We have reached the point in the course where we begin to address some topical issues that are facing the energy business today and will continue to be major issues in the near future. Perhaps the largest issue facing the energy businesses today is that of climate change and carbon reduction. In this lesson, we will look at the greenhouse effect, why reducing emissions of carbon dioxide is such a large issue, what some of the controversies surrounding this issue are, and what are some of the things that can be done to reduce carbon emissions.
By the end of this lesson, you should be able to:
This lesson will take us one week to complete. Please refer to Canvas for specific time frames and due dates. There are a number of required activities in this lesson. The chart below provides an overview of those activities that must be submitted for this lesson. For assignment details, refer to the lesson page noted.
Requirements | Submitting Your Work |
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Reading: Indexed entry on "Global Warming" in the Gwartney et al. (no reading in Greenlaw et al.), and all required material linked to in the text of the lesson. | Not submitted |
Lesson Quiz and Homework | Submitted in Canvas |
We are now moving into the part of the course where we examine some topical issues in the area of energy and environmental economics. There is currently no issue in this sphere that is more topical, and of greater importance, than that of climate change. If you work, or desire to work, in the energy sector, it is safe to say that this will be the largest issue that you face. Regardless of one's stance on the issue, it is going to be there.
We will start by going through a few of the physical basics underpinning the concept of climate change. We will then examine some of the considerations that exist in this area.
The US Energy Information Administration and NASA have good pages regarding
Please read these.
The basics: we start with something called the Greenhouse Effect. Inbound solar radiation (energy from the sun) has short wavelengths and high energy contents. The wavelength is typically less than 4 µm. This energy, in the form of radiation, passes through the atmosphere. Some of the energy is absorbed by the ground, causing the ground to warm up (which, in turn, warms the air), and some of the energy is reflected back towards space. As it reflects off the earth’s surface, some of the energy is absorbed as heating and the resulting reflected radiation has lower energy levels and longer wavelengths, of 4-100 µm. The atmosphere is basically transparent to incoming radiation, letting about 50% through, but it is not transparent to the reflected waves, and about 80% of the outgoing radiation is trapped in the lower troposphere. The troposphere is the layer of the atmosphere closest to the earth's surface, extending up about 12 miles at the equator and about 4 miles at the poles. It is the layer of the atmosphere that contains clouds as well as most of the suspended particulate matter in the environment. The troposphere gets colder as you go upwards, which means that it is a very turbulent layer - because warm air rises, there is a lot of mixing in the troposphere.
As mentioned above, the troposphere is not transparent to the lower-energy reflected solar radiation, and more of this radiation is trapped in the troposphere. This energy sort of hits a roadblock, and just piles up. This extra energy causes the troposphere to warm up, which eventually causes warming of the surface. This is why it is called the "Greenhouse" effect: in a greenhouse, panes of glass stop heat from rising out of the building, keeping the inside warmer and allowing us to grow plants in cold weather. In the atmosphere, greenhouse gases serve as the equivalent of the pane of glass - causing warmth to be trapped beneath it. Just like in a glass greenhouse, the temperature underneath is warmer than it otherwise would be. Take the roof off your garden greenhouse and the inside will soon be at the same temperature as the outside. The same is true of the earth - if we did not have gases in the troposphere trapping solar radiation, our planet would be much colder. Scientists have calculated that without the greenhouse effect, the planet would have a mean temperature of about zero degrees Fahrenheit. However, with the naturally occurring layer of greenhouse gases, the average global temperature is about 60oF. That is, the natural greenhouse effect makes the planet livable for us - without it, much more of our surface, and especially much more of our surface water, would be frozen.
The Greenhouse Effect was first described by French scientist Joseph Fourier, and quantified by Swedish physicist Svante Arrhenius in the 1890s. If you take any 300-level courses in mathematics, physics, or chemistry, you will hear those names quite frequently. Most of the greenhouse effect comes from “naturally occurring” greenhouse gases, including water vapor and carbon dioxide.
