Carbon Leakage with International Technology Spillovers

In this paper we study the effect of international technology spillovers on carbon leakage. We first develop and analyse two simple competing models for carbon leakage. The first model represents the pollution haven hypothesis. It focuses on the international competition between firms that produce energy-intensive goods. The second model highlights the role of a globally integrated carbon-energy market. We calculate formulas for the leakage rates in both models and, through meta-analysis, show that the second model captures best the major mechanisms reported in the CGE literature on carbon leakage. We extend this model with endogenous energy-saving technology and international technology spillovers. This feature is shown to decrease carbon leakage. We build-in the endogenous energy-saving technology in a large CGE model and verify that the results from the formal model carry over. Carbon leakage becomes negative for moderate levels of international technology spillover.arbon-Leakage, Climate Policy, Induced Technological Change; Trade and Environment

Cooperative and non-cooperative solutions to carbon leakage

A modified version of the CGE GTAP-E model is developed for assessing the economic and carbon emissions effects related to alternative policy measures implemented with the aim of reducing carbon leakage. We explore a set of scenarios, comparing solutions where Annex I countries introduce exogenously or endogenously determined carbon border taxes in order to solve the carbon leakage problem unilaterally. Results provide evidence on the scarce effectiveness of carbon tariffs in reducing carbon leakage and enhancing economic competitiveness, while they have large negative welfare effects not only on the Non-Annex countries, but also on certain Annex I countriesCarbon Leakage, Carbon Border Tax, GTAP-E model

Carrots and sticks for new technology: Abating greenhouse gas emissions in a heterogeneous and uncertain world

Many governments use technology incentives as an important component of their greenhouse gas abatement strategies. These “carrots” are intended to encourage the initial diffusion of new, greenhouse-gas-emissions-reducing technologies, in contrast to carbon taxes and emissions trading which provide a “stick” designed to reduce emissions by increasing the price of high-emitting technologies for all users. Technology incentives appear attractive, but their record in practice is mixed and economic theory suggests that in the absence of market failures, they are inefficient compared to taxes and trading. This study uses an agent-based model of technology diffusion and exploratory modeling, a new technique for decision-making under conditions of extreme uncertainty, to examine the conditions under which technology incentives should be a key building block of robust climate change policies. We find that a combined strategy of carbon taxes and technology incentives, as opposed to carbon taxes alone, is the best approach to greenhouse gas emissions reductions if the social benefits of early adoption sufficiently exceed the private benefits. Such social benefits can occur when economic actors have a wide variety of cost/performance preferences for new technologies and either new technologies have increasing returns to scale or potential adopters can reduce their uncertainty about the performance of new technologies by querying the experience of other adopters. We find that if decision-makers hold even modest expectations that such social benefits are significant or that the impacts of climate change will turn out to be serious then technology incentive programs may be a promising hedge against the threat of climate change.climate change, technology policy, uncertainty, agent-based modeling, exploratory modeling, social interactions

A review of subsidy and carbon price approaches to greenhouse gas emission reduction

The Climate Institute requested SKM MMA and Centre of Policy Studies (CoPS) to undertake an assessment of alternative policy options to achieve a given carbon emission target in Australia. The focus of the study was to compare outcomes under a suite of subsidy based policies to the outcomes under an emission trading scheme. The outcomes of the study are presented in this report.There are several market based approaches that could be used to achieve a carbon emission target. Which approach is more or less effective in achieving the target will depend on any restriction placed on the measure, the ability of each approach to manage the uncertainties on the cost and future scale of abating carbon emissions, the long term behavioural signals provided and the relative impacts on the broader economy.In principle, a subsidy scheme, such as the proposed Emission Reduction Fund (ERF), could achieve the same level of abatement at a similar cost to an emission trading scheme provided the sectoral coverage was the same and the eligible abatement options were the same. Any difference in effectiveness and cost may be due to other factors such as a limit on the budget available to be spent through the subsidy scheme and differences in sectoral coverage. Whether projects receiving funding under the subsidy scheme will proceed or go under either before they are built or after a few years of operation, as has happened under other subsidy scheme, is also important to the effectiveness of the scheme.SKM MMA used a marginal abatement cost approach to assess the options chosen under the subsidy fund. The approach was used to assess a range of emissions abatement opportunities in a range of sectors covering energy, transport, agriculture and land use change, industrial processes, fugitive emissions, and waste. The approach involved the assessment of the cost and potential emission abatement of the eligible options. The assumption was that the lowest cost combination of options is selected under the fund to meet the abatement cap up to any budget or other declared constraints. Only options that are additional (i.e. would not have proceeded in absence of the fund or carbon abatement incentive) were considered.The estimated level of abatement by options and their cost are input into CoPS’s Monash Multi Regional Forecasting Model (MMRF)to determine broader economic impacts.This report outlines the assumptions and method used and discusses the result of the modelling. Limitations and uncertainties in the approach are also outlined. The focus of the analysis was on potential impacts – there is no discussion on which approach is more efficient

