Greenhouse Gases

Greenhouse gases (GHGs) are gases that absorb and re-emit infrared radiation, trapping heat in the atmosphere. In economics, greenhouse gas emissions matter because they impose climate damages that are not fully reflected in market prices, making them a classic negative externality.

Key Examples

Major greenhouse gases include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and several industrial gases (for example, HFCs and SF6). They differ in how long they persist and how strongly they warm the planet per unit emitted.

Measuring Emissions (CO2e)

Because gases have different warming impacts, policy and reporting often convert them into CO2-equivalent (CO2e) units using a metric like global warming potential (GWP). The goal is not perfect physics, but a consistent accounting unit for policy, targets, and prices.

At a basic level, inventories of emissions often use:

Emissions = Activity × Emission factor

For example, fuel burned (activity) times kg CO2 per unit fuel (emission factor).

Why Policy Is Needed (Externality Logic)

If emitting a ton of CO2 creates damages that the emitter does not pay for, the market outcome tends to feature too much emissions relative to the social optimum. Policy tries to align private incentives with social costs.

Common Policy Instruments

Two widely discussed instruments are:

Carbon taxes: set a price per ton of emissions (a Pigouvian tax benchmark).
Cap-and-trade: set a total quantity (cap) and let a permit price emerge (the EU ETS is the best-known example).

Other tools include performance standards, clean-energy subsidies, and public investment. The details (coverage, enforcement, leakage, and distributional effects) often determine whether a policy works as intended.

Knowledge Check

### Why are greenhouse gas emissions typically modeled as a negative externality? - [x] The social damages from emissions are not fully paid by the emitter - [ ] Emissions always increase output - [ ] The private cost of energy is always too high - [ ] Emissions affect only the person who emits > **Explanation:** The core issue is a wedge between private and social cost: markets tend to overproduce the activity creating the unpriced harm. ### A carbon tax and a cap-and-trade system differ mainly in that: - [x] A carbon tax fixes the price per ton; cap-and-trade fixes the total quantity and lets the price adjust - [ ] A carbon tax fixes the quantity; cap-and-trade fixes the price - [ ] Only cap-and-trade can reduce emissions - [ ] Only a carbon tax can be enforced > **Explanation:** Both aim to internalize damages, but they choose different “control variables” (price vs. quantity). ### What does “CO2e” mean in emissions accounting? - [ ] A measure of GDP adjusted for pollution - [x] An equivalent amount of CO2 that would cause a similar warming impact as another gas - [ ] A guarantee that emissions will fall - [ ] The cost of producing renewable electricity > **Explanation:** CO2e converts different gases into a single comparable unit (using metrics like GWP) for reporting, targets, and pricing.