Program Lecture 2 Economic Returns From The Biosphere

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Information about Program Lecture 2 Economic Returns From The Biosphere

Published on January 4, 2017

Author: GracielaChichilnisky

Source: slideshare.net

1. Program on Information and Resources Columbia UniversityProgram on Information and Resources Columbia University 11 Economic Returns fromEconomic Returns from the Biospherethe Biosphere Pegram LecturesPegram Lectures Brookhaven National LaboratoriesBrookhaven National Laboratories Graciela ChichilniskyGraciela Chichilnisky UNESCO Chair in Mathematics and EconomicsUNESCO Chair in Mathematics and Economics Columbia UniversityColumbia University

2. Program on Information and Resources Columbia Universi2 Program on Information andProgram on Information and ResourcesResources Columbia UniversityColumbia University

3. Program on Information and Resources Columbia Universi3 Human beings, or their close genetic relatives,Human beings, or their close genetic relatives, have lived on Earth for several million yearshave lived on Earth for several million years Yet only recently has human activity reachedYet only recently has human activity reached levels at which it can affect fundamental naturallevels at which it can affect fundamental natural processesprocesses  the concentration of gases in thethe concentration of gases in the atmosphere (CO2, Ozone)atmosphere (CO2, Ozone)  the planet’s water massthe planet’s water mass  The complex web of species whichThe complex web of species which constitute life on earthconstitute life on earth

4. Program on Information and Resources Columbia Universi4 Changes in global atmospheric compositionChanges in global atmospheric composition Atmospheric Concentration of CO2 , 1959-2000 280 290 300 310 320 330 340 350 360 370 380 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 CarbonDioxideMixingRatio(ppm) Atmospheric Concentration of CFC-12, 1978-2001 0 100 200 300 400 500 600 1978 1982 1986 1990 1994 1998 CFC-12MixingRatio(ppm) Atmospheric Concentration of Methane, 1986-2001 1,560 1,580 1,600 1,620 1,640 1,660 1,680 1,700 1,720 1,740 1986 1990 1994 1998 MethaneMixingRatio(ppm) Fossil Fuel Consumption Forest Burning Refrigerants Foam Blowing Solvents Rice Paddies Marshlands Cattle Sources: The Facts - Trace Gas Concentrations are increasing Source: World Resources Institute, 2002

5. Program on Information and Resources Columbia Universi5

6. Program on Information and Resources Columbia Universi6 Source: National Oceanic and Atmospheric Administration (NOAA). US Department of Commerce. http://www.noaa.gov/

7. Program on Information and Resources Columbia Universi7 Policy responsesPolicy responses  1992 Rio targets: roll back industrial1992 Rio targets: roll back industrial countries emission to 1990 levels bycountries emission to 1990 levels by 20002000  Since then emissions have increasedSince then emissions have increased  Little progress has been achievedLittle progress has been achieved

8. Program on Information and Resources Columbia Universi8 Source: National Oceanic and Atmospheric Administration (NOAA). US Department of Commerce. http://www.noaa.gov/

9. Program on Information and Resources Columbia Universi9 Sources: “A timeline of climate change” Matthew Knight, CNN science, 14, May 2008. http://www.cnn.com/2008/TECH/science/03/31/Intro.timeline/index.html (the rest came from G. Chichilnisky directly).

10. Program on Information and Resources Columbia Universi10 How to achieve the Rio targets?How to achieve the Rio targets? Proposals:Proposals:  Global carbon taxes (OECD Study,Global carbon taxes (OECD Study, 1993 – 41993 – 4  Global markets for carbon emissionGlobal markets for carbon emission permits (Chichilnisky, 1993:permits (Chichilnisky, 1993: proposal to OECD, to UN Frameworkproposal to OECD, to UN Framework Convention on Climate Change, ChairConvention on Climate Change, Chair R. Estrada-Oyuela, and to WorldR. Estrada-Oyuela, and to World Bank 1995Bank 1995

11. Program on Information and Resources Columbia Universi11 1995 Berlin Mandate1995 Berlin Mandate  Negotiate Protocol to quantifyNegotiate Protocol to quantify limitations by industrial countries,limitations by industrial countries, e.g. in 2000, 2010, 2020e.g. in 2000, 2010, 2020  Joint implementations pilotJoint implementations pilot  Prelude to emissions tradingPrelude to emissions trading

