- Answer the questions in the case in a short summary (600 words) explaining the case background, your calculations, and recommendations highlighting the main findings of the researchers and the key conclusions.
E du ca tio na l m at er ia l s up pl ie d by T he C as e C en tre C op yr ig ht e nc od ed A 76 H M -J U J9 K -P JM N 9I C ou rs eP ac k co de C -4 30 2- 46 32 90 -S TU CASE: SM-234 DATE: 09/20/14 Christos Makridis, graduate student in Management Science and Engineering, and Professor Stefan Reichelstein prepared this case for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2014 by the Board of Trustees of the Leland Stanford Junior University. Publicly available cases are distributed through Harvard Business Publishing at hbsp.harvard.edu and The Case Centre at thecasecentre.org; please contact them to order copies and request permission to reproduce materials. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business. Every effort has been made to respect copyright and to contact copyright holders as appropriate. If you are a copyright holder and have concerns, please contact the Case Writing Office at cwo@gsb.stanford.edu or write to Case Writing Office, Stanford Graduate School of Business, Knight Management Center, 655 Knight Way, Stanford University, Stanford, CA 94305-5015. GLOBAL CARBON EMISSIONS: AN INTERACTIVE ILLUSTRATION “The greatest market failure in the history of mankind” —Sir Nicholas Stern, “The Stern Review” 1 The United Nations has convened another world climate conference with the goal of reaching an international agreement on the emissions of greenhouse gases. For the purposes of this conference, the world has been grouped into 10 regional blocs. The delegations representing the different blocs have authority to sign an agreement that would be binding for all the countries represented by the bloc. You are a delegate for and an adviser to one bloc and, in that capacity, you have been in constant contact with the home governments represented by your bloc. With less than a day to go at the conference, and no agreement in sight amongst the countries, the following question has been posed to you: assuming no agreement is reached at this conference, what advice would you give to the countries represented in your bloc regarding the (collective) level of CO2 emissions by your bloc? The answer to this question will obviously depend on how other blocs are expected to choose their own emission levels. The economic advisers in your delegation have pointed out that, within a certain range, higher emissions will translate into higher gross domestic product (GDP) for each bloc. This GDP calculation does not yet account for the economic losses that arise from carbon emissions and their impact on climate change. The benefits to GDP associated with higher emissions simply reflect that the burning of fossil fuels will enable relatively inexpensive energy, primarily for the 1 Sir Nicholas Stern, “The Stern Review,” as reviewed by a London-based economist on the personal blog entitled “New Economist,” October 30, 2006, http://neweconomist.blogs.com/new_economist/2006/10/stern_review_2.html, (September 9, 2014). Distributed by The Case Centre North America Rest of the world www.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903 All rights reserved e info.usa@thecasecentre.org e info@thecasecentre.orgcase centre U sa ge p er m itt ed o nl y w ith in th es e pa ra m et er s ot he rw is e co nt ac t i nf o@ th ec as ec en tre .o rg Ta ug ht b y P ro fe ss or A m it K oh li, fr om 5 -N ov -2 02 1 to 3 1- D ec -2 02 1. O rd er re f F 43 04 53 . P ur ch as ed b y S he lb y S ul liv an fo r u se o n th e E ne rg y S tra te gy C ap st on e P ro je ct , a t Y or kv ill e U ni ve rs ity . mailto:CWO@gsb.stanford.edu http://neweconomist.blogs.com/new_economist/2006/10/stern_review_2.html E du ca tio na l m at er ia l s up pl ie d by T he C as e C en tre C op yr ig ht e nc od ed A 76 H M -J U J9 K -P JM N 9I C ou rs eP ac k co de C -4 30 2- 46 32 90 -S TU Global Carbon Emissions SM-234 p. 2 transportation and electricity sectors of the economies. Specifically, the relation between GDP and carbon emissions at the level of each bloc has been estimated as: ???