Econ Climate Change Exam 2, Chap 5 & 6

Use value

1. The benefit from actually using a resource - hiking a trail, fishing a lake.

2. Directly being there. Directly being in the forest, directing using it.

Option value

1. The value of preserving the option to use it in the future, even if you don’t use it now.

2. Even if you are not directly IN the forest, you still benefit from the forest being there.

Existence value

1. The value people place simply on knowing something exists. Even if they’ll never see it.

2. You don’t want an animal to go extinct, even if you never see them or anything, you want them to not go extinct (polar bears).

Total value = (Equation)

use value + option value + existence value

Willingness to pay (WTP)

1. The maximum amount someone would pay to gain a benefit (to have a park protected)

2. How much are you willing to pay?

Willingness to accept (WTA)

1. The minimum amount someone would accept to give up that same benefit (allow the park to be developed)

2. How much are you willing to accept as compensation?

3. If you value a park a lot and the government wants that park, what are you willing to accept as compensation to give the park to the government.

Problem with WTP and WTA

Supposed to be the same but in real practice, it is not. You would rather be compensated a lot and pay the least amount. People’s willingness to pay is also dependent on their incomes. Better to use willingness to pay.

Risk assessment

• The statistical, scientific estimate of how likely a hazard is and how severe it would be.

• The facts. The numbers and data.

Risk perception

• How risky people actually feel a hazard is - often shaped more by dread, control, and familiarity than by the real odds.

• How we view it. Subjective.

Value of Statistical Life  (VSL)

• NOT saying whose life is worth more or less. It’s not really about the person.

  • Not: a price tag on any individual, identifiable person’s life. No one is saying a specific life is worth that amount.

  • IS: the aggregate value society places on reducing a small statistical risk shared across a large group - used to compare costs and benefits of safety regulations.

Note:

• Varies a lot. If lives are affected from pollution etc. how do you calculate the amount of compensation one should receive for it?

• VSL is derived from what people are actually paid or actually pay to accept or avoid small changes in risk of death - not a price on any specific person’s life.

• Studies of hazard pay in risky jobs (what wage premium workers demand to take a job with higher fatality)

  • People sign up knowing that there are risks (aka going into the army), so the compensation is less. If you simply died in a plane crash, your family gets some compensation because you did not sign up knowing the plane would crash.

  • Or jobs paying more because of the risks.

Engineering estimates

• Estimating costs sounds more straightforward than estimating benefits - compliance requires buying and installing real equipment with a real price tag. The standard approach is the engineering cost estimate: what would it cost, technically, to meet a given standard?

• These estimates are made before a regulation takes effect - they assume the world stays static. Which it rarely does.

• Ex: base rate, and then the task will cost more or less depending on exactly what you want done, but it will be semi close to the base rate still.

• Con: say a big number “it is too expensive”

Ex-ante

• Estimated BEFORE a regulation takes effect 

• Based on engineering models and projected compliance technology.

• Ex-Ante estimates tend to overshoot ex-post reality because of technology-forcing effects, strategy overstatement, and static assumptions.

• Essentially, estimates are higher but then in reality, with new technical innovations, the cost is actually lower.

Ex-post

• The ACTUAL cost, measured after firms respond to the regulation has been implemented.

• Did it really cost what we predicted it would cost and did it really have the benefits/ results we expected? Was it really worth it?

Ex-ante estimates typically overshoots ex-post (ex-ante seems larger) because:

• Technology forcing effects

  • Regulations spur innovation - firms finds cheapest ways to comply once the standard is actually in place.

• Strategic overstatement 

  • Regulated industries have an incentive to overstate compliance costs during the rulemaking process.

• Static assumptions

  • Engineering models often miss market responses, technology adoption, and other real-world adjustments.

Contingent Valuation - stated preference method - only method that can calculate total value (close to)

• Most direct approach - just asking people.

• Create a scenario and give info and ask people would they be willing…usually give them numbers + best to not leave open ended.

• Usually contingent along with a hypothetical. (if we are willing to do this, how much are you willing to pay?

• Strengths:

  • Only method that can capture existence value - you can ask someone what they’d pay to protect a species they’ll never see.

• Cons:

  • Hypothetical bias: people may answer carelessly or overstate their true WTP, since they know they won't actually have to pay fit it.

• Answers are also strongly affected by how the question is worded and what information respondents are given beforehand - careful survey design matters enormously.

• Very hypothetical 

Travel cost method

• Reveals willingness to pay. Observing where people travel to to determine how much they value it.

• Try to reveal (indirect way) what consumers value something. 

• It does it very well but doesn’t give the full picture.

• Reveals real behaviors (actual decisions they are making)

• Some people value whales but do not have the money or time to visit the whale, these people would not get included in the analysis. 

Hedonic Analysis - hedonic regression

• Includes costs/ are reflected like if your house is near a park it is nosy so that may decrease the value of the price. House that is near the lake, the house’s value increases.

Partial equilibrium

• The direct cost borne by the regulated firm or household - holding all other prices constant.

• If you put a regulation on a powerplant, you assume they will pay for all of it.

General equilibrium

• The full net cost to society once all affected markets adjust - prices, wages, and related industries included.

• Looking at the full picture and considering everything.

Capital (4 + definition)

• Human-made capital

  • Things we’ve made: machines, buildings, roads, power plants, infrastructure.

• Natural capital

  • Forests, soil, clean air and water, a stable climate.

• Human capital

  • Know how. Our knowledge, skills, and health of the workforce.

• Social capital

  • Trust, institutions, and cooperation.