So far, so good - the greenhouse effect is something good for mankind. What does this have to do with climate change and global warming? Well, for most of the time of recorded human history, we have had more or less the same levels of greenhouse effect, and the average temperature of the planet has been reasonably steady. The amounts of greenhouse gases have performed a bit of a balancing act - trapping enough radiation to keep the temperature at 60 degrees, letting the rest out. Carbon dioxide was released into the atmosphere by decaying and burning plant life, and CO2 was removed from the atmosphere by the growing of plants. There was a cycle that remained very stable over time. However, since the beginning of the Industrial Revolution in the 1800s, we have started burning fossil fuels - first coal, and then crude oil products and natural gas. Burning fossil fuels releases carbon dioxide that was previously locked away in coal or oil deposits for millions of years.
As we burn more fossil fuel, the atmospheric concentration of CO2 is increasing; the most recent observations at the Mauna Loa observatory in Hawaii have the levels at about 419 ppm in 2022 [4] (it was around 280 ppm about 150 years ago). At these levels, there is significant concern about trapping more outbound solar radiation, and thus warming the planet, with detrimental effects to many aspects of human life. This is referred to as “anthropogenic” global warming, with the word “anthropogenic” meaning “of human origin.” Intergovernmental Panel on Climate Change (IPCC), a group of 1,300 independent scientific experts from countries all over the world under the auspices of the United Nations, concluded that human activities have warmed the planet over the past 50 years, with more than 95% probability. It is estimated that anthropogenic greenhouse gases have led to an increase of a little over 1oF over the past century.
You should recognize this as a public goods problem: If we assume there is an "optimal" range of atmospheric CO2, then staying in this optimal range is a benefit that is neither rival or excludable - the benefits that I get from having an Earth at 60 degrees do not stop you from enjoying the same benefits, and nobody can force me to pay to keep the atmosphere at this level. We also have what appears to be a pretty large externality: by burning fossil fuel, private wealth is generated, both by the person burning the fuel, and by the person consuming the product of that burning fuel. The external effect is that greenhouse gas concentrations are rising, and these rising levels may cause a real deterioration in the quality of life for some people. The unusual thing about this externality is that the people benefiting from this private wealth creation are basically everybody alive today, and the people who will likely suffer are basically everybody who will be alive at some point in the future.
There is a variety of ways in which climate change can affect our existence on earth. Some of these effects are listed below.
Temperature rise causes changes to the earth’s atmosphere. As temperature has increased [5], the probability of extreme weather and climate events [6] occurrence, such as hurricane, severe storm, heat wave, flood, and drought, has gone up.
A rise in temperature will affect agriculture in several ways. Warmer weather will speed up the early development of plants, making it more difficult for plants to reach maturity - this is a phenomenon that I have discovered attempting to raise tomato seedlings in my basement - too much heat too early on, and the plants obtain energy from the heat in the ground, and do not develop sufficient leaves to allow them to use photosynthesis. Plants are generally closely adapted to their environments, and changes in the environment can stress plants in ways which upset the normal development of such plants. One plant that is grown in large amounts in the US that is susceptible to such stresses is corn, and it is forecast to be one of the plants hardest hit by a meaningful increase in temperatures. Another effect is on soil moisture - higher air temperatures mean more evaporation of water from soil, and drier soil supports less agriculture or, at least, different types of agriculture. Climate change will lengthen and improve growing seasons at higher latitudes, but greatly reduce yields in regions closer to the equator. The net effect is expected to be negative, at least in the near-term, as we would lose more arable farmland than we would gain. Global food yields under climate change have been modeled to be lower by 20% in the US and 7% in the world, with a wide distribution of changes on a country-by-country basis. I should reiterate that agriculture in some regions will exhibit gains in yield and productivity on a warmer planet, but these increases are not presumed by any serious modelers to be larger than the losses observed in other regions.
Like agriculture, a warmer planet will likely drive the forests more towards the poles and away from the equator. It would also likely change the composition of our forests. Some scientists have estimated that up to 40% of the biomass currently stored in trees in the US could be lost under a "doubling of carbon" scenario. The greatest economic effect would fall on the forestry industry and on sectors that consume wood products, such as construction.
There has not been much work done on quantification of the economic benefits of what is called "biodiversity", and the general effects of climate changes on many species are not known.
