The Copenhagen climate conference is happening this week and next, so let’s talk about some of the relevant economics. (We’ll do more of this after the break, too.) Here are some questions and readings:

  1. How does climate change fit into the Big Question? (“When does individual optimization lead to good outcomes for the group as a whole?”) Is there a case for government policy, or will the invisible hand take care of it?
  2. The three main policy approaches that folks talk about are command-and-control (e.g., fuel economy standards for cars, or the type of direct regulation that the EPA is slowly moving towards), carbon taxes, and cap-and-trade. Read more here about carbon taxes and cap-and-trade (which comes in two flavors, auctioned and grandfathered).
  3. What’s the point of the “cap” in cap-and-trade, and what’s the point of the “trade”?
  4. Economists overwhelmingly favor “economic instruments” (carbon taxes or cap-and-trade) over the direct command-and-control approach. Why do you think this is? (Hint: Think about the previous question 🙂
  5. How would you analyze the impacts of carbon taxes or cap-and-trade using supply and demand curves? (Hint: Carbon taxes are sometimes called “price” instruments, and cap-and-trade is sometimes called “quantity” instruments.)
  6. There are a million opinions you can read about existing proposals in the U.S. and in Copenhagen, so find one or two and bring your thoughts and questions. Some options (in no particular order) include James Hansen (“Cap and fade“), the WSJ editorial board (“Reckless ‘endangerment’“), Paul Krugman (“An affordable truth“), Alan Durning of Sightline (“Things I love—and hate—about Waxman-Markey [the federal cap-and-trade bill]”), Bjorn Lomborg (“Costly carbon cuts“) and yours truly (“Carbon cap: Be careful what you wish for“).

PS. We are not going to spend much if any class time talking about climate science because you already had a chance to do that. What we are going to do is take the IPCC scientific consensus as given and focus on “Okay, assuming this is correct then what should we do about it?” I am happy to talk about Climate-gate (or anything else you want to talk about 🙂 for a few minutes, but I am not going to let this take up too much time during class. (I am of course also happy to talk more about this stuff outside of class or via email 🙂