2 00:00:06,840 --> 00:00:14,040 The economics of climate change are driven 4 00:00:14,040 --> 00:00:17,700 by phenomenon known as the tragedy of the commons. 5 00:00:17,700 --> 00:00:22,010 Picture a common yard, 6 00:00:22,010 --> 00:00:26,880 in a village, that farmers could graze their sheep on. 7 00:00:26,880 --> 00:00:32,860 I made up a story about sheep to illustrate this idea. 8 00:00:32,860 --> 00:00:35,370 Let's say that the amount of lamb 9 00:00:35,370 --> 00:00:39,140 chops you could get per sheep decreases as 10 00:00:39,140 --> 00:00:44,050 the population of sheep on the common ground increases. 11 00:00:44,050 --> 00:00:48,540 But the total amount of lamb chops you get, is the lamb chops per 12 00:00:48,540 --> 00:00:52,950 sheep times the number of sheep, and that gives you a function that looks like this. 13 00:00:52,950 --> 00:00:55,870 It says that there's an optimum number of sheep that you 14 00:00:55,870 --> 00:01:01,080 could graze on this yard that would provide the most food for everybody. 15 00:01:01,080 --> 00:01:05,390 But the thing is, if you have one sheep and there's already, say, eight on 16 00:01:05,390 --> 00:01:10,720 this yard, and you add one more sheep, the yield from everybody's sheep goes down. 17 00:01:10,720 --> 00:01:12,690 But you now have two sheep, and so 18 00:01:12,690 --> 00:01:17,090 it's in your individual interest to continue to add 19 00:01:17,090 --> 00:01:21,790 more sheep to this common area long past the 20 00:01:21,790 --> 00:01:25,525 optimum number of sheep for the total yield. 22 00:01:29,260 --> 00:01:35,310 Another way of describing this economically is as an external cost. 23 00:01:35,310 --> 00:01:41,410 External means that the cost is not being paid for by the decision-maker. 24 00:01:41,410 --> 00:01:44,659 I have to decide whether to put another sheep in there. 25 00:01:45,860 --> 00:01:50,450 so I just do the calculation based on the 26 00:01:50,450 --> 00:01:52,320 what I have to pay and what I get out of it. 27 00:01:52,320 --> 00:01:54,420 If I am not paying for the damage 28 00:01:54,420 --> 00:01:56,930 to the common, I won't take that into account. 29 00:01:56,930 --> 00:02:02,720 That leads to a distortion of the market, because the true 30 00:02:02,720 --> 00:02:07,990 costs of the decision are not being paid by the person who's making the decision. 31 00:02:09,330 --> 00:02:17,210 The way to address this in economic framework is to internalize the cost, 32 00:02:17,210 --> 00:02:19,700 which means to make the person who's making the decision 33 00:02:19,700 --> 00:02:22,330 pay for it, rather than leaving it for everybody to pay for. 34 00:02:22,330 --> 00:02:26,270 And there's two strategies that are being proposed to 35 00:02:26,270 --> 00:02:31,190 internalize the cost of environmental damage by releasing CO2. 36 00:02:31,190 --> 00:02:36,210 One is a carbon tax, and the other is a scheme called cap and trade. 37 00:02:36,210 --> 00:02:44,790 In cap and trade, the idea is that the governing agency sets the amount of 39 00:02:44,790 --> 00:02:48,800 emissions that they are willing to allow, and then they allow 40 00:02:48,800 --> 00:02:53,960 people to buy and sell the right to emit that carbon. 41 00:02:53,960 --> 00:02:58,740 The advantage is that this allows the market to 42 00:02:58,740 --> 00:03:03,950 find the cheapest way to meet the obligation to decrease the emission. 