Global warming is expected to raise sea levels by melting of land-based glaciers, most specifically in Antarctica around the southern pole. Since the Northern icepack around the North Pole is floating ice, melting should not have a meaningful effect on water levels. Another source of sea-level rise is that water at higher temperatures expands. It has been estimated that under "business as usual" conditions, global temperatures could rise [7] by as much as 6oF by 2100, and this would cause an average sea level rise of 66 centimeters, or about two feet. There are costs assumed to be associated with construction required to protect low-lying areas from encroaching seawater, such as levees, dikes and seawalls. There will also be a significant effect on coastal freshwater wetlands and marshes which is significantly harder to quantify. Several poor nations have large populations that live at or near current sea level, the frequently cited example being Bangladesh, in which about 10,000 square miles of the country (about 15% of its land) would be lost to a 3-foot rise in the seas, with the subsequent displacement of 20 million people. Another country in jeopardy is the Maldives, a nation consisting of 1,200 islands in the Indian Ocean, in which the highest point is only 8 feet above sea level. Even a modest sea-level rise will put much of this nation underwater.
The EPA has estimated that the additional electricity that would be consumed for purposes of air conditioning under a 6oF temperature rise by 2050 would cost on the order of \$45 billion per year for additional fuel consumption and capital costs to build new power plants to meet the extra demand.
Other, less severe or harder-to-quantify costs include the costs of reduced human comfort, increased morbidity from disease caused by more insects carrying communicable diseases, migration costs from regions losing land to sea rise or reduced agriculture (and the related political difficulties that generally arise from mass migrations), costs from a hypothesized increase in the number of hurricanes, loss of leisure activities such as skiing, and stresses on the water supply.
A number of studies have been performed trying to estimate the costs of climate change. Needless to say, making such estimates requires a large number of assumptions, and involves a large degree of uncertainty. These studies typically claim that the costs of climate change, if we follow a "business as usual" approach, will be on the order of 1-3% of global GDP by mid-century. How big is this? Well, 2% of US GDP today is \$294 billion- less than \$1,000 per person per year, or about \$78 per month. While not a trivial amount, it is also far from our largest expenditures, such as defense, education, or health care.
A good summary can be found in this Christian Science Monitor article: Costs of Climate Change [8].
This article refers to a British Government study known as the Stern review, after its author. This is one of the most thorough recent reviews of the costs of climate change, and can be found here: Stern Review [9] or in the Penn State Library [10]. This is a 700-page report, so I cannot assign it here, but I strongly suggest you read the Short Executive Summary [11]. The Stern Review was not without its critics, and one of them was a critique written by Yale University forest economist Robert Mendelsohn [12].
Note: it is very likely that there will be some exam questions focusing on the readings listed above.
Like all public goods problems, and like most large-scale pollution-type externalities, we look to governments for solutions. This is because these problems have to be addressed collectively, and government is the way in which we act in a collective manner. The larger problem here is that climate change is not a regional or national concern, but a global concern, and there is no such thing as a global government.
In place of a global government, the governments of most countries in the world, acting together via the United Nations, have put together a group to study this issue and to make recommendations for addressing it. The body in question is called the Intergovernmental Panel on Climate Change, or the IPCC. This is a UN panel of scientists and policymakers who perform and collect scientific data and knowledge on this subject. The website for the IPCC can be found here [13].
The IPCC periodically publishes reports that attempt to define the current state of affairs with respect to climate change. The most recent summary report is called the Sixth Assessment report (AR6) [14].
If you have any interest in this issue whatsoever, or if you wish to be informed about it - and I firmly believe that it will be in your long-term benefit to be well informed - I strongly suggest that you read the Summary for Policymakers [15].
The details and questions around climate change are very political, an area I do not wish to get into here. I wish to address the economic effects of combating climate change on the energy industry.
