Climate Change & Economic Impacts

This assignment delves into the complex relationship between climate change and economic factors. It explores non-renewable resources, endogenous growth, environmental policies, and the economic externalities associated with global warming. The assignment encourages critical analysis of climate models, the effectiveness of carbon pricing mechanisms, and the broader economic consequences of inaction on climate change.

Running head: ASSIGNMENT ON ECONOMICS
Assignment on Economics
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction:....................................................................................................................................2
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................3
Answer 4:.......................................................................................................................................10
Answer 5:.......................................................................................................................................12
References......................................................................................................................................15

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Introduction:
In the recent period, one of the major issues of concern, which has been bothering the
environmentalists, global leaders and researchers for quite some time, is the issue of global
warming. The term “global warming” per se refers to the increase in the average temperature
across the globe, the pace getting increased with time. The impacts of this upward trend of global
temperature change, as is being speculated by many, are mostly negative. The impacts range
from short term changes and turmoil in the climatic conditions to long term changes, mostly
adverse, in demography, climatic conditions and overall way of living of the live forms,
including human beings (Caney 2014, pp. 320-342). The primary reason of this phenomenon, as
being argued by different environmentalists and scientists, is the unusual emission of greenhouse
gases, including carbon dioxide, over the years, much of which has been due to the human
activities. The assignment discusses this issue, based on the article by Kenneth J. Arrow, named
“Global Climate Change: A Challenge to Policy” and tries to analyze the ongoing debate
regarding global warming, with the help of certain significant questions (Arrow 2007).
Answer 1:
The article, by Arrow, shed light on the pertinent issue of worldwide concern that is the
issue o global warming. With substantial proof of the existence of global warming, there are
several projections made by the environmental researchers, regarding the impacts of this
phenomenon on the overall condition of the earth in the coming years. There has been significant
debate regarding the nature and the magnitude of effect of this phenomenon and the cost that has

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to be borne by human kind and when it has to be borne. The article, with support from other
research findings and data, speaks in support of implementations of restrictive measures on the
emission of greenhouse gases, especially carbon dioxide, to avert future catastrophe. The author
attributes much of the increase in the global mean temperature to the increase in the proportion
of trace gases in the atmosphere. The article also tries show the increase in the pace of the
concerned emission, especially with the initiation of the Industrial Revolution. With the cost-
benefit approach, it tries to analyze the feasibility of introducing controlling measures on CO2
emission (Ring et. al. 2012, p. 401).
Answer 2:
Kenneth J. Arrow, in the article, strongly argues in favor of the need to implement
restrictive norms on the emission of carbon dioxide and other greenhouses gases, at a global
level. According to him, though the implementation of such measures may lead to a trade of
present consumption and level of welfare and the future well being, it is utmost necessary to take
these steps in order to avoid the unpleasant consequences in near as well as not so near future
(Arrow 2007). To support this argument, several valid reasons can be put forward and
elaborated in the following sections:
The global warming has been primarily caused by the emission of the greenhouse gases
like nitrous oxide, methane and carbon dioxide, the last one being emitted both naturally as well
as through human activities over centuries. Together, these greenhouse gases add to the
percentage of the amount of trace gases, present in the atmosphere of the world (Hansen, Sato &
Ruedy 2012, pp. E2415-E2423). The inherent property of these trace gases is that, though they

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do not absorb the radiations at high frequencies, they tend to do so at lower frequencies, thereby
getting heated up and contributing to the increase in the average temperature of the earth. Carbon
dioxide forms one of the key components of these trace gases and the level of carbon dioxide has
been significantly and consistently increasing from the time of existence of human beings on
earth. The increase gained more pace, after the initiation of the phenomenon of the Industrial
Revolution, with which machines and technological innovations gained impetus, thereby
contributing significantly to the emissions of CO2 (Keohane & Olmstead 2016, pp. 1-10).
Figure 1: Carbon Emission over decades
(Source: Scienceblogs.com, 2017)
The above figure clearly shows this trend of increase in the pace of carbon emission post
Industrial Revolution, with the emissions of the same amounting to almost eight thousand of
million metric tons in 2001. The effect of this huge rate of carbon emission on the global
temperature dynamics can be seen with the help of the graph given below:

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Figure 2: Relation between CO2 emission and temperature rise
(Source: Scienceblogs.com, 2017)
Figure 2 shows the direct and clear positive relationship between the increase in the
emission of carbon dioxide and the corresponding increase in the levels of temperature around
the world, thereby giving substantial support to the argument that has been put forward by the
author.
The emissions, which were at the levels of 280 ppm prior to the Industrial Revolution,
increased to as high as 430 ppm after it and with the current trends continuing, is expected to
reach till 550 ppm in no time (by 2035). The level will be twice of that prevailing before the
occurrence of the Industrial Revolution. The global temperature, with the projected increase in
the carbon emission levels, is expected to increase by 2 degree centigrade in no time and by
2100, it is expected to increase by five degrees (Intergovernmental Panel on Climate Change
2014).

