Abstract
Chapter 3 presents the economic rationale behind climate change and introduce the crucial concept of externalities. Using simple and tractable models, this chapter explains the key dynamics behind environmental pollutions and the tragedy of the commons plaguing the climate, the most iconic public good. The chapter then proceeds to detail the three key economic instruments to remedy the issue of climate pollution, taxes, subsidies and permits, detailing their respective advantages and limits. A special emphasis is put on the existence and influence of uncertainty, a central concept that prepares the key concepts of real options and environmental investments presented in Chap. 4. Finally, the chapter touches upon the complex relationship between economic growth and the environment and describes possible alternatives to mitigate climate while conserving economic momentum.
“Climate change, like other environmental problems, involves an externality: the emission of greenhouse gases damages others at no cost to the agent responsible for the emissions.”
Sir Nicolas Stern
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Notes
- 1.
Readers interested in a more detailed analysis should refer to Baumol and Oates (1988).
- 2.
The relationship between permit price and marginal abatement cost is based on strong assumptions. As presented in Chap. 5, in presence of uncertainties and asymmetries of information about the pollution levels, permit prices may differ from the marginal abatement cost.
- 3.
- 4.
Many economists and policy makers have long favored the use of a price instrument to control greenhouse gases because they are a stock pollutant and as such the marginal benefit of abatement is relatively flat. While the early literature on the problem is consistent with this view, the later literature is less categorical. It showed that the choice between a price or quantity control depends, in part, upon the assumption on the dynamic structure of cost uncertainty. For a discussion on the role of stocks and shocks concepts in the debate over price versus quantity we refer to Parsons and Taschini (2013) and references therein.
- 5.
Readers should refer to Montero (2008) for the version of the model with multiple firms.
- 6.
Readers interested by the full fledged model should refer to Aghion and Howitt (2009), p. 379.
- 7.
The supremum of S or sup(S) is defined to be the smallest real number that is greater than or equal to every number in S.
- 8.
- 9.
Copenhagen Accord, Conference of the Parties (COP-15), December 2009, articles 8 and 11 (http://unfccc.int/resource/docs/2009/cop15/eng/l07.pdf).
- 10.
The concept was formally defined by Weisbrod (1964).
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Chesney, M., Gheyssens, J., Taschini, L. (2013). The Economics of Mitigation Strategies. In: Environmental Finance and Investments. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-36623-9_4
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