Prices vs. Quantities and the Intertemporal Dynamics of the Climate Rent

This paper provides a formal survey of price and quantity instruments for mitigating global warming. We explicitly consider policies’ impact on the incentives of resource owners who maximize their profits intertemporally. We focus on the informational and commitment requirements of the regulator. Furthermore, we study the interplay between (private) resource extraction rent and (public) climate rent and ask how property and management of the climate rent can be assigned between regulator and resource sector. There are only two instruments that unburden the regulator from the complex intertemporal management of the climate rent and associated commitment problems: in the cost-benefit world, we derive a stock-dependent tax rule; in the cost-effective (carbon budget) world, only an emissions trading scheme with free banking and borrowing can shift intertemporal timing decisions completely to the market.resource extraction, climate rent, intertemporal policy instruments, prices vs. quantities, Hotelling

Planet-proofing the global food system

Without a great food system transformation, the world will fail to deliver both on the United Nations Sustainable Development Goals and the Paris Climate Agreement. There are five grand challenges to be faced, by science and society, to effect that transformation

Learning or Lock-in: Optimal Technology Policies to Support Mitigation

We investigate conditions that aggravate market failures in energy innovations, and suggest optimal policy instruments to address them. Using an intertemporal general equilibrium model we show that “small” market imperfections may trigger a several decades lasting dominance of an incumbent energy technology over a dynamically more efficient competitor, given that the technologies are very good substitutes. Such a “lock-in” into an inferior technology causes significantly higher welfare losses than market failure alone, notably under ambitious mitigation targets. More than other innovative industries, energy markets are prone to these lock-ins because electricity from different technologies is an almost perfect substitute. To guide government intervention, we compare welfare-maximizing technology policies in addition to carbon pricing with regard to their efficiency, effectivity, and robustness. Technology quotas and feed-in-tariffs turn out to be only insignificantly less efficient than first-best subsidies and seem to be more robust against small perturbations.renewable energy subsidy, renewable portfolio standard, feed-in-tariffs, carbon pricing

Renewable Energy Subsidies: Second-Best Policy or Fatal Aberration for Mitigation?

This paper evaluates the consequences of renewable energy policies on welfare, resource rents and energy costs in a world where carbon pricing is imperfect and the regulator seeks to limit emissions to a (cumulative) target. We use a global general equilibrium model with an intertemporal fossil resource sector. We calculate the optimal second-best renewable energy subsidy and compare the resulting welfare level with an efficient first-best carbon pricing policy. If carbon pricing is permanently missing, mitigation costs increase by a multiple (compared to the optimal carbon pricing policy) for a wide range of parameters describing extraction costs, renewable energy costs, substitution possibilities and normative attitudes. Furthermore, we show that small deviations from the second-best subsidy can lead to strong increases in emissions and consumption losses. This confirms the rising concerns about the occurrence of unintended side effects of climate policy { a new version of the green paradox. We extend our second-best analysis by considering two further types of policy instruments: (1) temporary subsidies that are displaced by carbon pricing in the long run and (2) revenue-neutral instruments like a carbon trust and a feed-in-tariff scheme. Although these instruments cause small welfare losses, they have the potential to ease distributional conflicts as they lead to lower energy prices and higher fossil resource rents than the optimal carbon pricing policy.Feed-in-Tariff, Carbon Trust, Carbon Pricing, Supply-Side Dynamics, Green Paradox, Climate Policy

Adapt, Mitigate, or Die? The Fallacy of a False Trade-off by Ottmar Edenhofer and Steffen Brunner

Klimaveränderung; Internationale Umweltpolitik; Welt

Climate policies for road transport revisited (I): Evaluation of the current framework

The global rise of greenhouse gas (GHG) emissions and its potentially devastating consequences require a comprehensive regulatory framework for reducing emissions, including those from the transport sector. Alternative fuels and technologies have been promoted as means for reducing the carbon intensity of the transport sector. However, the overall transport policy framework in major world economies is geared towards the use of conventional fossil fuels. This paper evaluates the effectiveness and efficiency of current climate policies for road transport that (1) target fuel producers and/or car manufacturers, and (2) influence use of alternative fuels and technologies. With diversifying fuel supply chains, carbon intensity of fuels and energy efficiency of vehicles cannot be regulated by a single instrument. We demonstrate that vehicles are best regulated across all fuels in terms of energy per distance. We conclude that price-based policies and a cap on total emissions are essential for alleviating rebound effects and perverse incentives of fuel efficiency standards and low carbon fuel standards. In tandem with existing policy tools, cap and price signal policies incentivize all emissions reduction options. Design and effects of cap and trade in the transport sector are investigated in the companion article (Flachsland et al., 2010).Fuel efficiency standards, low carbon fuel standards, climate change

Prices vs. quantities and the intertemporal dynamics of the climate rent

This paper provides a formal survey of price and quantity instruments for mitigating global warming. We explicitly consider policies' impact on the incentives of resource owners who maximize their profits intertemporally. We focus on the informational and commitment requirements of the regulator. Furthermore, we study the interplay between (private) resource extraction rent and (public) climate rent and ask how property and management of the climate rent can be assigned between regulator and resource sector. There are only two instruments that unburden the regulator from the complex intertemporal management of the climate rent and associated commitment problems: in the cost-benefit world, we derive a stock-dependent tax rule; in the cost-effective (carbon budget) world, only an emissions trading scheme with free banking and borrowing can shift intertemporal timing decisions completely to the market

Avoiding Carbon Lock-In: Policy Options for Advancing Structural Change

A major obstacle for the transformation to a low-carbon economy is the risk of a carbon lock-in: fossil fuel-based ('dirty') technologies dominate the market although their carbon-free ('clean') alternatives are dynamically more efficient. We study the interaction of learning-by-doing spillovers and the substitution elasticity between the clean and the dirty sector in an intertemporal general equilibrium model. We find that the substitution possibilities between the two sectors have an ambivalent effect: although a high substitution elasticity requires less aggressive mitigation policies than a low one, it creates a greater lock-in in the absence of regulation. The optimal policy response consists of a permanent carbon tax as well as a learning subsidy for clean technologies. A single policy instrument can also avoid high welfare losses, but a more stringent mitigation target can only be achieved at painful costs. We demonstrate that the policy implication of [Acemoglu et al. 2012] is limited in scope. Our numerical results also highlight that infrastructure provision is crucial to facilitate the low-carbon transformation.structural change, low-carbon economy, carbon lock-in, mitigation policies, learning-by-doing

Is Capital Mobility Good for Public Good Provision?

We set up a general model on capital mobility which contains many of the models in the literature as special cases. The race to the bottom results not from a capital flight effect, but rather from a kind of Laffer curve effect in public good provision. Selectively introducing simplifying assumptions allows reproducing other models and understanding how they bias results in favor or against capital mobility. We then show how the net effect of capital mobility can be positive or negative within the same model depending on the relative capital endowment