Induced Technological Change in a Multi-regional, Multi-sectoral Integrated Assessment Model (WIAGEM): Impact Assessment of Climate Policy Strategies

This paper illustrates the representation of induced technological change in the multi- regional, multi-sectoral integrated assessment model WIAGEM. The main aim of this paper is to investigate quantitatively economic impacts of climate policy measures due to induced technological changes that are considered. Improved technological innovations are triggered by increased R&D expenditures that advance energy efficiencies. Model results show that induced technological changes due to increased investment in R&D reduce compliance costs. Although R&D expenditures compete with other investment expenditures, we find that increased R&D expenditures improve energy efficiency that substantially lowers abatement costs. Without the inclusion of induced technological changes, emission targets are primarily reached by production declines, resulting in overall welfare reductions. With the inclusion of induced technological changes, emission mitigations can achieve fewer production drawbacks. Technological spill over effects also lead to improved terms of trade effects.Induced technological change; Multi-regional applied integrated assessment model; Technological spillover

The "Bali Convention": Flexibility of Targets and Instruments Inevitable

The Kyoto Protocol is one first important step towards a global greenhouse gas emissions reduction strategy. In order to avoid irreversible climate changes and huge economic damage, not just some but all of the responsible nations should agree on a joint proposal to reduce emissions. Sharing the burden fairly would mean that those nations with high emissions per capita should reduce them more than countries with low emissions per capita. However, a fair burden sharing should also take into account early action and economic and social conditions. Most of the countries, especially those with high economic growth, fear large economic losses if emissions reduction targets are very high. Especially fast-growing nations such as China and India suspect negative consequences if climate policy takes a dominant role. The post-Kyoto negotiations can only be successful if flexibility of targets and instruments is considered. The next UN climate conference, at the end of 2007 in Bali, is an important starting point for a so-called "Bali Convention". This convention should take into account different emissions reduction options and flexible emissions reduction targets. Germany's Chancellor Merkel supports a world per capita emissions target; Europe should find soon a fair burden sharing between the EU member states and start negotiations with 30 % emissions reduction in order to make clear how serious EU is to reduce emissions. The APEC nations favour an energy intensity reduction target. The emissions intensity of a nation can be reduced if CO2-free technologies are widely applied. Nations with a large share of CO2 emissions resulting from high fossil-fuel usage or high methane emissions from energy production or agriculture usually favour flexible indexed targets. The "Bali Convention" should define such flexible targets to take into account national conditions and visions. It is most important that countries agree on binding targets, either concrete emissions reduction targets or indexed targets such as emissions intensity or per capita emissions. The key to success is flexibility of targets and instruments.

Impacts of the German Support for Renewable Energy on Electricity Prices, Emissions and Profits: An Analysis Based on a European Electricity Market Model

Effects of renewable support legislation on electricity prices have been analyzed with a plethora of models. However, these models neglect at least one of the following aspects which we take into account in our analysis: oligopolistic market behavior of dominant firms, emission trading, restricted electricity trade and production capacities, and effects on producer prices and firm profits. In this paper we use the electricity market model EMELIE and decompose the impact of the feed-in of renewable energy in Germany into two effects: a substitution effect triggered by the displacement of conventional sources and a permit price effect induced via the ETS. We find that the renewable support increases consumer prices slightly by 0.1 Eurocent/kWh, while the producer price decreases by 0.4 Eurocent/kWh. In addition, emissions from electricity generation in Germany are reduced by 32 Mt CO2, but are hardly altered if we consider the European electricity sector in total. Finally, the profits of most firms are significantly reduced by the support policy unless the firms combine relatively carbon intensive production equipment with a loose connection to the German grid.

Refunding ETS-Proceeds to Spur the Diffusion of Renewable Energies: An Analysis Based on the Dynamic Oligopolistic Electricity Market Model EMELIE

We use a quantitative electricity market model to analyze the welfare effects of refunding a share of the emission trading proceeds to support renewable energy technologies that are subject to experience effects. We compare effects of supporting renewable energies under both perfect and oligopolistic competition with competitive fringe firms and emission trading regimes that achieve 70 and 80 percent emission reductions by 2050. The results indicate the importance of market power for renewable energy support policy. Under imperfect competition welfare improvements is maximized by refunding ten percent of the emission trading proceeds, while under perfect competition the optimal refunding share is only five percent. However, under both behavioral assumptions we find significant welfare improvements due to experience effects which are induced by the support for renewable energy.emission trading, renewable energy support, experience effects, imperfect competition

What Direction for Oil Prices?