43 00:03:03,950 --> 00:03:06,520 We have a cap and trade system going 44 00:03:06,520 --> 00:03:11,070 in the U.S. to control SO2 emissions that lead to acid rain. 46 00:03:11,070 --> 00:03:14,480 And it turned out to be wildly cheaper than 47 00:03:14,480 --> 00:03:18,902 anybody had predicted in advance, to cut those emissions. 48 00:03:18,902 --> 00:03:24,250 The advantage of a 49 00:03:24,250 --> 00:03:29,770 tax scheme is that the price of carbon is controlled, and therefore you 50 00:03:29,770 --> 00:03:35,400 can budget for it in the future. Whereas the price for emission permits, 51 00:03:35,400 --> 00:03:38,000 in the cap and trade scheme, where you're buying 52 00:03:38,000 --> 00:03:41,920 and selling these emission permits, is floating. 53 00:03:41,920 --> 00:03:45,460 And so it's more difficult to know what the costs 54 00:03:45,460 --> 00:03:47,940 are going to be next year and the year after that. 55 00:03:47,940 --> 00:03:51,410 And makes it harder for the financial interests 56 00:03:51,410 --> 00:03:54,600 in the company to decide whether to actually invest 57 00:03:54,600 --> 00:03:58,150 in CO2 scrubbing equipment for example, or whether 58 00:03:58,150 --> 00:04:00,820 to just pay for the the permits 59 00:04:00,820 --> 00:04:02,366 in the future. 60 00:04:02,366 --> 00:04:07,710 A tax, I've also heard the argument, would be easier to implement 61 00:04:07,710 --> 00:04:10,710 because the carbon could be taxed 62 00:04:10,710 --> 00:04:13,030 at the source, at the coal mine, 63 00:04:13,030 --> 00:04:18,150 rather than cap and trade, you're trying to tax end users. 64 00:04:19,440 --> 00:04:21,440 The advantage of cap and trade might be 65 00:04:21,440 --> 00:04:26,440 that the actual emissions are controlled, 66 00:04:26,440 --> 00:04:29,670 but a carbon tax could also be tuned up and down 67 00:04:29,670 --> 00:04:32,590 to get emissions down to what you want them to be. 68 00:04:32,590 --> 00:04:38,110 Basically, as far as I am concerned, for what that's 69 00:04:38,110 --> 00:04:40,270 worth, either one of these would be a fabulous thing. 70 00:04:44,090 --> 00:04:48,620 Another issue that comes up in the economic discussion of 71 00:04:48,620 --> 00:04:51,780 climate change is an idea known as the discount rate. 72 00:04:51,780 --> 00:04:56,250 This is based on the idea that you could put money into some sort 73 00:04:56,250 --> 00:05:02,090 of a bank account that yields interest and that money will grow through time. 74 00:05:02,090 --> 00:05:09,750 Let's say you have an option to pay $100 now or 75 00:05:09,750 --> 00:05:12,930 you could put that money in the bank now, 76 00:05:12,930 --> 00:05:17,320 and then you could pay $135 in ten years. 77 00:05:17,320 --> 00:05:21,510 If you're trying to decide whether to fix your roof 78 00:05:21,510 --> 00:05:24,300 now or fix it in ten years, this 79 00:05:24,300 --> 00:05:27,590 is a perfectly reasonable way think about it. 80 00:05:29,090 --> 00:05:31,410 The problem comes in when the 81 00:05:31,410 --> 00:05:36,160 time frame extends beyond an individual lifetime. 82 00:05:36,160 --> 00:05:39,360 For one thing, the growth just gets 83 00:05:39,360 --> 00:05:42,220 crazy if you talk about a hundred years instead. 84 00:05:44,040 --> 00:05:46,140 an obligation in a hundred years, like 85 00:05:46,140 --> 00:05:48,470 climate change is an obligation that somebody would 86 00:05:48,470 --> 00:05:55,150 have to pay for, shrinks down to almost nothing if it's too far into the future. 