Greenhouse gas emissions trading and the world trading system

This article examines whether a greenhouse gas emissions trading scheme has the potential to bring parties into conflict with the WTO provisions in dealing with the initial allocation of permits, non-compliance with emissions targets, emissions trading system enlargement, and trade measures against non-members of an emissions trading club, and relates the discussion to joint implementation with developing countries. To our knowledge, this is the first article to analyze potential conflicts between an international emissions trading scheme and the world trade system.Emissions trading; climate change; WTO scrutiny; trade-related measures; compliance

Evaluating carbon offsets from forestry and energy projects

Under the Kyoto Protocol, industrial countries accept caps on their emissions of greenhouse gases. They are permitted to acquire offsetting emissions reductions from developing countries - which do not have emissions limitations - to assist in complying with these caps. Because these emissions reductions are defined against a hypothetical baseline, practical issues arise in ensuring that the reductions are genuine. Forestry-related emissions reduction projects are often thought to present greater difficulties in measurement and implementation, than energy-related emissions reduction projects. The author discusses how project characteristics affect the process for determining compliance with each of the criteria for qualifying. Those criteria are: 1) Additionality. Would these emissions reductions not have taken place without the project? 2) Baseline and systems boundaries (leakage). What would business-as-usual emissions have been without the project? And in this comparison, how broad should spatial, and temporal system boundaries be? 3) Measurement (or sequestration). How accurately can we measure actual with-project emissions levels? 4) Duration or permanence. Will the project have an enduring mitigating effect? 5) Local impact. Will the project benefit its neighbors? For all the criteria except permanence, it is difficult to find generic distinctions between land use change and forestry and energy projects, since both categories comprise diverse project types. The important distinctions among projects have to do with such things as: a) The level and distribution of the project's direct financial benefits. b) How much the project is integrated with the larger system. c) The project components'internal homogeneity and geographic dispersion. d) The local replicability of project technologies. Permanence is an issue specific to land use and forestry projects. The author describes various approaches to ensure permanence, or adjust credits for duration: the ton-year approach (focusing on the benefits from deferring climatic damage, and rewarding longer deferral); the combination approach (bundling current land use change and forestry emissions reductions with future reductions in the buyer's allowed amount); a technology-acceleration approach; and an insurance approach.Montreal Protocol,Environmental Economics&Policies,Climate Change,Decentralization,Global Environment Facility,Environmental Economics&Policies,Energy and Environment,Carbon Policy and Trading,Montreal Protocol,Climate Change

China and East Asian Energy - Prospects and Issues Volume II Part I

This collection of papers in two volumes is the second in a series on China and East Asian Energy, a major project which is an initiative of the East Asia Forum in conjunction with the China Economy and Business Program in the Crawford School of Economics and Government at the Australian National University (ANU). The first volume was published in April 2007. The research program is directed at understanding the factors influencing Chinas energy markets. It also involves high-level training and capacity building to foster long-term links between policy thinkers in China and Australia. It provides for regular dialogue with participants from the energy and policy sectors in the major markets in East Asia and Australia. The backbone of the dialogue is an annual conference, the location of which has thus far alternated between Beijing and Canberra. The objective is to advance a research agenda that informs and influences the energy policy discussion in China, Australia and the region. This special edition of the Asia Pacific Economic Papers brings together papers presented at the second conference in the series. Due to their number and length, papers from that second conference are published across two volumes of the Asia Pacific Economic Papers. This volume includes the first half of the papers, while the next volume includes the second half. The third conference in the project is scheduled for July 2008.China, Energy, East Asia

Enhanced financial mechanisms for post 2012 mitigation

Despite the many calls to reform the CDM, its conceptual underpinnings are strong and it will most likely survive in the post-2012 climate regime. Some modifications may be considered in the short term to strengthen the effectiveness and transparency of the mechanism without modifying the Marrakesh Accords. In the medium term substantially increased mitigation efforts in developing countries may require a combination of three possible financial mechanisms: the current activity-based CDM albeit improved, a second market mechanism that would seek to improve the long term emission trends of developing countries by promoting broad based emission reduction programs primarily in the private sector, and a third financial mechanism outside of the market which would be an incentive for the adoption of policy changes leading to a low carbon path, but where emission reductions would not be used as international offsets.Environmental Economics&Policies,Carbon Policy and Trading,Montreal Protocol,Energy and Environment,Environment and Energy Efficiency

Do Oligopolists Pollute Less? Evidence from a Restructured Electricity Market

Electricity restructuring has created the opportunity for producers to exercise market power. Oligopolists increase price by distorting output decisions, causing cross-firm production inefficiencies. This study estimates the environmental implications of production inefficiencies attributed to market power in the Pennsylvania, New Jersey, and Maryland electricity market. Air pollution fell substantially during 1999, the year in which both electricity restructuring and new environmental regulation took effect. I find that strategic firms reduced their emissions by approximately 20% relative to other firms and their own historic emissions. Next, I compare observed behavior with estimates of production, and therefore emissions, in a competitive market. According to a model of competitive behavior, changing costs explain approximately two-thirds of the observed pollution reductions. The remaining third can be attributed to firms exercising market power.