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The constant increase in the temperature levels and the projected threat of even more
elevation, poses a direct threat on the sea-levels of the world, as with temperature increase, the
glacial reserves are melting and many of the huge ones are at threat to see extinction, thereby
rising the sea-level substantially. This can be seen from the following figure, which shows the
change in the trend of the sea levels over centuries:
Figure 3: Change in the sea level over centuries
(Source: Climatecentral.org, 2017)
The above figure shows a striking increase in the sea level of the world, by the twentieth
century, which goes at par with the projections, as put forward by the author. If the current
trends are not restricted, much of the populous land masses of the world is subjected to the threat
of future extinction, including huge parts of countries like Bangladesh ad highly populated areas
like Manhattan, which are c lose to seas and have low sea levels. The climatic pattern of the

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world is also expected to see a major shift in nature, with the tropical storms becoming more
adverse in strength and frequencies. Many countries like those of the European countries faces
the threat of experiencing Greenland like climate in the near future, with the current pace of
global warming continuing (Schaeffer et. al. 2012, p. 867).
Global Warming and Market Failure:
Market failure, in terms of economics, refers to the situation of a market, which does not
maximize the welfare of society as a whole. This economic concept can be linked to the
concerned discussion. The fruit of the phenomenon of Industrial Revolution, which is considered
to be one of the primary influencing factors, in the increase in the carbon emission levels, has
been primarily enjoyed by the contemporary economic giants and highly developed countries
(Keohane & Olmstead 2016, pp. 1-10).
These countries were at developing state during that time and as a result, in the absence
of awareness and restrictions on carbon emission levels, took full advantage of this technological
progress and grew fast until they reached the current sustainable state. This growth of the
developed nations, however, came at the cost of the progress of the current developing and less
developed countries, which are facing the trade –off between their own economic progress and
the overall well being of the future generations. This implies that the cost of global warming,
though logically should be borne by the developed countries, are being borne by the developing
ones. This indicates towards the presence of market failure in this aspect (Rezai, Foley & Taylor
2016, pp. 447-470).

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Solutions to the problem:
With global warming posing as a credible threat to the world, few measures can prove to
be feasible and show potential in mitigating the problem to some extent, few of which are
discussed as follows:
a) One of the primary ways of lessening the problem of carbon emission and global warming is
replacing the usage of high carbon emitting non-renewable fossil fuels with those of the
renewable ones, which emits much lesser carbon (Yamin 2012, pp. 11-12).
b) Awareness regarding the negative effects of global warming across the globe and how people
can combat this problem across the globe, is required to be uniformly generated among people of
all socio-economic strata (Halkos 2014).
c) Technological innovations, which are pro-conservation and are less energy emitting, are of
immense importance. Emphasize should be on these innovations and uniform implementations of
these technologies in all the countries, irrespective of the economic status of the countries
(Weitzman 2014, pp. 29-49).
d) The ones, which have enjoyed the fruits of the Industrial Revolution, that is the highly
developed and industrialized countries, should take the initiative in this aspect and take
restrictive measures on their own carbon emission, thereby setting examples for the other
countries (Halkos 2014).

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Answer 3:
The article, tries to analyze the need for the implementations of restrictive policies
regarding carbon emissions, with priority, with the help of cost-benefit framework, for which the
following equation is considered:
δ = ρ+gη
The symbol δ signifies the consumption discount rate. Higher the value of this indicator,
higher is the preference of the concerned individual or society to increase the current welfare
over future welfare and consumption levels. On the other hand, ρ can be defined as the rate of
time preference, which is a symbol of trade-off between current and future levels of preferences.
Higher ρ implies higher preference of present over future (Revesz et. al. 2014, pp. 173-175).
The term g, in the above equation signifies the expected growth rate of average consumption and
η shows the elasticity of social weight due to consumption level changes. This term is similar to
that of diminishing marginal utility.
Economic intuition behind the equation:
The two contributing factors of the above equation have different economic
interpretations. The ρ term is positively related to the discount rate, as with the increase in the
former, current consumption also tends to increase. Again, the terms gη, cumulatively shows the
change n the value of δ, with change in the average consumption, provided with an increase in
the value of g, the value of η tends to decrease (Goulder & WILLIAMS III 2012, p. 1250024).
The critique argues that uncertainty occurring in g can lead to a fall in the value of the
consumption discount rate. However, this may not be the case in a generalized framework, as