12. Program on Information and Resources Columbia Universi12 Geneva: June 1996Geneva: June 1996  U.S. Tim Wirth proposes globalU.S. Tim Wirth proposes global emission marketsemission markets

13. Program on Information and Resources Columbia Universi13 ●● In 1996, the IPCC reported thatIn 1996, the IPCC reported that human induced emissions of carbonhuman induced emissions of carbon have a discernible effect on climatehave a discernible effect on climate ● Scientific uncertainty persists● Scientific uncertainty persists ● But the risk of climate change is real● But the risk of climate change is real and potentially catastrophicand potentially catastrophic

14. Program on Information and Resources Columbia Universi14 Kyoto: 1997Kyoto: 1997  166 nations accepted our166 nations accepted our emissions market proposal toemissions market proposal to UNFCCCUNFCCC The Kyoto ProtocolThe Kyoto Protocol

15. Program on Information and Resources Columbia Universi15 Kyoto set 5% emission reductionsKyoto set 5% emission reductions for Annex 1 countries by 2008-2012for Annex 1 countries by 2008-2012 and created three facilitatingand created three facilitating mechanisms to achieve thismechanisms to achieve this

16. Program on Information and Resources Columbia Universi16 The Kyoto Protocol sets caps onThe Kyoto Protocol sets caps on COCO22 emissions, and allowsemissions, and allows industrial nations to trade the rightsindustrial nations to trade the rights to emitto emit

17. Program on Information and Resources Columbia Universi17 Facilitating mechanisms forFacilitating mechanisms for Annex 1 countries:Annex 1 countries:  Joint implementation (article 6)Joint implementation (article 6)  Emission trading (article 17)Emission trading (article 17) See also art 3.10 and 3.11See also art 3.10 and 3.11

18. Program on Information and Resources Columbia Universi18 Only one mechanism involves bothOnly one mechanism involves both industrial and developing countries:industrial and developing countries: CLEAN DEVELOPMENTCLEAN DEVELOPMENT MECHANISMMECHANISM (ARTICLE 12)(ARTICLE 12)

19. Program on Information and Resources Columbia Universi19 1993 BUENOS AIRES COP41993 BUENOS AIRES COP4 Set 2 year deadline for completingSet 2 year deadline for completing the KYOTO AGENDAthe KYOTO AGENDA

20. Program on Information and Resources Columbia Universi20 The Kyoto Protocol sets caps onThe Kyoto Protocol sets caps on COCO22 emissions, and allowsemissions, and allows industrial nations to trade the rightsindustrial nations to trade the rights to emitto emit

21. Program on Information and Resources Columbia Universi21 TODAYTODAY The profits obtained are the same forThe profits obtained are the same for a Ford factory that produces cars ina Ford factory that produces cars in China usingChina using dirtydirty technology ortechnology or cleanclean technologytechnology

22. Program on Information and Resources Columbia Universi22 BALI - COP 13:BALI - COP 13: The Bali RoadmapThe Bali Roadmap COPENHAGEN COP15COPENHAGEN COP15 Reducing the U.S. – China impasseReducing the U.S. – China impasse A NEW COLD WAR?A NEW COLD WAR?

23. Program on Information and Resources Columbia Universi23 Three outstanding issues forThree outstanding issues for implementation of the Kyotoimplementation of the Kyoto Protocol:Protocol:  Opposition from the private sectorOpposition from the private sector  Developing countries do not participate inDeveloping countries do not participate in emissions limitsemissions limits  U.S.-China impasse: A new Cold War?U.S.-China impasse: A new Cold War?

24. Program on Information and Resources Columbia Universi24 Both issues arise from fearsBoth issues arise from fears that emissions limits willthat emissions limits will interfere with economicinterfere with economic growth and the rise ingrowth and the rise in standards of livingstandards of living

25. Program on Information and Resources Columbia Universi25 How to cut the link betweenHow to cut the link between emissions and economicemissions and economic growth?growth? Only new clean technologiesOnly new clean technologies can achieve thiscan achieve this

26. Program on Information and Resources Columbia Universi26 New technology requiresNew technology requires appropriate economicappropriate economic conditions to beconditions to be implemented.implemented. Resource prices are keyResource prices are key

27. Program on Information and Resources Columbia Universi27 Prices have an impactPrices have an impact A much-quoted statistic on this subject isA much-quoted statistic on this subject is that the amount of energy used inthat the amount of energy used in producing $1000-worth of constant-dollarproducing $1000-worth of constant-dollar GNP in the USA fell by 38.9% from 1973GNP in the USA fell by 38.9% from 1973 to 1983.to 1983. This was a result of switching to moreThis was a result of switching to more energy-efficient technologies, and mostlyenergy-efficient technologies, and mostly of demand patterns changing away fromof demand patterns changing away from energy intensive products and services.energy intensive products and services. Most of this striking drop in energy useMost of this striking drop in energy use occurred in the period 1979-1983.occurred in the period 1979-1983.