The price of crude oil goes up and up -most recently driven by hurricane Katrina, which had a catastrophic effect on the US oil industry, and was followed by hurricane Rita. In September 2005 the price of Brent crude reached a new record at US $66 per barrel. The agreement by member states of the International Energy Agency (IEA) to release crude oil and petroleum products from their strategic reserves has brought prices down again slightly, but it is very questionable whether this will calm the upward drive for long. Crude oil prices have been rising continuously since 2003, largely as a result of increased demand, particularly from China. The high level of capacity utilization in oil extraction creates risks that are reflected in rising prices on the forward markets. The rise in oil prices since 2003 is around US$ 30 per barrel, and this is probably mainly due to short-term effects and resultant speculative buying. In view of the high stocks of oil the current prices do seem excessive. Sooner or later they will normalize on a lower level, but in the long term higher prices for oil than the average of recent decades must be expected. Model simulations up to the year 2025 show that in a scenario of adequate resources real oil prices (price base 2000) of between US $30 and US$ 40 per barrel are to be expected. In a scenario of more limited resources, however, prices could rise to just under US $80 per barrel in real terms, which is up to US$ 160 nominally.

WIATEC: A World Integrated Assessment Model of Global Trade Environment and Climate Change

This paper describes the structure of the World Integrated Assessment model of global Trade, Environmental, and Climate change (WIATEC).The model consists of a multi-regional multi-sectoral core CGE model linked to a climate model. The core CGE is based on an existing global trade and environment model called GTAP-E (Truong, 1999; Burniaux and Truong, 2002). A suite of different and interchangeable 'modules' are then built around this 'core' to enable the model to be able to handle a range of different policy issues such as CO2 emissions, abatement, trading, non-CO2 (CH4 and N2O) emissions, land use land use change and forestry (LULUCF) activities, and changing technologies in the electricity generation sector. The approach which uses a core model structure with different additional modules built around this core structure allows the overall model to be flexible and can be adapted to a range of different policy issues. We illustrate the usefulness of this approach in a policy experiment which looks at the interaction between emissions trading scheme and the promotion of renewable energy targets in the European Union climate policy.Integrated Assessment Model, Technological Change, Climate Policy

Methane: A Neglected Greenhouse Gas

Methane is a greenhouse gas that gets far less public attention than carbon dioxide. This is entirely unwarranted. Being 25 times more potent than carbon dioxide in trapping heat in the atmosphere, methane accounts for about one-sixth of all anthropogenic (i.e. human-induced) greenhouse gas emissions. Methane is also overlooked when it comes to taking concrete measures for climate protection, despite the fact that reducing methane emissions is potentially cheap. Major sources of methane emissions are livestock farming, the natural gas sector, landfills, wetland rice cultivation and coal mining. In many cases, it is possible to mitigate substantial amounts of methane in a cost-effective way. Moreover, captured methane can be used for generating heat and power. In other words, abating one ton of methane emissions is sometimes cheaper than abating an equivalent amount of carbon dioxide. The challenge is to effectively incorporate cutbacks of methane gas emissions into climate policy strategies.Methane, Mitigation, Climate policy

A Flexible Global Warming Index for Use in an Integrated Approach to Climate Change Assessment

Global Warming Potential (GWP) is an index used to measure the relative accumulated radiative effect of a tonne of greenhouse gas (GHG) compared to that of a 'reference' gas (CO2). Due to the different lifetimes of the GHGs, the GWPs are often measured over a fixed and long period of time (usually 20, 100, or 500 years). The disadvantage of this time-approach is that the index may give a good indication of the relative average effect of each GHG or total radiative forcing over the chosen time horizon, but it may not describe accurately the marginal contribution of each GHG to the overall climate change at a particular point in time, and conditional on a particular climate change policy scenario which is being considered. In this paper, we propose an alternative approach which measures the relative contribution of each GHG to total radiative forcing more accurately and in accordance with the current policy context being considered. We suggest the use of a marginal global warming potential (MGWP) rather than the existing (total or cumulative) GWP index. The MGWP can be calculated accurately and endogenously within a climate model. This is then linked to the marginal abatement cost (MAC) of the gas, estimated within an economic model linked to the climate model. In this way the balancing of the benefits and costs associated with the reduction of a unit of emission of the GHG can be achieved more accurately. We illustrate the use of the new approach in an illustrative experiment, using a multi-sector multi-gas and multi-regional computable general equilibrium economic model (GTAP-E) coupled with a reduced form climate change model (ICLIPS Climate Model, or ICM). The results show that the new approach can significantly improve on the existing method of measuring the trade-offs between different GHGs in their contribution to a climate change objective.