The default assumption is that we need to reduce carbon emissions. This can be done by a command-and-control method, whereby CO2 producers are limited by their governments in how much they can emit, but this is generally thought to be generally ineffective. Instead, economics are to be employed: if we wish to lower the demand for something, we need to raise its cost of production. Thus, to lower the “demand” for carbon (which is really a demand for the things that are produced by processes that emit carbon, such as electricity and transportation), we need to increase its cost of production. Putting carbon into the environment is basically free, but if we can assign a cost to depositing carbon into the atmosphere, then there will be less carbon produced, and fewer carbon-producing goods will be consumed. Think of carbon production as a side-effect of economic activity: We burn fossil fuels to make things or to facilitate transportation, and based upon the aggregate of all of those private choices concerning consumption of goods and travel, some amount of carbon is deposited into the environment. We can call this the “private” quantity of carbon, because it is based upon a sum of private, individual consumption choices. However, this quantity of carbon is felt to have negative effects – the result of the aggregate of all of these private decisions is creating problems for some other members of society. In this case, the sum of carbon placed into the environment is thought to cause climate change. Thus, we need to reduce carbon output. We do not want to reduce it entirely, because the decrease in economic activity that would result from such a decision would harm human welfare more than having some amount of emissions. Our goal is to find some point where we balance the costs and benefits of carbon production. Using language that has been previously employed in this course, we are looking for the socially optimal amount of carbon emissions. We need to “internalize the externality” - some people call climate change the ultimate externality. We strive to make sure that the appropriate costs are applied to carbon – not just the private costs, but also the external social costs.
So how do we put a price on carbon? First, it is necessary to figure out how much carbon we want to put into the environment. When a number has been agreed upon, then a cost must be applied.
We can raise the cost of carbon by simply applying a tax to it. This is called the Pigouvian approach, named after Pigou, the economist who devised this idea. However, the application of a tax is not the optimal mechanism for incentivizing technology development. It is preferable to allow individuals to profit from the reduction of carbon, and the best way to do this is to adopt a Coasian property-rights approach. This method has been used successfully to address the problem of sulfur dioxide emissions in the US. A brief summary of this method is as follows:
The permit recipients can then either use the permits or trade them (Cap and Trade). A market for the permits is formed, and in this market, the people who value them the most will pay the highest price. This is the very definition of economic efficiency. It also means that there is an incentive to others to develop technology that would allow one to reduce carbon emissions at a cost lower than that of buying a permit, which spurs innovation and technological development. A permit system also allows something that a tax does not: an interested individual or group can purchase emission permits and then retire them without emitting carbon. This enables a real reduction in output if there are enough groups of people willing to “put their money where their mouth is”.
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 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 [16]) 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.
For more background on the Kyoto Protocol see United Nations Framework Convention on Climate Change's page on Kyoto Protocol [17] or the Wikipedia page on Kyoto Protocol [18].
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.
The Paris agreement is explained in more detail on United Nations Framework Convention on Climate Change (UNFCCC) [19].
I will now attempt to list and briefly describe some of the major points in the climate change discussion.
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.
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.
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.
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.
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.
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.
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?
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.
Regardless of what economic or political mechanisms are put into place, if any policy is enacted, then, at the end of the day, actions will have to be taken to reduce carbon emissions. I wish to briefly look at some of the things we can do to reduce carbon emissions from fossil fuel combustion.
We burn fossil fuels for three basic reasons: to heat spaces, such as homes and offices; to transport things, such as people and cargo; and to generate electricity, which is then used to heat things or move things.
About 90% [20] of the coal we burn in the US is used to generate electricity. The rest is burned in industrial applications like steel making. We consume approximately 0.5 billion tons of coal per year in the United States. Note that lower emission and significant recent drop in the natural gas price [21] have created incentive for the power generation sector to switch to natural gas.
About 70% of crude oil is refined into products that are used for transportation, in the forms of gasoline, diesel fuel, and jet fuel. Oil products are, by far, our largest source of transportation energy. The rest is used for home heating, generating electricity, and as feed stocks for plastics and other materials, like asphalt. We consume about 20 million barrels per day of crude oil.
Natural gas is used in three sectors, in approximately equal shares. It is used in residences and businesses for space heat, it is used in industries for process heat (i.e., as part of a production process), and it is burned in power plants to generate electricity. We consume about 32 trillion cubic feet of gas per year.
The amount of carbon dioxide put out by burning a certain amount of fossil fuel is called the carbon intensity:
The Kyoto Protocol had a goal of reducing carbon output to 95% of 1990 levels by 2012. That is, for every ton put out in 1990, the goal was to put out 0.95 tons in 2012. For comparison, the United States saw emissions rise by 7% from 1990 to 2009, so reducing to 95% of 1990 levels would be the same as reducing "business as usual" 2012 numbers by perhaps 15-20%.