28. Program on Information and Resources Columbia Universi28 New TechnologiesNew Technologies (fuel cells, solar)(fuel cells, solar) seem uncompetitive because ofseem uncompetitive because of excessively low resource pricesexcessively low resource prices In real terms, oil prices are theIn real terms, oil prices are the lowest ever todaylowest ever today

29. Program on Information and Resources Columbia Universi29 Through clean technologies,Through clean technologies, developing countries candeveloping countries can “leapfrog”, without repeating the“leapfrog”, without repeating the resource-intensive growth thatresource-intensive growth that characterizes industrialcharacterizes industrial countriescountries

30. Program on Information and Resources Columbia Universi30 Technology transfers andTechnology transfers and emissions tradingemissions trading Today there is no incentive for a USAToday there is no incentive for a USA corporation to set plants incorporation to set plants in developing countries using modern,developing countries using modern, clean technologyclean technology

31. Program on Information and Resources Columbia Universi31 EMISSIONS MARKETSEMISSIONS MARKETS Change all thisChange all this They reward the transfers of cleanThey reward the transfers of clean technologytechnology How?How?

32. Program on Information and Resources Columbia Universi32 If Ford is allocated permits forIf Ford is allocated permits for clean car technologyclean car technology corresponding to the emissionscorresponding to the emissions saved, it can cash these permitssaved, it can cash these permits in the emissions marketin the emissions market

33. Program on Information and Resources Columbia Universi33 Markets for Emission PermitsMarkets for Emission Permits Annex 1 Countries are givenAnnex 1 Countries are given allocations of property rights onallocations of property rights on emissions summing up to a 5%emissions summing up to a 5% reduction, and they can tradereduction, and they can trade these freely among themselvesthese freely among themselves

34. Program on Information and Resources Columbia Universi34 EXAMPLESEXAMPLES  The trading of SOThe trading of SO22 in the Chicagoin the Chicago Board of Trade since 1993, followingBoard of Trade since 1993, following the Clean Air Actthe Clean Air Act  Proposed Water Markets in CaliforniaProposed Water Markets in California

35. Program on Information and Resources Columbia Universi35 Biodiversity and Markets forBiodiversity and Markets for emissions permitsemissions permits Deforestation is the source ofDeforestation is the source of approximately 20% of globalapproximately 20% of global greenhouse gas emissions. Sciencegreenhouse gas emissions. Science has shown that forests act as “sinks”has shown that forests act as “sinks” retaining large amounts of carbonretaining large amounts of carbon and absorbing large quantities ofand absorbing large quantities of carbon dioxidecarbon dioxide

36. Program on Information and Resources Columbia Universi36 Biodiversity and Markets forBiodiversity and Markets for emissions permitsemissions permits The Bolivian government has added 2.1 millionThe Bolivian government has added 2.1 million acres of tropical forest land to the Noel Kempffacres of tropical forest land to the Noel Kempff Mercado National Park, essentially doubling itsMercado National Park, essentially doubling its size. By investing in the protection of this area,size. By investing in the protection of this area, three U.S. corporations, American Electric Power,three U.S. corporations, American Electric Power, BP America and Pacific Corp., and the BolivianBP America and Pacific Corp., and the Bolivian government will receive carbon offset credits.government will receive carbon offset credits. These credits could have significant market value,These credits could have significant market value, should a trading system develop as a result ofshould a trading system develop as a result of international negotiations stemming from theinternational negotiations stemming from the December 1997 Kyoto conference on climateDecember 1997 Kyoto conference on climate changechange

37. Program on Information and Resources Columbia Universi37 Market InnovationMarket Innovation New Markets are created, whichNew Markets are created, which trade property rights on the use oftrade property rights on the use of the Global Commonsthe Global Commons

38. Program on Information and Resources Columbia Universi38 The Emergence of GlobalThe Emergence of Global Environmental MarketsEnvironmental Markets The Kyoto ProtocolThe Kyoto Protocol

