Class 8

1. Class 8 a) Atmosphere & b) Environment and GDP http://www.agecon.purdue.edu/staff/shively/courses/AGEC406/index.htm

2. AGEC/FNR 406 LECTURE 18 What the ozone hole looks like to a statistician!

3. Atmospheric Change Two major issues 1. Ozone depletion in stratosphere 2. Global warming and climate change

4. Stock vs. Fund Pollutants 1. Fund pollutants: environment has some assimilative capacity 2. Stock pollutants: environment has little or no assimilative capacity Economic importance is that stock pollutants continue to accumulate or are persistent: the problem is dynamic not static

5. Issues in atmospheric change: 1. Activities affect basic chemistry 2. Pollutants accumulate 3. Effects are global 4. Economic impacts may be severe 5. Consequences are uncertain

6. Ozone depletion Main issue: Ozone in stratosphere blocks UV Depletion of ozone was predicted in 1974 Depletion was first observed in 1985 More UV means… - skin cancer - lower agricultural yields - mutation in phytoplankton

7. Ozone hole 1. Annual variation normal 2. Less ozone now

8. Source: British Antarctic Survey, data online at http://www.antarctica.ac.uk/met/jds/ozone/data/ZOZ5699.DAT

9. Ozone depletion: main cause Main cause of ozone depletion is worldwide use of fluorocarbons, especially cholorofluorocarbons (CFCs). CFCs are: catalysts to convert O3 (“ozone”) to O2inert, and therefore persistent

10. CFCs: main uses RefrigerationAir conditioningSpray propellantsFoam productionSolvents Ubiquitous in industry and consumer products in 1960s, 70s, and 80s.Main benefit: inert

11. Ozone depletion: consequences 1. More UV transmission 2. CFCs are greenhouse gases and therefore increase global warming 3. Less ozone has a cooling effect and therefore mitigates global warming Net effect on global warming ambiguous, but other negative effects are clear.

12. $ MDF MAC CFC emissions Ozone depletion: policy context The optimal level is near zero, so a ban is likely to be an efficient approach.

13. Montreal Protocol 1987 agreement signed by most nationsamended in 1990 and 1992 Called for complete elimination of CFCs:- in industrialized countries by 1996(done) - in developing countries by 2006(still in progress)

14. CFC replacements(hydrochloroflurocarbons) Two issues: 1. HCFCs are also ozone depleting 2. Economic incentives to develop recovery systems but… since CFCs are still available in less developed countries, an incentive for illegal importation exists.

15. What Progress?“Perhaps the single most successful international agreement to date has been the Montreal Protocol.”- Kofi Annan, Secretary General of the United Nations But…according to NASA, from September 21-30, 2006 the average area of the ozone hole was the largest ever observed, at 10.6 million square miles.

16. For more information, visit: http://www.theozonehole.com/montreal.htm www.atm.ch.cam.ac.uk/tour/ and www.ciesin.org/TG/PI/POLICY/montpro.html

17. Acid Rain Name derives from a chemical reaction between SO2 (sulfur dioxide) NO2 (nitrogen dioxide)andH2O (water)

18. Reaction leads to... • Creation of sulfuric and nitric acid, • which fall in the form of acidified rain(or snow or sleet).There are actually two forms of acid deposition: • wet deposition • dry deposition • http://www.epa.gov/airtrends/sulfur.html

19. http://www.epa.gov/air/emissions/so2.htm

20. Acid Deposition (Acid Rain) • Regional Pollutant • Effects felt over a broad geographic area. • Location important: Effects felt downwind of source. • Transboundarypollutant • Emitted in one country and transported across a national border to another country. • U.S. sulfur dioxide emissions responsible for 50-75% of acid deposition over most of eastern Canada. • Canada sulfur dioxide emissions responsible for < 5% of acid deposition in the U.S.

21. Acid rain impacts 1. Aquatic systems (-) 2. Forests (-) 3. Human health (-) 4. Visibility (-) 5. Agriculture (- /+) 6. Building materials (-)

22. Example TravelCost $250 Damage = Loss in consumer surplus. P = 250 -5Q $200 P = 200 -5Q 0 0 50 40 Number of visits

23. Damage and cost assessment Main issues: 1. Market and non-market effects 2. Chemical synergies + metals 3. “Common metric” problem Measurement and quantification of MAC is difficult due to interdependencies. Who benefits? Who should pay?

24. Actual policy in U.S. 1970-1990- uncertainty prevailed - Reagan administration stalled - EPA regulations focused on local effects which may have exacerbated problem 1990-present- Clean Air Act: marketable permits (1990) - NOXexcluded, 1-1 trading ignores location - SO2 falling but NO2 increasing

25. Why so long? Political concern regarding job lossesin coal-producing states (IN, IL, MI, OH) Local losses in high-sulfur coal stateswould be balanced by gains in low-sulfurcoal statesCosts of electricity would rise

26. Marketable Permits: Allowances • Emission standard set and number of permits determined. • Permits issued to polluters based on some allocation system. • Polluters allowed to trade permits. • Market should develop…

27. Why does trading work? • 1. If firm can cleanup at a price lower than the permit price, it will. • Low MAC firms sell permits • 2. If cleanup is costly then a firm will choose to buy a permit • High MAC firms buy permits • 3. Anyone who wants to can buy a permit.

28. GDP What doesn’t GDP measure? Non-marketed services are excludedDoes not accounts for depreciation of natural capital Example: Exxon Valdez oil spill

29. Three types of capital 1. Human 2. Human made 3. Natural The key issue from an environmental standpoint is whether these different forms of capital can be substituted

30. Alternatives to GDP 1. Net National Product (NNP) or Green GDP (gGDP)Accounts for depreciation of natural capital. 2. Index of environmental indicatorsAccounts for the fact that many benefits from environmental improvements are not accounted for in market transactions

31. International aspects of the environment 1. International public goods 2. Transfrontier pollution 3. Impact of environmental policy on trade 4. Impact of trade policy on environment

32. Global public goods Similar to national or local public goods:nonexcludable and nonrival in consumption, but production and consumption are separated by political border. Examples: The atmosphere and outer space Disease prevention Ecosystem services

33. Transfrontier Pollution Pollution that crosses an international political boundary Examples: Acid Rain Smoke from fires Water pollution in major river systems Important because applying economic incentives may be difficult -- but some hope for solutions based on tradable permits.

34. Environmental Policy and Trade Main concern is that a country’s environmental policies will reduce the country’s competitiveness and reduce its volume of exports. Three main linkages: 1. Cost of production 2. Incentives for relocation 3. Export of “green technologies”

35. Trade Policy and the Environment Trade policy is generally designed to promote exports and imports without regard to conditions of production. This often has the effect of undermining environmental goals (both domestic and international).

36. Trade Alliances North American Free Trade Agreement (NAFTA)US + Mexico + Canada General Agreement on Trade and Tariffs (GATT)Includes most countries

37. Why are Trade Alliances Important? They often specify that “unfair” barriers cannot be used to protect a country against imports. WTO has generally held restrictions on environmental grounds to be unfair. Examples: U.S. attempted tuna ban from Mexico (w/o “dolphin friendly” practices)

38. Conflict resolution? Free trade and environmental policies are both beneficial. A potential compromise would be to establish an international board to review cases and separate reasonable environmental barriers from phony barriers.