87 00:05:55,150 --> 00:05:58,020 And it's kind of silly, nobody's going to put $5 in the bank 88 00:05:58,020 --> 00:06:01,200 and let it sit there for a hundred years, but this does 89 00:06:01,200 --> 00:06:04,910 describe the way that money tends to flow. 90 00:06:04,910 --> 00:06:08,010 Like, water flows downhill, money flows 91 00:06:08,010 --> 00:06:12,090 toward a short-term gain, because of this, 92 00:06:14,500 --> 00:06:15,210 this phenomenon. 93 00:06:17,640 --> 00:06:22,640 But weighing the costs of climate change versus the costs of 94 00:06:22,640 --> 00:06:28,480 mitigating climate change is kind of fraught with an ethical problem. 95 00:06:28,480 --> 00:06:32,000 In that it's not the same people who are paying for the 96 00:06:32,000 --> 00:06:37,610 climate damages, as the people who are benefiting from using fossil fuels. 97 00:06:37,610 --> 00:06:44,290 It's basically like saying, I'll save $5 today, and you can pay $100 later. 98 00:06:44,290 --> 00:06:50,810 It loses the ethical justification of the way this worked on 99 00:06:50,810 --> 00:06:54,400 a short time, if you're trying to decide whether to fix your roof in ten years. 100 00:06:54,400 --> 00:06:59,610 Basically, applying a discount rate over long time scales like this is 101 00:06:59,610 --> 00:07:03,505 assuming that people live forever, and that's just you know, not on. 103 00:07:08,220 --> 00:07:14,680 I would close by giving the encouraging perspective that most of the 104 00:07:14,680 --> 00:07:18,640 carbon will really concerned about in changing 105 00:07:18,640 --> 00:07:21,270 Earth's climate, is still in the ground. 106 00:07:21,270 --> 00:07:25,190 We've burned about 300 gigatons 107 00:07:25,190 --> 00:07:28,290 of fossil fuel and 200 gigatons of trees we've cut down. 108 00:07:28,290 --> 00:07:33,380 That's about 500 gigatons of carbon. That's enough to raise 109 00:07:33,380 --> 00:07:36,090 the earth's temperature eventually by about 1 degree C. 110 00:07:36,090 --> 00:07:38,940 Which is not a disaster yet. 111 00:07:40,330 --> 00:07:45,790 But if we keep going, we start getting into warming unlike 112 00:07:45,790 --> 00:07:51,940 any the earth has seen in millions of years and this is bad. 113 00:07:51,940 --> 00:07:54,990 But most of the carbon that we're worried about is 114 00:07:54,990 --> 00:07:59,050 still in the ground, so the world is only in 115 00:07:59,050 --> 00:08:03,320 trouble if we continue to decide to make it so. 116 00:08:03,320 --> 00:08:06,850 And also, most of the carbon that we're worried about is coal. 117 00:08:06,850 --> 00:08:09,935 If you are concerned about driving 118 00:08:09,935 --> 00:08:12,610 funny-looking little cars or something like that, 119 00:08:12,610 --> 00:08:15,780 You can realize that there's not really that much oil 120 00:08:15,780 --> 00:08:20,090 and natural gas in the traditional forms in the ground anyway. 121 00:08:20,090 --> 00:08:22,760 A few hundred gigatons of each maybe. 122 00:08:22,760 --> 00:08:28,070 To really torch the planet requires getting into that coal. 124 00:08:28,070 --> 00:08:32,740 And, my feeling is that if we simply had no more coal, if we just 125 00:08:32,740 --> 00:08:34,220 ran out, if that was the hand we 126 00:08:34,220 --> 00:08:37,110 were dealt, it wouldn't be an existential threat. 127 00:08:37,110 --> 00:08:39,050 We wouldn't be going back to live like 128 00:08:39,050 --> 00:08:42,660 the Flintstones, it would just be a business opportunity. 129 00:08:42,660 --> 00:08:45,060 The only hard part here is to make the decision.