EBF 200
Introduction to Energy and Earth Sciences Economics


Climate Change Discussions


That the planet is warming is now widely accepted, but the mechanisms to address the risks are still debated. At the end of the day, devising and implementing economic instruments to address climate change has become a political decision, which means it is largely beyond the scope of discussion in this forum – economists seem to have a habit of getting themselves in hot water when they venture into the field of politics. All I can do here is spell out the framework of some of the current considerations.

What is notable is the change that has occurred in the United States over the last twenty years. The Kyoto Protocol was the first attempt to reach a global agreement on carbon reduction.

Kyoto Protocol

Kyoto Protocol was one of the early international attempts to address and reduce greenhouse gas emissions. Any action concerning ratification of the Kyoto treaty was voted down 95-0 in the US Senate in 1997. However, 12 years later, in 2009, a bill was passed through the House of Representatives, containing greenhouse gas (GHG) standards on vehicles and implementing a carbon cap and trade policy for large stationary emitters. This was called the Waxman-Markey bill (officially titled the American Clean Energy and Security Act). This bill proved to be somewhat unpopular with some parts of the American populace, and, as such, an accompanying bill was never introduced in the Senate. However, as I mentioned above, there has been a large change since 1997. Furthermore, the Environmental Protection Agency has been granted, by the Supreme Court, the responsibility of reducing carbon emissions using provisions contained in the Clean Air Act, and the EPA is currently developing policy and guidelines for the control of carbon from emitters.

Additionally in the United States, a number of state and regional cap and trade programs have been, or are being, implemented. In the northeast, up to 11 states have been participating in the Regional Greenhouse Gas Initiative (RGGI) since the program's beginning in 2009. The program provides for a cap on carbon emissions from electrical generation facilities in the 11 states which decreases over time. In California, a cap and trade program began trading allowances in 2012, with an emissions cap on electrical generation facilities beginning January 1, 2013. Other states and some Canadian provinces were considering joining California to form a regional program called the Western Climate Initiative (WCI).

Therefore, it is unlikely that this issue is going to go away. Regardless of where you stand on the political spectrum, this is an issue that you will have to address. It is not going to go away because of one election.

Recommended Reading

For more background on the Kyoto Protocol see United Nations Framework Convention on Climate Change's page on Kyoto Protocol or the Wikipedia page on Kyoto Protocol.

Paris agreement

For the first time, in December 2015, 196 nations came to a globally accepted agreement under United Nations Framework Convention on Climate Change (UNFCCC) to unitedly combat climate change and accelerate actions required for a sustainable low carbon future. The agreement objective is to reduce the impact of global warming as soon as possible by: 1) limiting the average temperature increase within 2 degrees C above the pre-industrial levels. 2) enhancing the nations’ ability to tackle the impacts of climate change. 3) making the financial efforts consistent with a low emissions and climate-resilient future.

The Paris agreement doesn’t apply enforcement mechanism to set emission targets for the nations. The agreement allows voluntary emission targets to be decided by each nation. Nations have to determine their contributions to the agreement through regular reports on their emissions and implementation efforts. These targets were politically determined rather than legally binding, as was the case in the Kyoto Protocol.

In 2017, President Donald Trump announced his decision to withdraw the United States from the Paris agreement. In 2021, President Biden announced that the United State rejoined the Paris agreement.

Recommended Reading

The Paris agreement is explained in more detail on United Nations Framework Convention on Climate Change (UNFCCC).

I will now attempt to list and briefly describe some of the major points in the climate change discussion.

Benefits versus Costs

Defining the sizes of the costs and benefits from emitting carbon is difficult. This is complicated by the fact that the beneficiaries and the victims often live in different places, and perhaps exist at different places in time. Thus, calculating the socially optimal amount of carbon emissions for each different country is very difficult. Thus, policy design is complicated, and we have the ever-present free-rider problem, whereby some countries may have more incentives to cheat on carbon emission with impunity to benefit their domestic industries and people at the expense of others.

