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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
e 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
XXXXXXXXXX or write to Case Writing Office, Stanford Graduate School of Business, Knight Management
Center, 655 Knight Way, Stanford University, Stanford, CA XXXXXXXXXX.
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
epresented 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 ca
on emissions and
their impact on climate change. The benefits to GDP associated with higher emissions simply
eflect 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 XXXXXXXXXXt XXXXXXXXXX
All rights reserved e XXXXXXXXXX e XXXXXXXXXX centre
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Global Ca
on Emissions SM-234
p. 2
transportation and electricity sectors of the economies. Specifically, the relation between GDP
and ca
on emissions at the level of each bloc has been estimated as:
???(??) = XXXXXXXXXX ∙ ?? − .01667 ∙ ??
2, (1)
where ?? represents the CO2 emissions of bloc i, measured in millions of tons (megatons), from
here on a
eviated 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 ca
on emissions. These costs represent primarily property
damage and productivity losses associated with extreme weather events in the form of heat
waves, droughts, hu
icanes, 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 ca
on emissions and let ?−? denote the total ca
on
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
eyond 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.
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Global Ca
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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
XXXXXXXXXX XXXXXXXXXX
Emissions by Bloc i
Scenario 1: NDP as a function of xi
60000
70000
80000
90000
100000
110000
120000
130000
140000
150000
160000
XXXXXXXXXX XXXXXXXXXX
Emissions by Bloc i
Scenario 2: NDP as a function of xi
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