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1. Adventures in Energy
Economics
Robert P. Murphy
Mises Academy
July 16, 2013
Lecture 3: The Economics of Climate Change, Part
I

2. Economics of Climate
Change, I
I. Review: Rothbard
A. Overview of Law
B. Applied to Pollution
II. Review: Free-Market
Environmentalism
A. Endangered Species
B. Overfishing”Tragedy
of the Commons”
III. Economics of Climate
Change
A. IPCC
B. ECS
C. Integrated Assessment
Models (IAMs)
D. “Social Cost of Carbon”
E. Regulations vs. “Market
Solution”
F. Carbon Tax vs. Cap-
and-Trade

3. I. Rothbardian View

4. A. Overview of Law
Normative (not Positive)
Physical Invasion (not “harm”)
Strict Liability (not “reasonable
person” standard)

5. B. Applied to Pollution
Actual victims (not D.A.) must bring suit.
Privity (in auto example)
Utilitarian considerations can’t trump
justice

6. II. Free-Market
Environmentalism

7. A. Endangered Species
versus

8. B. Overfishing:
“Tragedy of the Commons”
Garret
Hardin
1915-
2003

9. III. Economics of Climate Change
(Mainstream View)

10. A. Intergovernmental Panel on Climate
Change (IPCC)

11. B. Equilibrium Climate Sensitivity
(ECS)
In climate models, the equilibrium (after all
feedbacks) increase in global mean near-surface
air temperature from a doubling of carbon
dioxide atmospheric concentrations.
IPCC AR4 estimated ECS in range of 2 – 4.5
degrees Celsius, with a best estimate of 3
degrees.

12. C. Integrated Assessment Models
(IAMs)

13. D. “Social Cost of Carbon” (SCC)

14.  SCC Heavily Dependent on
Discount Rate
SOURCE: White House Working Group on SCC, May 2013 update

15.  Because Early Benefits and Distant
Harms!
SOURCE: White House Working Group on SCC, 2010

16. E. Regulation vs. “Market Solution”

17. f. Carbon Tax vs. Cap-and-Trade
If government had perfect knowledge of
“abatement costs” (marginal compliance cost of
restricting an additional ton of emissions) and
schedule of social cost of carbon (marginal
benefits of avoided future climate change
damages) then two approaches would be
equivalent.
But with uncertainty, government might err and
one approach will be preferable (minimize
deadweight loss due to mistake) depending on
cost curves.

18.  Carbon Tax better if abatement
costs steeper than climate change
damages
Emission Reductions 

19.  Cap-and-Trade better if abatement
costs Shallower than climate change
damages
Emission Reductions 