(??) = 105.555 ∙ ?? − .01667 ∙ ?? 2, (1) where ?? represents the CO2 emissions of bloc i, measured in millions of tons (megatons), from here on abbreviated as Mt, and GDP(??) is measured in millions of dollars. In fact, the relation depicted in (1) is presumed to hold only for emissions in the range between 1,000 and 3,500 Mt and the contribution to GDP in (1) is taken relative to some base level. To illustrate, if Bloc i were to choose an emissions level of 2,500 Mt of CO2, the incremental contribution to its GDP (relative to its base level) would be: 105.555 ∙ 2,500 − .01667 ∙ 2,500 =159,700 millions of dollars. The economic advisers in your delegation have also come up with an estimate of the costs associated with carbon emissions. These costs represent primarily property damage and productivity losses associated with extreme weather events in the form of heat waves, droughts, hurricanes, and floods. These costs fall on each bloc in the world and the magnitude of the cost is increasing in the overall level of global emissions. Let ? = ?1 + ?2 + ⋯ ?10 denote global carbon emissions and let ?−? denote the total carbon emissions of all blocs other than i, so that ?−? = ? - ??. Given the emissions by all others, if Bloc i emits ?? Mt of CO2, its Net Domestic Product, NDP, becomes: ???(??| ?−?) = ???(??) − ?(?), (2) where ?(?) measures the cost associated with emissions. For relatively modest global emission levels up to 14,000 Mt, the cost ?(?) is considered to be negligible. Yet, for emission levels beyond 14,000 Mt, each additional Mt is estimated to raise the cost of emissions at the rate of 5.555 million dollars. Thus: ?(?) = { 0, ? ≤ 14,000 5.555 ∙ (? − 14,000), ? > 14,000 (3) To help you visualize the tradeoffs, suppose you represent Bloc i. Your economic advisers have depicted your bloc’s NDP as a function of your own bloc’s emissions in three separate scenarios that differ in the level of emissions chosen by the other blocs. U sa ge p er m itt ed o nl y w ith in th es e pa ra m et er s ot he rw is e co nt ac t i nf o@ th ec as ec en tre .o rg Ta ug ht b y P ro fe ss or A m it K oh li, fr om 5 -N ov -2 02 1 to 3 1- D ec -2 02 1. O rd er re f F 43 04 53 . P ur ch as ed b y S he lb y S ul liv an fo r u se o n th e E ne rg y S tra te gy C ap st on e P ro je ct , a t Y or kv ill e U ni ve rs ity . E du ca tio na l m at er ia l s up pl ie d by T he C as e C en tre C op yr ig ht e nc od ed A 76 H M -J U J9 K -P JM N 9I C ou rs eP ac k co de C -4 30 2- 46 32 90 -S TU Global Carbon Emissions SM-234 p. 3 Scenario 1 All other regional blocs emit 1,000 Mt of CO2 each. Thus ?−?= 9,000 Scenario 2 All other regional blocs emit 1,500 Mt of CO2 each. Thus ?−?= 13,500 60000 80000 100000 120000 140000 160000 180000 1000 1500 2000 2500 3000 3200 3500 Emissions by Bloc i Scenario 1: NDP as a function of xi 60000 70000 80000 90000 100000 110000 120000 130000 140000 150000 160000 1000 1500 2000 2500 3000 3200 3500 Emissions by Bloc i Scenario 2: NDP as a function of xi U sa ge p er m itt ed o nl y w ith in th es e pa ra m et er s ot he rw is e co nt ac t i nf o@ th ec as ec en tre .o rg Ta ug ht b y P ro fe ss or A m it K oh li, fr om 5 -N ov -2 02 1 to 3 1- D ec -2 02 1. O rd er re f F 43 04 53 . P ur ch as ed b y S he lb y S ul liv an fo r u se o n th e E ne rg y S tra te gy C ap st on e P ro je ct , a t Y or kv ill e U ni ve rs ity . E du ca tio na l m