As can be seen from the above intensity data, natural gas puts out less CO2 per ton than other fossil fuels. Thus, switching to gas from oil and coal is one way to reduce carbon emissions. Note that due to the extraction from abundant unconventional shale gas reservoirs during the past decade, natural gas price has been decreased significantly, which made the transition from coal to natural gas more convenient for the industry and the economy.
We can replace carbon-creating energy sources with carbon-free ones. Alternatives include hydroelectric power (dams), nuclear power, wind, solar, geothermal, and tidal energy. Recently, methane emissions captured from agriculture, landfills, and coal mines are also being utilized. Most of these are for electricity-generating purposes and do not address transport fuel needs.
This is another way of talking about what are called bio-fuels: fuels made from plants. As the carbon that forms part of the plant came from the environment, burning plants is what is called "carbon-neutral" - we are simply cycling the carbon from the air to the plants to the combustion process, which puts the carbon back in the air, and so on.
We can choose to use less energy in our daily lives. This can be thought of as a type of factor substitution - when looking at factors of production, we can sometimes substitute one for another. For example, if I add insulation to my house, I am substituting capital for energy. If I purchase a smaller car that gets better mileage, I am investing in more capital in order to reduce my consumption of energy. This is likely to be one of the largest sources of carbon reduction.
This is a bit like energy efficiency, but it means that instead of employing more energy-efficient capital, I simply perform less of the actions that consume energy. This could mean driving less - maybe I will go on driving vacations less frequently, or maybe walk to work. Maybe it means that I go without air conditioning in the summer by raising my thermostat, or using less heat in the winter by wearing a sweater inside.
This involves capturing the carbon before it gets into the environment and storing it in the underground formations.
We will examine the costs of some of these strategies in next week's lesson.
In this lesson, we looked at what is likely to be the largest issue facing the energy business over the next quarter-century - the issue of climate change and carbon reduction. We looked at the basic physics of the greenhouse effect, and why carbon emissions from fossil-fuel combustion may be causing undesirable changes in the earth's atmosphere. We looked at the public goods/market failure aspects of carbon emissions, and looked at some of the policy options available to address this issue. We examined several controversies and contentious issues surrounding carbon reduction policy, and then we examined some of the strategies for reducing carbon output.
If you log in to Canvas, you will find the task to be completed for this lesson: an online multiple choice quiz.
You have reached the end of Lesson 10! Double check the list of requirements on the first page of this lesson to make sure you have completed all of the activities listed there.
If you have anything you'd like to comment on or add to the lesson materials, feel free to post your thoughts in the discussion forum in Canvas. For example, if there was a point that you had trouble understanding, ask about it.
Links
[1] http://www.eia.gov/energyexplained/index.cfm?page=environment_about_ghg
[2] https://climate.nasa.gov/causes/
[3] https://climate.nasa.gov/effects/
[4] https://www.esrl.noaa.gov/gmd/ccgg/trends/
[5] https://earthobservatory.nasa.gov/world-of-change/global-temperatures
[6] https://nca2014.globalchange.gov/highlights/report-findings/extreme-weather
[7] https://climate.nasa.gov/news/2943/study-confirms-climate-models-are-getting-future-warming-projections-right/
[8] http://www.csmonitor.com/Environment/Bright-Green/2010/0104/The-comparative-costs-of-climate-change
[9] https://biotech.law.lsu.edu/blog/sternreview_report_complete.pdf
[10] https://catalog.libraries.psu.edu/catalog/34844443
[11] http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/CLOSED_SHORT_executive_summary.pdf
[12] https://resources.environment.yale.edu/files/biblio/YaleFES-00000260.pdf
[13] http://www.ipcc.ch/
[14] https://www.ipcc.ch/assessment-report/ar6/
[15] https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM_final.pdf
[16] https://www.rggi.org/
[17] http://unfccc.int/kyoto_protocol/items/2830.php
[18] http://en.wikipedia.org/wiki/Kyoto_Protocol
[19] https://unfccc.int/process-and-meetings/the-paris-agreement/what-is-the-paris-agreement
[20] https://www.eia.gov/energyexplained/us-energy-facts/
[21] https://www.eia.gov/dnav/ng/hist/rngwhhdm.htm
[22] https://www.netl.doe.gov/research/coal/carbon-storage/carbon-storage-faqs/what-is-carbon-storage