Chapter 15 — Exercises

Section A — Climate as externality

A1. Apply the externality framework from Chapter 11 to a coal-fired power plant. Identify the private cost, the external cost, and the social cost. What is the market producing too much of?

A2. Why can't the Coase theorem solve climate change? Give three specific reasons.

A3. List three characteristics that make climate change the hardest externality problem in history.

A4. The social cost of carbon has been estimated at $190/ton (Biden 2023). A gallon of gasoline produces about 0.009 tons of CO₂. What carbon tax per gallon would this imply? How does it compare to current gas prices?

Section B — The discount rate

B1. Suppose climate damage of $1 trillion will occur in 50 years. Calculate the present value at three discount rates: (a) 1%, (b) 3%, (c) 5%. How does the choice of discount rate affect the urgency of action?

B2. Nordhaus uses a discount rate of 3–5%. Stern uses ~1.4%. Explain the logic behind each. Which do you find more persuasive? Why?

B3. "The discount rate is a technical parameter, not a value judgment." Evaluate this claim.

B4. Suppose you could spend $100 billion today to prevent $500 billion in climate damage in 2075 (50 years from now). At what discount rate does the investment break even? At Nordhaus's rate, should you make the investment? At Stern's rate?

B5. "We should use a discount rate of 0% for climate policy because future people's welfare matters exactly as much as ours." What would this imply for climate spending today? Is this position defensible?

Section C — Policy approaches

C1. Compare a carbon tax of $100/ton with a cap-and-trade system that achieves the same total emissions reduction. Under what conditions do the two produce identical outcomes? Under what conditions do they diverge?

C2. The U.S. acid rain program (Chapter 11) is often cited as a model for climate cap-and-trade. What is similar? What is different? Is the analogy useful?

C3. The Inflation Reduction Act uses subsidies rather than a carbon tax. Apply the efficiency framework: why is this less efficient in theory? Why might it be better in practice?

C4. A "carbon border adjustment" taxes imports from countries without carbon pricing. Apply the trade framework from Chapter 9. What are the benefits? What are the risks?

C5. Should the U.S. adopt a carbon tax? Make the strongest case for and the strongest case against.

Section D — Political economy

D1. Why is climate change a classic present-bias problem? Use the language of Chapter 10.

D2. "Carbon tax" is unpopular. "Carbon dividend" (same tax, revenue returned to citizens as a rebate) is more popular. Why? Is the economic substance different?

D3. The fossil fuel industry has lobbied against carbon pricing for decades. Apply the concentrated-costs/diffuse-benefits framework from Chapter 9.

D4. What is a "just transition"? Why is it necessary for political sustainability of climate policy? What would a just-transition program look like for a coal-dependent county in West Virginia?

Section E — Data lookup

E1. Look up global CO₂ emissions by country on the IEA or Our World in Data website. Which countries emit the most? How has the picture changed since 2000?

E2. Look up the EU Emissions Trading System carbon price (market data). What is the current price? How does it compare to the $190/ton social cost of carbon estimated by the Biden administration?

E3. Look up U.S. greenhouse gas emissions over time (EPA data or FRED). Have they been falling? By how much? What is the trajectory needed to meet the Paris Agreement target?

E4. Look up the cost of solar electricity (LCOE — levelized cost of energy) over time. How much has it fallen since 2010? How does it now compare to coal and natural gas?

Section F — Policy debate

F1. "We should just ban fossil fuels." Apply the externality framework and the cost-benefit framework. Why is this almost certainly not the efficient policy? What is the efficient level of fossil fuel use?

F2. "The U.S. shouldn't act on climate change until China and India act too." Evaluate using the collective action framework and the free-riding problem.

F3. "Nuclear power should be part of the climate solution." Apply the cost-benefit framework. What are the externalities of nuclear power (both positive and negative)?

F4. "If we can't agree on a global carbon tax, we should focus on subsidies for clean energy instead." Is this a defensible second-best policy? What does the IRA evidence suggest?

Section G — Reflection

  • After reading this chapter, how would you describe the discount rate debate to a friend?
  • Which of the three policy approaches (carbon tax, cap-and-trade, regulation/subsidies) do you think is most likely to work in the U.S.? Why?
  • The chapter argues that the discount rate is a moral question. Do you agree? How much do you think we owe future generations?

Selected answers in appendices/answers-to-selected.md.