assigned –Stern Report: Executive SummaryStern Report: Executive Summary –Nordhaus: Criticism of Stern ReportNordhaus: Criticism of Stern Report Of Interest –Tol and Yohe: Deconstruction of Stern ReportTol and Yohe: Deconstruction of Stern Report Foundational References –Stern Report: Primary Web PageStern Report: Primary Web Page

4. Lectures coming up http://www.snre.umich.edu/events

5. Outline of Lecture Review some basic ideas Science and Uncertainty –Motivators, catalysts for policy Economics as a motivator? –Exponential growth and discounts Stern Report –Criticisms of Stern Report Markets as a Policy Vehicle

6. Review some basic ideas Energy-climate relation –Big Items Coal-electricity Oil-transportation Local-global –Energy security time scales are short –Wealth strongly correlated with energy use –Wealth protection and acquisition lend urgency to energy security Coal comes forward –Climate change (climate security?) less urgent Strategies to address energy security neutral or negative to climate change

7. Review some basic ideas Need for a carbon policy Policy –IPCC is the formal way science informs policy Climate Change Study Program National Academy of Sciences –Global policy for mitigation UN Framework Convention on Climate Change –“Dangerous” climate change Kyoto protocol –Introduction on “market” mechanisms Little or no evidence of reduction of greenhouse gas emissions –Regional versus global policy: Recognition of the granularity of the problem Regional States Cities

8. Summary moment It is sensible to look at governance and policy to address climate change –It’s a “greater good” problem –It relates to natural resources and waste from the use of natural resources –It impacts economic and national security –There is precedence Given the relation to energy and wealth it is natural to expect there will not to be a “one size fits all solution” for climate change.

9. Energy and Climate Change POPULATION ENERGY CONSUMPTION GREEN HOUSE GAS INCREASE SURFACE WARMING

10. Science: Knowledge and Uncertainty Knowledge from Predictions Motivates policy Uncertainty of the Knowledge that is Predicted Policy 1)Uncertainty always exists 2)New uncertainties will be revealed 3)Uncertainty can always be used to keep policy from converging

11. Science: Knowledge and Uncertainty Knowledge from Predictions Motivates policy Uncertainty of the Knowledge that is Predicted Policy 1)Uncertainty always exists 2)New uncertainties will be revealed 3)Uncertainty can always be used to keep policy from converging What we are doing now is, largely, viewed as successful. We are reluctant to give up that which is successful. We are afraid that we will suffer loss.

12. A Premise Climate change problem cannot be solved in isolation. Requires integration with all elements of society. –Requires identification of reasons to motivate us to take action Apparent benefit Excess Risk

13. A Conclusion about Policy Policy cannot stand alone as our response to climate change. –Every person and every group of people will be impacted by climate change, and therefore, by policy to address climate change. In fact, some feel that they are more impacted by policy than by climate change. Policy has to not only be effective, but it has to include and balance the interests of all who have a stake. Policy represents our values – our societal belief system. –It sets the bounds on behavior to benefit society

14. Motivators for Policy More is needed than scientific knowledge to motivate the development of policy. –A policy accelerator or catalyst is needed to promote convergence on policy. Apparent benefit Excess risk –What are important sources of benefit and risk?

15. A SLIDE TO TAKE NOTES Change in leadership Natural disasters- personal loss Extreme weather-food production Biodiversity Loss Public Health /U.S. Water Resources Cost of Oil / Energy Sea ice Decline Federal Reserve: Power to control economy EPA: Power to “control” environment? Urgency of Public Health Where does the wealth sit?

16. Climate Science-Policy Relation CLIMATE SCIENCE KNOWLEDGE UNCERTAINTY POLICY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE

17. From last lecture We saw from last lecture the development of regional, state, and local policy

18. Scales of Policy: U.S. –Pew: State-based Initiatives (Update, 2007)Pew: State-based Initiatives (Update, 2007)

19. Motivations for State Activity Economics –States (and cities) are very aggressive at promoting policy that they perceive as offering economic advantage. –Branding: To attract, for instance, the “creative class” Belief and Culture –Reflection of political constituencies

20. The role of economics An assertion: When thinking about climate change we first think of policy. When we think about how to promote policy where do our thoughts first land? –Conservation? –Public Health? –Economics? –other

21. The convergence to economics Conservation, public health, etc., touch economy. Hence it is sensible to place attention on the economics of climate change. –Production, Distribution, and Consumption of goods and services –Macroeconomics is generally the summation of the economy of states, regions, countries, world. Measured broadly by gross domestic product

22. Where we sit at a national level SEC. 16__. SENSE OF THE SENATE ON CLIMATE CHANGE. (2005) (a) Findings.—Congress finds that— 1)greenhouse gases accumulating in the atmosphere are causing average temperatures to rise at a rate outside the range of natural variability and are posing a substantial risk of rising sea-levels, altered patterns of atmospheric and oceanic circulation, and increased frequency and severity of floods and droughts; 2)there is a growing scientific consensus that human activity is a substantial cause of greenhouse gas accumulation in the atmosphere; and 3)mandatory steps will be required to slow or stop the growth of greenhouse gas emissions into the atmosphere. (b) Sense of the Senate.—It is the sense of the Senate that Congress should enact a comprehensive and effective national program of mandatory, market-based limits and incentives on emissions of greenhouse gases that slow, stop, and reverse the growth of such emissions at a rate and in a manner that— 1)will not significantly harm the United States economy; and 2)will encourage comparable action by other nations that are major trading partners and key contributors to global emissions.