Neoclassical (“weak”) view

Says natural and human-made capital are basically the same in value.

• Natural and human-made capital are substitutes

  • Transforming capital. As in we do not lose capital, we just transform it into a different capital

  • Con: we don’t know if the future generation would see the substitute as valuable as us rn.

• What matters is total capital, summed in value

• Depleting a resource is fine if we invest the proceeds

• Technology and prices will find a way around scarcity

  • By using technology better, we are able to stretch the use more.

  • Ex: 15 years ago people said we would run out of oil but we have not run out of oil yet because technology has allowed us to extract oil in a different way.

• Traditional view. 

Ecological (“strong”) view

Says natural and human-made capital are not valued as the same. We should try to contain and preserve natural capital.

• Natural capital is largely a complement, not a substitute.

• Some natural capital is critical and cannot be replaced.

• Thresholds and irreversibility make drawdown dangerous.

• Natural capital must be maintained on its own.

Note:

• Both agree future well-being must not decline. They disagree about whether a factory can replace a forest, fishery, or a stable climate.

Can anything replace a stable climate?

• Weak view: some services have no substitute (coral reefs, ice sheets, monsoon patterns, species).

• Strong views: some services have no substitutes

• Irreversibility matters: we do not know where all the thresholds are

• Uncertainty matters: we do not know where all the thresholds are.

Hicksian income:

You can consume the most that you can and still have left over. You’re well off enough that you’re fulfilling all your needs and still have left overs.

• Transfer one to the next. You have not made anything and spending it makes your wealth goes down. 

A country that extracts oil, cuts forests, or uses up the atmosphere can show high income while its total capital shrinks

• Assuming that we can substitute that we can replace natural capital into human capital (we take away natural capital but we give other capital so it’s ok).

Hartwick rule

Rule:

• Reinvest the rents from depleting a resource in other productive capital, so total capital is maintained.

Limit:

• Works only if capital types are substitutes. It cannot rebuild an irreversible loss, such as a melted ice sheet or a lost reef.

Note:

• Hartwick rule alone does not justify unlimited CO2 emissions: a stable climate is critical natural capital, and the harm falls on future generations.

Invest the rents from depleting a resource in other productive capital

• Resource rent = price - extraction cost, per unit sold (that is what we need to reinvest into something else).

• If the rents are consumed, total capital falls

• If the rents are reinvested, total capital is maintained

• Idea: turn exhaustible resource into lasting assets

Efficiency standard

• Weigh total benefits and costs, discounted 

• Set emissions where marginal cost = marginal damage

• Uses the social cost of carbon

• Result depends strongly on r and on damage estimates

• Maximize discounted net benefits: set emissions where marginal cost equals marginal damage (the social cost of carbon). 

• Sensitive to the discount rate.

Sustainability standard

• Do not leave future generations worse off

• Treat stable climate as capital to be protected

• Use limits or budgets, rather than prices alone.

• Result depends on what we count as irreplaceable.

• Calls for faster emission cuts because they don’t want the future generation worse off. 

What the sustainability standard implies for policy

• Protect critical natural capital with limits (ex: cap on cumulative emissions tied to a temperature goal)

• Reinvest proceeds from resource extraction (sovereign wealth funds, clean energy, education).

• Account for future generations explicitly, rather than through a high discount rate

• Support technology development to expand substitution possibilities (clean tech)

• Monitor the capital stock with indicators, not GDP alone.

• Sustainability does not mean “no growth”. It means growth that does not erode the capital base future people reply on.

Measure, How it works, View for:

Green NNP

Genuine Savings

Genuine Progress Indicator

Footprint/Planetary Boundaries

Measure	How It Works	View
Green NNP	GDP - depreciation of machines - depletion of natural capital	Weak
Genuine Savings	Net saving + education - resource depletion - pollution damage	Weak
Genuine progress indicator	Adjusts consumption for inequality, unpaid work, pollution, depletion	Mixed
footprint/planetary boundaries	Physical use of nature versus what earth can regenerate or absorb	Strong

Green accounting (Equation)

Net national product = GDP - depreciation of human-made capital - depreciation of natural capital

Genuine savings (Equation) What does it mean when GS is above or below 0?

Net saving + investment in human capital - natural resource depletion - pollution damage

• Genuine savings > 0 means total wealth is growing

• Genuine savings < 0 means the country is eating its capital

• Includes CO2 damage, so it can flag climate-driven drawdown.

• Cost of carbon is the damages.

Footprints and boundaries

• Ecological footprint

  • Land and water needed to supply resources and absorb waste, compared with what earth regenerates (biocapacity)

• Overshoot

  • Humanity uses nature faster than it regenerates. “Earth overshoot day” has fallen in late July to early august in recent years

• Planetary boundaries

  • Limits for earth systems (climate, biodiversity, nitrogen, and others) that we should not cross. Strong-sustainability flavor.

Basically we can’t go back if we overshoot the boundaries/capacity of the environment.

Climate depreciation (Equation)

tons of CO2 emitted x social cost of carbon

Decoupling: can growth continue without emissions?

(Relative decoupling & Absolute decoupling)

• Relative decoupling

  • Emissions rise more slowly than GDP

  • Emissions per dollar of GDP fall

  • Common in many wealthy countries

  • Not enough to stabilize the climate by itself

• Absolute decoupling

  • Emissions actually fall while GDP rises

  • Required to meet temperature goals

  • Seen in some countries through energy efficiency, renewables structural change

  • Debate: how fast, and how far, can it go?