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with more uncertainty in g, people will try to maximize their current welfare, as future
consumption growth is becoming unsure to them.
Keeping in mind, the present scenario of credible threats of global warming, if a country
is seen t have low value of the term δ, then that implies that the country gives more importance t
future welfare as compared to the current satisfaction levels. This, in other words, means that the
country can take up significant controlling measures to reduce the levels of carbon emission, to
protect their future welfare from the projected threats of catastrophe. The country is expected to
be in favor of restricting and reducing global warming (Goulder and WILLIAMS III 2012, p.
1250024).
Answer 4:
In his article, Adam Morton, discusses about the current crisis that is being faced by the
residents of Australia, due to a striking upward trend in the prices of the power resources in the
country. The country has been experiencing a consistently increasing price trend in this sector;
with the price becoming almost twice after the government axed the carbon taxes:

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Figure 4: Changes in the prices of electricity in Australia
(Source: Smh.com.au, 2017)
As is evident from the above figure, the hike in the prices of electricity has been
substantial in the recent period. The primary reasons behind this hike in the price levels may
have been the huge rise in the prices of natural gas, which is one of the key alternative sources of
renewable energy and the presence of considerable uncertainty and doubts regarding the
conditions of investment I the power sector of the country. The new and modern technology
augmented power plants, have been center of immense interest in the country as they are
expected to displace the traditional source of power, the coal factories, which are expected to
stop operating in the near future. However, there are substantial doubts regarding how these new
power plants will perform and what their future profitability and prospects are. This uncertainty,
in its turn, has made the investors skeptic and the sector, as a result is facing unsure situations
regarding the future investment scenario (Weitzman 2014, pp. 29-49).

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The hike in the price of gases has also led to significant increase of concern and unrest
among the residents of the country. In face of such a crisis, the Australian government, who
previously pledged to take up highly corrective and environment friendly measures, of achieving
a target of replacing half of the total energy consumption with renewable sources of energy, is
now having second thoughts regarding this target. This behavioral change of the policy makers
and the residents directly imply that with future uncertainties, the consumption discount rate of
the country is expected to increase (Che & Kompas 2014).
The residents, for example are already putting pressure on the government to reduce the
price levels of power resources, as electricity and power being necessary commodities, the prices
are directly hurting them. In this situation, if the prices cannot be reduced in a short span of time,
the government may be forced to bring back the traditional energy resources, even at the cost of
welfare of the future generations (Hardisty, Appelt & Weber 2013, pp. 348-361).
The above phenomenon shows the inherent risk averse nature of human beings, who, in
presence of future uncertainties, attaches more importance to their current consumption levels
and current welfare, knowing that their preference of current welfare may come at the cost of
welfare of the future generations.
Answer 5:
The article uses the consumption discount rate equation,
δ = ρ+gη

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Here, the time preference variable ρ, shows the preference of an individual or the society
between current and future well being. Higher value of this variable indicates higher preference
of current welfare over that of the future consumption and welfare. Therefore, with a high value
of the time preference rate indicator, the consumption discount rate is also expected to be high,
which indirectly implies that the concerned individual or country is less bothered about the
welfare of the future generations (Hong 2013).
The current incident of withdrawal of the United States of America, under the current
President, Mr. Donald Trump, from the Paris Climate Accord, can be related with the above
discussion regarding the time preference rate and is expected to have significant implications on
the coming climatic and environmental conditions of the country as well as on earth as a whole.
The accord was mainly formed with the objective to mitigate the issues regarding global climatic
deterioration and global warming (Bodansky 2016, pp. 288-319).
The USA has been considered as one of the primary developed nations as well as one of
the highest contributors in the carbon emission scenario of the world, over decades. The country
contributes more than 25 per cent of the total carbon emission that takes place globally and much
of its current sustainability has come at the cost of welfare and economic growth of the
contemporary less developed countries. Therefore, in the current threatening environmental
scenario, controlling the carbon emitting activities, on part of the USA, would have been a highly
beneficial step not only for the country, but also for the world as a whole as the strategies taken
by the country alone can significantly influence the global climatic scenario (Leiserowitz et. al.
2013, pp. 1-3).

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In this context, the withdrawal of the country from the Climate Accord of Paris indicates
towards the fact that the country is not so much eager to impose restrictions on the carbon
emission activities to address the situation of the increasing crisis of global warming. Given a
chance, residents of the country will mostly choose to maximize the current welfare and
consumption even if it comes at the cost of welfare reduction of the future generations. This
indicates that with the withdrawal of the country form the climate accord, the variable of time
preference rate of the country is expected to increase (Pindyck 2013, pp. 860-872). This, in its
turn, is expected to increase the consumption discount rate of the country significantly, as with
higher time preference; people will tend to assign more weight to the current consumption and
welfare level than to the welfare levels of future.
The USA, being one of the biggest contributors in the carbon dioxide emission aspect, in
the global level, the increase in the value of their consumption discount rate, alone, will lead to
an increase in the value of the same indicator for the world as a whole. This indicates that, with
the withdrawal of the country from the climate accord of Paris, the consumption discount
indicator of the world is expected to increase, thereby indicating towards possible increase in the
extent of global warming problem in the years to come (Bodansky 2016).