23. Economy We have built economy into our response to climate change. States cite economic incentives as a reason for developing policy.

24. Exponential Growth U.S. views 2-3% Growth / year as a Stable Economy Consider this gross domestic product (GDP)

25. Exponential Discount This is how we discount the value of investments into the future.

26. Exponential Discount This is how we discount the value of investments into the future. How to value future return on investment versus near-term focus on investment.

27. Exponential Discount Economic growth versus discount In general. must also account for inflation or deflation

28. Exponential Discount Real growth of wealth must address the loss of wealth through inflation, taxes, discounting.

29. Global economic analysis –Stern Report: Primary Web PageStern Report: Primary Web Page –Stern Report: Executive SummaryStern Report: Executive Summary –Nordhaus: Criticism of Stern ReportNordhaus: Criticism of Stern Report –Tol and Yohe: Deconstruction of Stern ReportTol and Yohe: Deconstruction of Stern Report

30. Stern Report Considered a radical revision of climate change economics. –If we don’t act now it will cost between 5% and 20% of gross domestic product (an aggregate measure of economy.) Stands in contrast to many studies that usually come to numbers of closer to 1% –The idea that initiation of a policy with a slow growth rate will have little impact on the economy or environment in the beginning, but will ultimately become important when the nature of expenditures is more clear.

31. Stern Report included very small discount rate. The discount rate of Stern Report is very small. (Represents high valuation of ethical issues. Assumptions about value of environment.) (represented qualitatively by the red line)

32. Impact of low discount rate Amplifies the impacts of the decisions we make today. –Note: Even a 1% discount rate over 100 years generally leads to the conclusion that what we do today does not matter to the economy. Also brings attention to our poor explicit valuation of the environment.

33. Stern Review: Criticisms Document is fundamentally political: An advocacy document. Not up to the standards of academic economic analysis Not based on empirical observations of the economy –Observed discount rates –Observed behavior

34. Strengths of Stern Review Explicitly linked economic goals and environmental goals –Considered a major flaw of the Kyoto Protocol (Recall: Kyoto did include market mechanisms) Showed explicitly the necessity of having the cost of carbon dioxide, the cost of greenhouse gases, the valuation of the environment in environmental policy.

35. Return to the interface with policy

36. Climate Science-Policy Relation CLIMATE SCIENCE KNOWLEDGE UNCERTAINTY POLICY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE

37. Economics-Policy Relation ECONOMIC ANALYSIS KNOWLEDGE UNCERTAINTY POLICY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE Economic analysis is not the compelling catalyst to converge the development of policy – at least on the global scale. Different story on the local scale.

38. The economics argument Comes to the conclusion that we must provide valuation to the environment, the cost of energy, the disposal of our waste. –Usually collapses to the argument of a market versus a taxation problem. –Economic efficiency.

39. The possibility of addressing the climate change challenge One strategy is to integrate into our thinking, our culture, our behavior the value of the climate and the consequences of our decisions, and in particular, what is the cost of our energy and our water, and what happens with our waste.

40. The possibility of addressing the climate change challenge What does bring us all together? How do we ascribe value and valuation? –Our beliefs and belief systems link us strongly. And stand at the foundation of our disagreements. –Our economies link us strongly. –Others ???

41. Economies, markets A leading policy mechanism is the carbon market. This would be a way to allow valuation of our climate and the treatment of our waste. –Markets are a way to provide an interface between all of the interested parties. Requires participation in the market. Requires a functioning market. –The most likely way to touch most elements of society? –How to develop a market?

42. Elements of environmental pollutant market ENERGY PRODUCTION FUEL SOURCES ABATEMENT SHARES OF POLLUTANT CREDITS F1cF1c F2cF2c FicFic F1AF1A F2AF2A FiAFiA A1A1 A2A2 AiAi GDP. POLLUTANT efficiency COST GAP

43. Elements of environmental pollutant market ENERGY PRODUCTION FUEL SOURCES ABATEMENT SHARES OF POLLUTANT CREDITS F1cF1c F2cF2c FicFic F1AF1A F2AF2A FiAFiA A1A1 A2A2 AiAi GDP. POLLUTANT efficiency COST GAP Common Unit of Transference Cost  $

44. Elements of environmental pollutant market ENERGY PRODUCTION FUEL SOURCES ABATEMENT SHARES OF POLLUTANT CREDITS F1cF1c F2cF2c FicFic F1AF1A F2AF2A FiAFiA A1A1 A2A2 AiAi GDP. POLLUTANT efficiency COST GAP

45. Elements of environmental pollutant market ENERGY PRODUCTION FUEL SOURCES ABATEMENT SHARES OF POLLUTANT CREDITS F1cF1c F2cF2c FicFic F1AF1A F2AF2A FiAFiA A1A1 A2A2 AiAi GDP. POLLUTANT efficiency COST GAP Pacala and Socolow

46. Markets It is not clear to me that the ingredients exist for a market. There are too few options. –Abatement? –Cost differential for fuel? –Valuation of efficiency? –The requirement of economic growth? –...

47. Next Lecture Justin Felt: Carbon Market