39. Program on Information and Resources Columbia Universi39 Financial Innovation Offers AFinancial Innovation Offers A SolutionSolution  New York purchased conservationNew York purchased conservation land in the Catskillsland in the Catskills  The $660 million purchase was paidThe $660 million purchase was paid by selling an environmental bondby selling an environmental bond  New York saved $3.34 billion byNew York saved $3.34 billion by conserving the watershedconserving the watershed

40. Program on Information and Resources Columbia Universi40 Financial instruments to preserveFinancial instruments to preserve and realize the value of watershedsand realize the value of watersheds  For decades the water of New York isFor decades the water of New York is purified by micro-organisms in the Catskillpurified by micro-organisms in the Catskill soilsoil  Their survival is threatened today byTheir survival is threatened today by pesticides and fertilizerspesticides and fertilizers  A $6 billion purification plant would beA $6 billion purification plant would be needed if they disappearedneeded if they disappeared  Trading an innovative environmental bond,Trading an innovative environmental bond, New York purchased conservation land forNew York purchased conservation land for $680 million in the Catskills, thus avoiding$680 million in the Catskills, thus avoiding the cost of the plantthe cost of the plant

41. Program on Information and Resources Columbia Universi41 The watershed problem is globalThe watershed problem is global  The value of watershed services toThe value of watershed services to major cities across the world ismajor cities across the world is estimated at $900 billionestimated at $900 billion  One can securitize watershedOne can securitize watershed services through innovative financialservices through innovative financial instrumentsinstruments

42. Program on Information and Resources Columbia Universi42 SECURITIZATIONSECURITIZATION  Form corporation to manageForm corporation to manage conservationconservation  Corporation owns the cost savingsCorporation owns the cost savings from conserving watershedfrom conserving watershed  Finance conservation by sellingFinance conservation by selling sharesshares  Local community and state shouldLocal community and state should own sharesown shares

43. Program on Information and Resources Columbia Universi43 Increased knowledge can helpIncreased knowledge can help How?How? It can lead to:It can lead to:  Better understanding of natural risks andBetter understanding of natural risks and how to manage themhow to manage them (El Nino and catastrophic bundles)(El Nino and catastrophic bundles)  Better understanding of human impacts onBetter understanding of human impacts on nature and of new courses of actionnature and of new courses of action (watersheds and environmental(watersheds and environmental bondsbonds

44. Program on Information and Resources Columbia Universi44 Markets are widely usedMarkets are widely used institutionsinstitutions They are decentralized, and can be efficient.They are decentralized, and can be efficient. But global environmental markets tradeBut global environmental markets trade unusual goods:unusual goods: privately produced publicprivately produced public goodsgoods ● Biodiversity is one● Biodiversity is one ● The planet’s atmosphere is another● The planet’s atmosphere is another

45. Program on Information and Resources Columbia Universi45 Environmental assets are oftenEnvironmental assets are often public goodspublic goods  COCO22 concentration in the atmosphereconcentration in the atmosphere is a quintessential public goodis a quintessential public good because it mixes very thoroughlybecause it mixes very thoroughly throughout the planet and is verythroughout the planet and is very stable (remains about 100 years)stable (remains about 100 years)  It is not a typical public goodIt is not a typical public good because it is not produced by thebecause it is not produced by the government such as defensegovernment such as defense  COCO22 is privately producedis privately produced

46. Program on Information and Resources Columbia Universi46 Public goods changePublic goods change mattersmatters New Economic FindingsNew Economic Findings  Only certain allocations of propertyOnly certain allocations of property rights on the atmosphere betweenrights on the atmosphere between countries will yield efficient marketcountries will yield efficient market solutionssolutions  This ties together the goals ofThis ties together the goals of efficiency and fairness:efficiency and fairness:  The aspirations of North and SouthThe aspirations of North and South

47. Program on Information and Resources Columbia Universi47 Privately produced public goodsPrivately produced public goods  are goods which are not “rival” inare goods which are not “rival” in consumption, but are privatelyconsumption, but are privately producedproduced  we all produce emissions but thewe all produce emissions but the atmosphere is the same for us allatmosphere is the same for us all

48. Program on Information and Resources Columbia Universi48 First Theorem of Welfare EconomicsFirst Theorem of Welfare Economics The allocation resulting from a competitiveThe allocation resulting from a competitive market equilibrium with private goods ismarket equilibrium with private goods is Pareto efficient (Arrow, 1950)Pareto efficient (Arrow, 1950)  This theorem is independent of theThis theorem is independent of the distribution of property rights. Fordistribution of property rights. For example: all but two traders may haveexample: all but two traders may have zero endowments of property rights andzero endowments of property rights and the resulting equilibrium is still Paretothe resulting equilibrium is still Pareto efficient.efficient.