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References
Arrow, K.J 2007, ‘Global climate change: A challenge to policy’, The Economists' Voice, 4(3).
Bodansky, D 2016, ‘The Paris climate change agreement: a new hope?’, American Journal of
International Law, 110(2), pp.288-319.
Caney, S 2014, ‘Climate change, intergenerational equity and the social discount rate’, Politics,
Philosophy & Economics, 13(4), pp.320-342.
Che, T.N & Kompas, T 2014, ‘The Structure and Dynamics of Liquefied Natural Gas Pricing in
Asia and the Pacific and Implications for Australia’.
Climatecentral.org, J. (2017). Study Reveals Stunning Acceleration of Sea Level Rise. [online]
Climatecentral.org. Available at: http://www.climatecentral.org/news/study-reveals-acceleration-
of-sea-level-rise-20055 [Accessed 3 Sep. 2017].
Goulder, L.H & WILLIAMS III, R.C 2012, ‘The choice of discount rate for climate change
policy evaluation’, Climate Change Economics, 3(04), p.1250024.
Halkos, G 2014, The Economics of Climate Change Policy: Critical review and future policy
directions.
Hansen, J, Sato, M & Ruedy, R 2012, ‘Perception of climate change’, Proceedings of the
National Academy of Sciences, 109(37), pp.E2415-E2423.
Hardisty, D.J, Appelt, K.C & Weber, E.U 2013, ‘Good or bad, we want it now: Fixed‐cost
present bias for gains and losses explains magnitude asymmetries in intertemporal
choice’, Journal of Behavioral Decision Making, 26(4), pp.348-361.

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Hong, Y.A 2013, ‘Non-renewable Resources, Endogenous Growth, and Environmental Policy’
(Doctoral dissertation).
Intergovernmental Panel on Climate Change 2014, ‘Climate Change 2014–Impacts, Adaptation
and Vulnerability: Regional Aspects’, Cambridge University Press.
Keohane, N.O & Olmstead, S.M 2016, Introduction. In Markets and the Environment, pp. 1-10,
Island Press/Center for Resource Economics.
Leiserowitz, A, Maibach, E.W, Roser-Renouf, C, Feinberg, G & Howe, P 2013, Climate change
in the American mind: Americans' global warming beliefs and attitudes in April 2013.
Pindyck, R.S 2013, ‘Climate change policy: What do the models tell us?’, Journal of Economic
Literature, 51(3), pp.860-872.
Revesz, R.L, Howard, P.H, Arrow, K, Goulder, L.H, Kopp, R.E, Livermore, M.A, Oppenheimer,
M & Sterner, T 2014, ‘Global warming: Improve economic models of climate change’,
Nature, 508(7495), pp.173-175.
Rezai, A, Foley, D.K & Taylor, L 2016, Global warming and economic externalities. In The
Economics of the Global Environment, pp. 447-470, retrieved 1 September 2017, Springer
International Publishing.
Ring, M.J, Lindner, D, Cross, E.F & Schlesinger, M.E 2012, ‘Causes of the global warming
observed since the 19th century’, Atmospheric and Climate Sciences, 2(04), p.401.
Schaeffer, M, Hare, W, Rahmstorf, S & Vermeer, M 2012, ‘Long-term sea-level rise implied by
1.5? C and 2? C warming levels’, Nature Climate Change, 2(12), p.867.

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Scienceblogs.com (2017). Denying Climate Science in Multiple Dimensions. [online] Greg
Laden's Blog. Available at: http://scienceblogs.com/gregladen/2014/02/27/denying-climate-
science-in-multiple-dimensions/ [Accessed 3 Sep. 2017].
Smh.com.au, A. (2017). Wholesale power prices have doubled since the carbon tax was axed.
[online] The Sydney Morning Herald. Available at:
http://www.smh.com.au/federal-politics/political-news/energy-crisis-wholesale-power-prices-
have-doubled-since-the-carbon-tax-was-axed-20170308-gutf8t.html [Accessed 3 Sep. 2017].
Weitzman, M.L 2014, ‘Can negotiating a uniform carbon price help to internalize the global
warming externality?’, Journal of the Association of Environmental and Resource
Economists, 1(1/2), pp.29-49.
Yamin, F 2012, ‘Climate change and carbon markets: A handbook of emissions reduction
mechanisms’, Routledge, pp. 11-12