ECON 428 PSU Environmental Economics Questions

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Econ 428, Patrik Guggenberger
Homework 7
Spring 2022
Due date: Tuesday, April 19 (The problem set seems long – however, only the questions are
long, the answers should require only little space…)
Question 1 (Follow-up on the “Global climate change game”)
In Lecture VI we had discussed how international cooperation on combatting climate change
could be modelled as a prisoners’ dilemma. While each country benefits from a reduction of
greenhouse gases, each country would prefer freeriding on the abatement efforts of the other
countries because abatement is costly. Reconsider the game from Lecture VI with two countries,
A and B say, where each country can either “contribute” or “shirk”. Payoffs are as follows:
If both countries contribute then each country has GDP growth of -4.8%.
If both countries shirk then each country has GDP growth of -6%.
Finally, if one country shirks while the other one contributes the former country has GDP growth
of -3.5% while the latter has -7.3%.
We discussed that no matter what the strategy of the other country is it is always better to shirk.
The dilemma is that this leads to a GDP growth of -6% when coordination between both
countries and both countries playing “contribute” would yield the better outcome of -4.8%
growth.
Following-up on the “Global climate change game” played in class that had five rounds assume
that the two countries A and B get to play their game infinitely often and countries have to
choose C or S (contribute or shirk) in each round. Assume the payoffs are the net present value
of the GDP growth in each round with a discount rate of r=1%, that is the infinite sum
P1+(1/(1+r))*P2+1/(1+r)2*P3+1/(1+r)3*P4+….,
Where Pi denotes the payoff in period i. We want to show that repeating the game could lead to
overcoming the dilemma of ending up in the bad equilibrium. Namely, assume that country A
communicates to country B that it will play always play C unless country B ever plays S. If that
is the case then A will always play S too from that point onward.
a) Given the strategy described by A, what should B do? (Hint: the infinite sum
1+(1/(1+r))+1/(1+r)2+1/(1+r)3+… equals 1+(1/r))
b) Assume now that rather than infinitely often the game is only played for three periods.
Assume country A makes the same proposal as before. What should B do?
c) What is the problem that in b) there is a “last” round?
Question 2 (Model of wages, land prices and pollution, Lecture 23).
a) Assume pollution is unproductive for firms. Prove why, as pollution goes up, it must be
the case that land rent goes down.
b) How would the analysis change if land were not an input into production? In particular,
how would an increase in pollution affect wages and land rents?
Question 3 (IPCC report, AR6)
The Sixth Assessment Report (AR6) of the United Nations (UN) Intergovernmental Panel on
Climate Change (IPCC) is the sixth in a series of reports which assess scientific, technical, and
socio-economic information concerning climate change. Three Working Groups (WG) have been
working on 1. The Physical Science Basis, 2. Impacts, Adaptation and Vulnerability, and Mitigation
of Climate Change. The various reports can be downloaded at
https://www.ipcc.ch/report/ar6/wg1/#SPM
The complete report comprises thousands of pages. There is also a short “summary for
policymakers” that was drafted by scientist and government officials that I will upload on canvas.
a) To achieve the “at most 1.5 degree Celsius increase in temperature” from the Paris
agreement global Greenhouse gas emissions must be reduced by 50% by 2030 and “netzero” must be achieved by 2050. Based on the data in the “summary for policymakers” are
we on track to reach that goal since the Paris agreement was adopted in 2015?
The chart below provides a long list of mitigation options together with their relative potential and
costs.
b) Do some research about “carbon capture and storage” (CCS) and write a short summary
about it. How advanced is the technology? What are some of its problems? Could it currently
serve as a justification for further investment in the fossil fuel industry? According to the chart
what are the most promising routes for a reduction of net emissions?

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Explanation & Answer:
3 Question Sets

Tags:
Global climate change

Poor Quality of Air

Environmental Economics

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