49. Program on Information and Resources Columbia Universi49 • But it requires all tradedBut it requires all traded goods to begoods to be private goods,private goods, with rival consumption, andwith rival consumption, and privately owned.privately owned.

50. Program on Information and Resources Columbia Universi50 Markets with PPP goods areMarkets with PPP goods are different from standard marketsdifferent from standard markets In private goods markets,In private goods markets, efficiency and fairness areefficiency and fairness are separate conceptsseparate concepts In markets with privatelyIn markets with privately produced public (PPP) goods theseproduced public (PPP) goods these two concepts are linkedtwo concepts are linked

51. Program on Information and Resources Columbia Universi51 With private goods efficiency requiresWith private goods efficiency requires that MRS=MRT, but with public goodsthat MRS=MRT, but with public goods the formula changes:the formula changes: Linden-Bowen and Samuelson provedLinden-Bowen and Samuelson proved that:that: Sum of MRS across people = MRTSum of MRS across people = MRT

52. Program on Information and Resources Columbia Universi52 ●● For efficient markets, tradersFor efficient markets, traders should choose freely betweenshould choose freely between private goods andprivate goods and environmental qualityenvironmental quality ●● However the atmosphereHowever the atmosphere concentration of COconcentration of CO22 is one andis one and the same for all. This is anthe same for all. This is an unavoidable physical factunavoidable physical fact

53. Program on Information and Resources Columbia Universi53 ●● Therefore free choice mustTherefore free choice must lead every trader to select thelead every trader to select the same overall trade-off betweensame overall trade-off between private goods and atmosphericprivate goods and atmospheric qualityquality ●● For this to happen, trader’sFor this to happen, trader’s wealth should not be too farwealth should not be too far apartapart

54. Program on Information and Resources Columbia Universi54 ●● Efficiency and distribution areEfficiency and distribution are connected in markets with PPPconnected in markets with PPP goodsgoods ●● A measure of equity is necessaryA measure of equity is necessary for efficiencyfor efficiency ●● Markets with knowledge andMarkets with knowledge and environmental assets requireenvironmental assets require equity for efficiencyequity for efficiency

55. Program on Information and Resources Columbia Universi55 First Welfare Theorem inFirst Welfare Theorem in Markets with PrivatelyMarkets with Privately Produced Public GoodsProduced Public Goods  Only a finite number of ways ofOnly a finite number of ways of distributing property rights on adistributing property rights on a given total of emissions rightsgiven total of emissions rights between the traders gives rise tobetween the traders gives rise to efficient market allocationsefficient market allocations

56. Program on Information and Resources Columbia Universi56 ●● Efficiency and distribution areEfficiency and distribution are closely connected in economiesclosely connected in economies with environmental assetswith environmental assets ● A measure of equity is● A measure of equity is necessary for efficiencynecessary for efficiency

57. Program on Information and Resources Columbia Universi57

58. Program on Information and Resources Columbia Universi58 POLICYPOLICY Those who have fewer endowmentsThose who have fewer endowments of private goods must be endowedof private goods must be endowed with more property rights on the usewith more property rights on the use of the PPP good. Otherwise theof the PPP good. Otherwise the market does not operate efficientlymarket does not operate efficiently

59. Program on Information and Resources Columbia Universi59 ●● One way to ensure this is to follow aOne way to ensure this is to follow a simple rule: the countries that emit lesssimple rule: the countries that emit less receive somewhat more permits:receive somewhat more permits: ● A “reverse grand-fathering” allocation● A “reverse grand-fathering” allocation ● Repeated across time, such a policy● Repeated across time, such a policy would compensate those who use thewould compensate those who use the atmosphere judiciously and provideatmosphere judiciously and provide incentives to abateincentives to abate

60. Program on Information and Resources Columbia Universi60 This scheme:This scheme:  Rewards the transfers of cleanRewards the transfers of clean technology to developing countriestechnology to developing countries  Multiplies the returns on R&D in theMultiplies the returns on R&D in the private sectorprivate sector  Securitizing these returns attractsSecuritizing these returns attracts global capital from private sourcesglobal capital from private sources for clean technology transfersfor clean technology transfers