Uncertainty of Effects

There is uncertainty in the future severity of effects from an increase in anthropogenic carbon dioxide. Where will be impacted the most? How the world temperature distribution will be affected across time? What kind of feedback loops exist? There are a number of feedback mechanisms that have been talked about. For example, the Gulf Stream is an ocean current that carries warm water from the Caribbean to the North Atlantic. The result of this is that western Europe is quite a bit warmer than most other parts of the planet that are at similar latitudes (for example, London is about 750 miles further north than New York, but both have similar climates, especially in the winter.) The Gulf Stream is driven by salinity gradients in the North Atlantic, but if a lot of fresh icecap water melts, the salinity gradient will be weakened, and this may cause the Gulf Stream to stop flowing, making northern Europe much colder. Another possible mechanism is that there is a lot of methane trapped in the permafrost of the frozen tundra of northern Canada and Siberia. If the permafrost melts, this methane will go into the environment, and methane is about 20 times more effective than CO2 at trapping heat in the troposphere. Thus, if the tundra melts, it will cause the greenhouse gas to accelerate, raising temperatures even more, and so on. These feedback loops are not well-understood. There are other ones that might work in the opposite direction. For example, warmer air means more moisture suspended in the atmosphere. Water vapor is a powerful greenhouse gas, but in the form of clouds, it is effective at blocking radiation and might reflect it back out into space before it reaches the ground. Which effect would dominate? This question is currently under investigation. However, in the face of uncertainty, it might be wise to adopt the "precautionary principle", be prepared for the worst, and try to prevent, or minimize the causes of climate change.

Tax versus Cap-and-Trade

There is a current debate against cap-and-trade, despite its success in combating acid rain in the US and the operating of a European GHG cap-and-trade market. Some people believe that such a market is overly complicated, will be easily gamed, and will result in windfall profits accruing to certain firms and industries. Tax opponents claim that using a tax is an indirect approach that is fraught with potential error, as it requires knowledge of the shape and form of the demand curve, something that is almost impossible to know. Tax supporters say that at least a tax will give price stability, and that a cap-and-trade market can lead to great price volatility, making business and tax planning very difficult.

Allocation of Permits – Domestically and Internationally

Europe has been experiencing a carbon trading regime in place for several years, and in its early phases, it was not very effective. One of the reasons for this was that each country in Europe got to decide how many permits will be issued to firms within that country. Thus, every country had an incentive to issue more permits to firms within its borders, while arguing that "somebody else" should be issued less. In the absence of any sort of superior governmental authority, this problem is difficult to overcome. When nations disagree, and one nation attempts to force another nation to change policies, compliance mechanisms typically involve trade sanctions. I should note that this permit allocation problem in the European Union has been largely overcome in recent years by fine-tuning the allocation process.

Abatement versus Adaptation

One might argue that it may make economic sense to simply let global warming happen and deal with the consequences. That is, adapting to the consequences of climate change may be a cheaper option than trying to prevent climate change. The problem is, when we don't know how severe the effects of climate change would be, how inhospitable some places will get, it is too risky to do nothing now when the window is closing. In reality, we will likely see some combination of abatement and adaptation, but adaptation is difficult to apply in an equal fashion across the globe.

International Implementation

How can all countries be forced to implement policies addressing climate change? How do we punish free-riders? How do we tell developing countries that they are not free to use fossil fuels to build industrial economies in the way that we in the west have done over the past 200 years.

Revenue Recycling

If we auction off permits, where does the revenue from these permits go? Towards clean technology development? To the reduction of income and capital investment taxes? To compensate the victims of climate change? To State governments, to dole out as political pork?

Intergenerational Equity and Discounting

Why should we make ourselves poorer today to benefit people who will be born 100 years from now, when they are likely to have better technology to deal with a warmer world? Conversely, how can we perform “bad behavior” that will inevitably make the world a worse place for future generations to live in? How can we perform cost-benefit calculations that have time-dependence built in (that is, near-term effects are valued higher than far-term effects?) For me, a dollar twenty years from now has less value than a dollar today, and a dollar earned 100 years from now has zero value to me. However, to somebody who is 25 years old in 100 years, the relative utilities of those dollars would be very different.


It is likely that we will see some global-scale technology efforts aimed at attacking climate change. One example involves putting large mirrors in space to reduce the amount of solar radiation reaching the earth. Another is seeding the oceans with iron oxides in order to increase their capacity to store carbon. Yet another is carbon capture and sequestration, which involves storing carbon deep in the earth. All of these things are expensive, and all of them have potential adverse, unintended consequences that may cause more damage than good. How do we address these things on a global scale? Indeed, climate change is intrinsically a global issue, and we do not have a single global human institution with the power, money and authority to act upon climate change.

Many of the issues mentioned above have a common theme: uncertainty and it could be difficult to quantify the effects and timing and location and costs of climate change, and, as such, it is challenging to reach a meaningful consensus that we should do something as soon as possible. Thus, it is no longer an economic problem, but a political problem. At the end of the day, we have only one planet. You can argue any discount rate is low and unfair to undemine the problems that will be created for the next generations if we continue exploiting the resources in an unsustainable manner as we do. We may have to act now before it's too late, before we reach the irreversible point.