Review of Analytical Tools for Assessing Trade and Climaite Change Linkages

In this paper, the authors briefly refer to the essential elements underlying the theoretical linkages between trade, economic development, and climate change and review the analytical tools which are used to describe these linkages.Climate Changes, Trade Linkages, CGE

Impact Assessment of Emissions Stabilization Scenarios with and without Induced Technological Change

The main aim of this paper is to investigate quantitatively the economic impacts of emissions stabilization scenarios with and without the inclusion of induced technological change (ITC). 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 which substantially lowers abatement costs. Without the inclusion of induced technological change, emissions targets are primarily reached by declines in production, resulting in overall welfare reductions. With the inclusion of induced technological changes, emissions mitigations can result in fewer production and GDP drawbacks.Impact assessment of climate policy; Technological change

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

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.

Returns to scale in the electricity supply sector, imperfect competition, and efficiency of climate change policies

Climate change policies often contain the dual objectives of trying to reduce the level of CO2 emissions from the use of fossil-fuels while at the same time encouraging the use of renewable energy. In the area of electricity generation, these two objectives can be considered either as complementary or competing with each other. In this paper we show that this depends on the structure of the electricity market and the characteristics of the generation technologies. If the market is perfectly competitive with all technologies subject to constant returns to scale then climate change policies may require only one instrument to achieve the single objective of CO2 emissions reductions. If on the other hand some fossil-fuel based electricity generation technologies are subject to increasing returns to scale which gives rise to some degree of natural monopolistic power in the electricity generation market then to correct for both the environmental externality which is caused by un-priced CO2 emissions and the market imperfection caused by the existence of increasing returns to scale, policy makers may need two rather than just one policy objectives (and instruments). The first objective is to correct for the environmental externality and reduce CO2 emissions while the second objective is to correct for the imperfection in the electricity market. Whether the secondary objective can help or hinder the first objective will depend on how it is designed. In this paper, we illustrate this analysis with an examination of the European Union 20-20-20 climate change policies

Constant elasticity of substitution (CES) production function can greatly overestimate the economic costs of climate policies.

In this paper, we look at a modification to the conventional constant-elasticity-of-substitution (CES) production function to arrive at a more general specification which can allow for varying, or ‘flexible’ elasticity of substitution (FES). The function reduces to the CES as a special case, hence it is more general. We use the new function in a climate policy experiment to test the usefulness and robustness of the new function. It turns out that using the new function in an economic model can give estimates of the economic costs of a climate policy which is about half of the costs as estimated from a conventional CES production function specification. This has significant implication, not only for climate policy, but also for any other economic policy which relies on models which use the CES production function specification as a basic building block

Returns to scale in the electricity supply sector, imperfect competition, and efficiency of climate change policies

Climate change policies often contain the dual objectives of trying to reduce the level of CO2 emissions from the use of fossil-fuels while at the same time encouraging the use of renewable energy. In the area of electricity generation, these two objectives can be considered either as complementary or competing with each other. In this paper we show that this depends on the structure of the electricity market and the characteristics of the generation technologies. If the market is perfectly competitive with all technologies subject to constant returns to scale then climate change policies may require only one instrument to achieve the single objective of CO2 emissions reductions. If on the other hand some fossil-fuel based electricity generation technologies are subject to increasing returns to scale which gives rise to some degree of natural monopolistic power in the electricity generation market then to correct for both the environmental externality which is caused by un-priced CO2 emissions and the market imperfection caused by the existence of increasing returns to scale, policy makers may need two rather than just one policy objectives (and instruments). The first objective is to correct for the environmental externality and reduce CO2 emissions while the second objective is to correct for the imperfection in the electricity market. Whether the secondary objective can help or hinder the first objective will depend on how it is designed. In this paper, we illustrate this analysis with an examination of the European Union 20-20-20 climate change policies

Comprehensive Package of Climate Protection Measures Could Substantially Decrease Cost of Emission Reductions in Germany

Seeking to play a pioneering role in climate protection, the European Union has decided to pursue a reduction of at least 20% in greenhouse-gas emissions (on 1990 levels) by the year 2020. Moreover, Europe has declared its willingness to commit itself to emission reductions of 30% over the same period if other developed countries commit themselves to similar targets and if developing countries also make an appropriate contribution. A fair distribution of the burden of emission reductions in Europe and a comprehensive package of climate protection measures in Germany could substantially reduce the cost of emission reductions for the German economy. If Germany succeeds at European level in pushing through a fair burden-sharing mechanism that takes into account the emission reductions achieved to date in the different member states, and at the same time implements a comprehensive package of climate protection measures at home, then climate protection costs can be kept low. It would be very difficult for Germany to achieve its reduction target only by shutting down nuclear installations. What are also needed, in particular, are increased exploitation of energy efficiency potentials, the further development of renewable energy sources, the improvement of the system of emissions trading, and the promotion of innovative energy technologies. If European burden-sharing were fairly distributed and if Germany were to exploit all its energy efficiency potentials, then, in order to achieve a 20% reduction in current European emissions, Germany's climate protection costs would amount to total of around 1.9 billion euro per annum up to 2020. In this case, Germany would have reduced its emissions by 31% on 1990 levels. If it were not possible to negotiate a fair distribution of the burden, and if Germany were unable to exploit the necessary energy efficiency potentials, then the reduction costs would increase to around 5.7 billion euro per annum.Climate protection, Germany, costs of climate policy

GTAP-E: An Energy-Environmental Version of the GTAP Model with Emission Trading

Energy is an important commodity in many economic activities. Its usage affects the environment via CO2 emissions and the Greenhouse Effect. Modeling the energy-economy-environment-trade linkages is an important objective in applied economic policy analysis. Previously, however, the modeling of these linkages in GTAP has been incomplete. This is because energy substitution, a key factor in this chain of linkages, is absent from the standard model specification. This technical paper remedies this deficiency by incorporating energy substitution into the standard GTAP model. It begins by first reviewing some of the existing approaches to this problem in contemporary CGE models. It then suggests an approach for GTAP which incorporates some of these desirable features of energy substitution. The approach is implemented as an extended version of the GTAP model called GTAP-E. In addition, GTAP-E incorporates carbon emissions from the combustion of fossil fuels and this revised version of GTAP-E provides for a mechanism to trade these emissions internationally as well as domestically. The policy relevance of GTAP-E in the context of the existing debate about climate change is illustrated by some illustrative simulations of the implementation the European emissions trading scheme in 2005. It is hoped that the proposed model will be used by individuals in the GTAP network who may not be themselves energy modelers, but who require a better representation of the energy-economy-environmental linkages than is currently offered in the standard GTAP model.