61. Program on Information and Resources Columbia Universi61 A market hasA market has NN traded goods andtraded goods and HH traderstraders Each trader has a preferenceEach trader has a preference uuhh : R: RNN RR andand and allocation of property rightsand allocation of property rights ΩΩhh ЄЄ RRNN .. NEW MARKETS

62. Program on Information and Resources Columbia Universi62 What is economic efficiency:What is economic efficiency: A feasible allocation isA feasible allocation is ParetoPareto efficientefficient if there is no other feasibleif there is no other feasible allocation which makes everybody asallocation which makes everybody as well off, and some strictly better offwell off, and some strictly better off

63. Program on Information and Resources Columbia Universi63 AA competitive equilibriumcompetitive equilibrium is a priceis a price p*p* ∈∈ RRNN and an allocationand an allocation xx11,…,x,…,xHH ∈∈ RRN x HN x H such thatsuch that each trader maximizes utility subject to aeach trader maximizes utility subject to a budget constraint:budget constraint: Max (uh(y)) for y ∈ {z Є RN : <p*, z> = <p*,Ωh>} And markets clear:And markets clear: Σ xh = Σ Ωh. H H h=1 h=1

64. Program on Information and Resources Columbia Universi64 A competitive market equilibriumA competitive market equilibrium Is a set of pricesIs a set of prices p*p* and an allocation ofand an allocation of goodsgoods xx11,…, x,…, xHH ∈∈ RRN x HN x H at which each traderat which each trader maximizes utility subject to a budgetmaximizes utility subject to a budget constraint, and all markets clear.constraint, and all markets clear.

65. Program on Information and Resources Columbia Universi65 A General ModelA General Model •Consider a world economy with I countries, I ≥ 2 , indexed by i = 1,…,I. Each has a utility function ui , arguments a vector of private goods ci = (ci,1,ci,2,…,ci,m) where m is the number of private goods, and also the quality of the world’s atmosphere, a, which is a public good. • The quality of the atmosphere, a, is measured by the reciprocal or the negative of CO2 concentration. The concentration of CO2 is “produced” by emissions of carbon, which are positively associated with the production of private goods.

66. Program on Information and Resources Columbia Universi66 •Let y be a vector giving the production levels of the m private goods in the country i. a = Σ ai , ai = Φ (yi) and < 0 ∀ i. a is a measure of atmospheric quality overall, and ai is an index of the abatement carried out by country i. •Feasibility is defined by the above and by the condition that the total consumption of each private good worldwide equal total production, ∑ ci = ∑ yi This allows unrestricted lump sum redistributions. I i=1 ∂φι ∂yi,l i=1,…,I i=1,…,I

67. Program on Information and Resources Columbia Universi67  A Pareto efficient allocation is the solution to theA Pareto efficient allocation is the solution to the problem of maximizing the utility of a designedproblem of maximizing the utility of a designed country, subject to the other countries all reachingcountry, subject to the other countries all reaching prescribed utility levels. This gives the followingprescribed utility levels. This gives the following conditions:conditions: = λ= λkk ∀∀ l =l = 1,…,1,…,mm andand ∀∀ kk ≠≠ i.i. This implies common MRS for all countries. CountryThis implies common MRS for all countries. Country ii is the country whose utility is being maximized, and λis the country whose utility is being maximized, and λkk is a Lagrange multiplier associated with the constraintis a Lagrange multiplier associated with the constraint that countrythat country kk reach a specified welfare level, andreach a specified welfare level, and == ∀∀ l ,l , ∂ui ∂ci,l ∂uk ∂ci,l ∂Φi ∂yi,l ∂uk ∂ci,l Σk λk ∂uk ∂ a

68. Program on Information and Resources Columbia Universi68 First Welfare Theorem for Markets withFirst Welfare Theorem for Markets with Privately Produced Public GoodsPrivately Produced Public Goods TheoremTheorem In an economy withIn an economy with kk≥≥2 traders,2 traders, jj≥≥1private1private goods and a public good, there exists at most agoods and a public good, there exists at most a one-dimensional manifold o property rightsone-dimensional manifold o property rights allocations on the use of the public goodallocations on the use of the public good (allocation of “permits”) from which the(allocation of “permits”) from which the competitive equilibrium is Pareto efficient.competitive equilibrium is Pareto efficient. This is the Manifold of Efficient Allocations ofThis is the Manifold of Efficient Allocations of Property RightsProperty Rights

