Welcome to Ethec-Risk Institute. Today we are going to talk about climate change, and we are going to argue that climate change is actually an economic problem. Let me provide you with this very intriguing quote by William Nordhaus, who is a Nobel prize winning economist on the faculty at Yale School of Management. And he's really well known for his work, for his phenomenal work on climate economics. And here is what he claims, in a few words, he claims that climate change is an economic problem, so here is the actual quote. Most people think that global warming is a question for the natural sciences. However, in reality the ultimate source and the solutions lie in the realm of the social sciences, and by social sciences, well, we know the house as in mind is essentially economics. So why are we claiming that climate change is an economic problem? After all, it sounds like it's all about physics, and geo-science, and impact of carbon emissions, So that sounds like physical processes. So what is it that economic processes have to do with global warming? Well, there's a simple relationship, global warming is born from economic growth. So here is the second quote from William Nordhaus, which is very clear, virtually everything we do involves either directly or indirectly the combustion of fossil fuels. So the way we have to think about it is ever since the industrial revolution, economic growth is fueled by the use of technology machines techniques. And all of these technologies are powered by energy sources, and up until recently most of these energy sources were carbon emitting. Now if you take a look at this picture, this picture gives you a sense of the relationship, visual sense of the relationship between economic growth. So that's the orange line, which is the trend in average economic growth over time worldwide, and the blue line shows the trend in physical production of oil. And clearly we see that there's a very close correspondence between economic growth and oil production, and of course oil consumption. So ever since the last 30 to 40 years at least and even before, we have been using fossil fuel to fuel our economic growth. Now another way to think about it is when you look at the pattern of carbon emission. Well, carbon emission have been virtually zero up until the Industrial Revolution. Now when the Industrial Revolution takes place, it started to increase and to increase sharply the level of carbon emission worldwide. Now it's a story of a never increasing curve, except on a few moments on a few occasions when there's a small or more substantial decrease in carbon emissions. I mean, the first critical case is World War II, where we see a decrease in carbon emissions. Then we're looking at the major economy crisis as the times when carbon emission goes down. Now if you look more recently at more recent history, 2008, 2009, the global financial crisis, the subprime crisis. We see a tiny bit of reduction in carbon emission, which is of course related to slowdown of economic growth. And, well, the most recent one, the COVID pandemic crisis results in a sharp decrease in economic activities around the globe. And it is expected that for 2020, the pandemic would result in a 5% full of carbon emissions, which is something in the order of magnitude of 2.5 billion tons of carbon emissions around the world. Okay, so climate change is born from economic growth. Now climate change is also related to the fact that the condition of those fossil fuel and those carbon emissions are not internalized, are not priced within economic activities. Economists have a fancy way to talk about this concept, they talk about the negative externality. Negative externality is something which is included in an economic transaction implicitly, but the cost of that problem is not reflected in the price paid by the buyer to the seller of these goods or services. And that's exactly is what is the problem with carbon emissions. And here is, again, another quote from William Nordhaus. The problem is that those produced the emissions do not pay for that privilege, and those who are armed are not compensated. And let's keep in mind that those who are armed essentially virtually everybody because climate change is, of course, a global problem, okay? So one of the key themes within climate change policies and regulations put in place to fight against climate change is the big theme is, how can we efficiently internalize this externality? In other words, how can we manage to find a way to put a price to carbon so that anyone in emitting carbon in a substantial way will have to pay for the global social cost of carbon emission. That is, if you will, the spirit behind various kinds of climate economic policies, including things that will have the opportunity to discuss in some details, such as carbon taxes, carbon markets, and other such regulatory schemes. Which are essentially put in place with the intention to internalize the cost of carbon emissions. [MUSIC]