69. Program on Information and Resources Columbia Universi69 First Welfare TheoremFirst Welfare Theorem In Markets with Privately Produced Public GoodsIn Markets with Privately Produced Public Goods There is only a finite number of ways ofThere is only a finite number of ways of distributing property rights on a given totaldistributing property rights on a given total environmental use between the traders so thatenvironmental use between the traders so that thethe market equilibrium is Pareto efficientmarket equilibrium is Pareto efficient Typically efficiency requires that those with fewerTypically efficiency requires that those with fewer endowments of private goods should have aendowments of private goods should have a higher allocation of property rights on the publichigher allocation of property rights on the public goodsgoods Chichilnisky, 1992-3Chichilnisky, 1992-3 Chichilnisky and Heal, 1993Chichilnisky and Heal, 1993 Chichilnisky, Heal and Starrett, 1993-4Chichilnisky, Heal and Starrett, 1993-4

70. Program on Information and Resources Columbia Universi70 Simple Example of a Market withSimple Example of a Market with Privately Produced Public GoodsPrivately Produced Public Goods Two Countries, i=1,2Two Countries, i=1,2 Two Goods:Two Goods: one private:one private: xx and one public:and one public: aa = abatement = -emissions= abatement = -emissions Initial data: (1) the technologyInitial data: (1) the technology φ (φ (aa) =) = x,x, And (2) the property rights on the use of the publicAnd (2) the property rights on the use of the public good,good, aaii ,, ΣΣιι aa11 = a= a

71. Program on Information and Resources Columbia Universi71 Each Country solves the following problem:Each Country solves the following problem: ((**)) Max uMax uii (x(xii ,a),,a), Such thatSuch that xxii== φ (φ (aaii)+π)+π ( a( aii – a– aii),), φφ’’ < 0< 0 wherewhere φφ is the market price ofis the market price of xx relative torelative to a.a. At World Market Equilibrium each countryAt World Market Equilibrium each country maximizes utility (*), and markets clearmaximizes utility (*), and markets clear ΣΣ aaii == ΣΣ aaii = a= aii

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73. Program on Information and Resources Columbia Universi73 New Economic FindingsNew Economic Findings  Efficiency in trading permits requiresEfficiency in trading permits requires more emission rights to developingmore emission rights to developing countriescountries  Why?Why?

74. Program on Information and Resources Columbia Universi74 Experiments withExperiments with GREEN MODELGREEN MODEL Show that the world costShow that the world cost of abatement is lowerof abatement is lower when the South is givenwhen the South is given proportionately moreproportionately more permitspermits

75. Program on Information and Resources Columbia Universi75 Experiments with Columbia-GreenExperiments with Columbia-Green model:model:  General equilibrium model withGeneral equilibrium model with permit marketspermit markets  12 regions12 regions  12 by 12 international trade matrix12 by 12 international trade matrix  8 sectors8 sectors  Experiments lead to similar finding,Experiments lead to similar finding, i.e. equity and efficiency arei.e. equity and efficiency are connectedconnected

76. Program on Information and Resources Columbia Universi76 Sensitivity analysis of the OECD-Sensitivity analysis of the OECD- PIR global model shows that it isPIR global model shows that it is more efficient to allocate somewhatmore efficient to allocate somewhat more permits to developingmore permits to developing countriescountries  Currently the N-S per capita difference inCurrently the N-S per capita difference in emissions is 6:1emissions is 6:1  IN the case of U.S. the difference is 10:1IN the case of U.S. the difference is 10:1  Developing countries with more than 86%Developing countries with more than 86% of the world population emit less thanof the world population emit less than 70% of the total carbon emissions70% of the total carbon emissions

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83. Program on Information and Resources Columbia Universi83 Present Value of Real Income Loss over 2000-2050Present Value of Real Income Loss over 2000-2050 (in percentage deviation relative to BaU)(in percentage deviation relative to BaU) INDIVIDUALINDIVIDUAL STABLILITYSTABLILITY UNIFORMUNIFORM TAXTAX GRANDGRAND FATHERINGFATHERING POPULATIONPOPULATION BASEDBASED MIXEDMIXED USAUSA JPNJPN -O.79-O.79 -2.41-2.41 -0.90-0.90 -1.24-1.24 -0.76-0.76 -1.83-1.83 -2.94-2.94 -2.84-2.84 -1.84-1.84 -2.34-2.34 EECEEC OOEOOE -1.23-1.23 -0.58-0.58 -1.16-1.16 -0.55-0.55 -1.22-1.22 -0.54-0.54 -3.13-3.13 -1.53-1.53 -2.19-2.19 -1.04-1.04 EEXEEX CHNCHN -3.39-3.39 -3.88-3.88 -0.83-0.83 -3.47-3.47 -0.78-0.78 -4.14-4.14 0.090.09 6.026.02 -0.39-0.39 1.041.04 FSUFSU INDIND -1.42-1.42 -2.61-2.61 -2.66-2.66 -2.00-2.00 1.081.08 -2.94-2.94 -7.13-7.13 14.6214.62 -2.92-2.92 7.007.00 EETEET DAEDAE -0.33-0.33 -0.29-0.29 -1.09-1.09 0.160.16 0.810.81 0.200.20 -5.94-5.94 0.190.19 -2.51-2.51 -0.05-0.05 BRABRA ROWROW -1.60-1.60 -0.40-0.40 -1.78-1.78 -0.01-0.01 -4.40-4.40 0.050.05 -0.55-0.55 0.210.21 -2.45-2.45 0.120.12 WORLDWORLD -1.65-1.65 -1.16-1.16 -1.17-1.17 -1.06-1.06 -1.07-1.07

84. Program on Information and Resources Columbia Universi84 This is because each dollar ofThis is because each dollar of investment yields more output ininvestment yields more output in the Souththe South

85. Program on Information and Resources Columbia Universi85 GDP growth (annual %) of high income vs. middle and low income countries 0 1 2 3 4 5 6 1980 1984 1988 1992 1996 2000 High income Low & middle income World Bank 2002.

86. Program on Information and Resources Columbia Universi86 Gross domestic savings rate (% of GDP) high income vs. middle and low income countries 0 5 10 15 20 25 30 1980 1984 1988 1992 1996 2000 High income Low & middle income World Bank 2002.

87. Program on Information and Resources Columbia Universi87 Ratio of GDP growth (annual %) to Gross domestic savings (% of GDP) 0 0.05 0.1 0.15 0.2 0.25 1980 1984 1988 1992 1996 2000 High income Low & middle income World Bank 2002.

88. Program on Information and Resources Columbia Universi88 TODAYTODAY  There is a general agreement thatThere is a general agreement that making accessible more developmentmaking accessible more development funding for poor countries in afunding for poor countries in a controlled and incremental fashioncontrolled and incremental fashion could benefit the world economy as acould benefit the world economy as a wholewhole

89. Program on Information and Resources Columbia Universi89 TODAYTODAY  There is a general agreement thatThere is a general agreement that something must be done at thesomething must be done at the international levelinternational level  Kyoto, December 1997 could be aKyoto, December 1997 could be a turning pointturning point

90. Program on Information and Resources Columbia Universi90 ●● Yet in the global negotiations, theYet in the global negotiations, the division between industrial anddivision between industrial and developing nations is as deep as everdeveloping nations is as deep as ever ● There is a general agreement that● There is a general agreement that without bridging North-South gap therewithout bridging North-South gap there will be no real progresswill be no real progress How to move ahead?How to move ahead?

91. Program on Information and Resources Columbia Universi91  One way to ensure this is to follow aOne way to ensure this is to follow a simple rule: the countries that emitsimple rule: the countries that emit less receive somewhat more permits:less receive somewhat more permits: A “reverse grand-fathering”allocationA “reverse grand-fathering”allocation  Repeated across time, such a policyRepeated across time, such a policy would compensate those who use thewould compensate those who use the atmosphere judiciously and provideatmosphere judiciously and provide incentives to abateincentives to abate

92. Program on Information and Resources Columbia UniversityProgram on Information and Resources Columbia University 9292 The Key IssuesThe Key Issues •Allocation of rights on the use of the atmosphere •This is a question of efficiency as well as equity More on this in the lecture

93. Program on Information and Resources Columbia UniversityProgram on Information and Resources Columbia University 9393 How to resolveHow to resolve the China-US Impassethe China-US Impasse • New Financial mechanism • New Technologies

94. Program on Information and Resources Columbia UniversityProgram on Information and Resources Columbia University 9494 Technology TransferTechnology Transfer •Negative Carbon Market •To increase clean energy • Reduce carbon in the atmosphere

95. Program on Information and Resources Columbia UniversityProgram on Information and Resources Columbia University 9595 New Financial MechanismsNew Financial Mechanisms • Based on Carbon Market • Replicating Article UNFCCC • Giving North and South what they want

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