The Economic Cost of CO2 Emission Cuts

We follow Schmalensee, Stoker, and Judson (1998) to forecast CO2 emissions based on the environmental Kuznets curve (EKC). Our findings suggest that the EKC will not lead to significant decreases in CO2 emissions even by 2050 for countries with the highest incomes. Therefore, mandatory emissions cuts are required to limit climate change. In the same spirit of Horowitz (2009) and Ng and Zhao (2010), we then use a reduced-form approach to estimate the economic costs of mandatory emission cuts. Based on our parameter estimates, we find that a 25% mandatory deduction in CO2 emissions from 1990 will lead to a 5.63% decrease in the combined GDP of the 19 OECD countries, and a 40% deduction will result in a 12.92% loss in income (holding other relevant variables constant)! Our estimates are substantially higher than those in Paltsev, Reillya, Jacobya, and Morris (2009) and Dellink, Briner and Clapp (2010), and suggest that the economic cost to limit climate change as envisioned in the Copenhagen Accord may be substantial and more research should be done before mandatory emission cuts are implemented.Environmental Kuznets Curve, Carbon Dioxide Emissions, Economic Cost, Climate Change, Environmental Economics and Policy,

Examining Point-Nonpoint Trading Ratios for Acid Mine Drainage Remediation with a Spatial-Temporal Optimization Model

A trading ratio is required for water quality trading that involves nonpoint sources to compensate for the difficulty of determining nonpoint loadings, the stochastic characteristics of nonpoint loadings, and the uncertainty inherent in nonpoint source pollution control strategies. Compensating for risk and uncertainty is one of the primary justifications that a trading ratio greater than one is commonly considered. However, the appropriate specific value of a trading ratio remains unclear because of qualitative differences between point and nonpoint sources. This study addresses a growing concern with the analytical underpinnings of point/nonpoint trading ratios in water quality trading programs. This paper considers a basic spatial-temporal optimal control model assuming that the goal of the decision maker is to maximize ecological services from the watershed over a 10-year planning horizon given a predetermined budget each year to treat acid mine drainage problems. The level of pollution is assumed to be known but declining slightly over time as the acid mine drainage sources evolve. Resources are assumed to be spent on remediation projects that produce long term but declining treatment results. The primary goal of the model is to distribute the available resources over the basin by investing in restoration projects for targeted streams each year that will maximize the ecological return on this investment. The model reflects both the spatial reality of variations in flow, in pollution, in treatment, and in the ecological benefits produced and the intertemporal constraints of limited resources and the inability to move remediation programs once the initial investment is made. The resulting optimal temporal and spatial investment strategies are derived from solutions to a mixed integer programming problem obtained using the GAMS/CPLEX mixed integer programming package. The optimal results are then manipulated to evaluate trading ratios. A hypothetical acidity trading scenario is proposed in which a point source (a new coal mine operation subject to TMDL rules) uses credits generated through remediation projects at other sites from treatment of nonpoint sources within the same basin over the 10-year planning horizon. The trading ratio is the ratio of the expected amount of pollutant removed by treating the nonpoint source divided by the amount of additional pollution allowed from the new point source. Our results indcate that point/nonpoint trading ratios in proposed trading scenarios greater than one can be justified. For example, for a point/nonpoint trade between sources in adjacent stream segments, the appropriate trading ratio is 3.66 (or 3.66 to one). We note that current regulations give a lower bound for point/nonpoint trading ratio of 1:1. The upper bound for point/nonpoint trading ratio depends on technical aspects of the relative costs of treating the point source or treating nonpoint sources and reflects the limit of how much one is willing to pay for credits. A variety of factors determine trading ratios. First, to encourage trades with less uncertainty, trades in which the credit seller and buyer are in close proximity, and in which the credit seller is upstream, lower trading ratios are recommended. Second, trading ratios should be adjusted to favor trades that contribute to strategic restoration goals such as the improvement or maintenance of water quality in a particular basin. Reduced ratios provide incentives to promote the generation of credits in priority locations. Finally, trading ratios for same-pollutant trades should be lower than those for cross-pollutant trades. Three separate trading currencies would be used to account for same-pollutant acid mine drainage trades: pounds of iron, aluminum, and manganese. There would be little uncertainty in the outcome of a trade if the credit generator and buyer were affecting the same pollutant. In contrast, cross-pollutant trades that use a common currency such as ecological indices would be measured based on their ecological effect, which is one step removed from the actual changes in pollutant loads. The higher trading ratio required for cross-pollutant trades reflects this greater uncertainty. All potential trades considered in this study are interspatial trades; trades occur in the same basin; trades could be cross-pollutant trades within acid mine draiange and same-pollutant trades as well; and the credit buyer is the new coal mining operation; credit generators could be government agencies or nonprofit organization; and abandned mine lands and bond forfeiture sites can be sites where credits are generated.point-nonpoint water quality trading, trading ratio, acid mine drainage, spatial-temporal optimization, Environmental Economics and Policy,

Is global warming mainly due to anthropogenic GHG emissions? Working paper series--09-14

Although there is little controversy about global warming, there is still a debate regarding whether global warming is mainly due to anthropogenic GHG emissions. Many researchers strongly believe that global warming is mainly due to GHG emissions. However, other scientists argue that the standard models overstate the importance of CO2 emissions. We propose a reduced-form regression-based test. With the temperature and CO2 emissions data from the U.S, we find little evidence in support of the notion that recent global warming is mainly due to CO2 emissions. Our results therefore call for more research on the causes of recent global warming

The Adverse Impact of Temperature on Income

Crop Production/Industries, Risk and Uncertainty,

The cost of CO2 emission cuts: Working paper series--10-14

We study how carbon dioxide (CO2) emission cuts affect income for 23 OECD countries over the 1980-2004 period. The importance of this question is manifested in the disagreements at the 2009 United Nations Climate Change Conference in Copenhagen and the 2010 State of the Union Address by United States President Barack Obama. We start by deriving an income-CO2 relationship based on a structural production function, which is a natural way to model the relationship among income, energy consumption, and CO2 emissions. We then use a similar empirical methodology as Tucker (1995) to estimate the income-CO2 relationship. Such an approach not only allows us to focus on the long-run relationship but also enables us to project the relationship between income and CO2 emissions for future years. Our findings suggest that the economic cost of CO2 emission cuts is significant. To reduce emissions 50% below 1990 levels by 2050, the economic cost per year for developed countries is about 0.3% reduction in GDP per capita which represents a 15% slowdown in economic growth

AN OPTIMAL CONTROL APPROACH TO WATER QUALITY TRADING: COST-EFFECTIVE POINT/NONPOINT MANAGEMENT IN A WATERSHED FRAMEWORK

This study reflects a growing interest in water quality trading involving both point and nonpoint sources in a watershed framework. An empirical spatial-temporal optimal control model is presented and solved to assess the scope and implications of point/nonpoint trading. Results indicate significant economic gains to broader based interpretations of trading rules.Resource /Energy Economics and Policy,

Industrial Agglomeration, Production Networks and FDI Promotion The Case Study of China

Chinas Industrial clustering is a distinguished economic phenomenon over the last 20 years. It began to enter into its fast track in the mid-1990s and developed rapidly in recent years. Both market-driven force and government-driven force contribute to Chinese industrial clusters. The opening and stable macroeconomic policies create a favorable climate for the industrial clustering. Local government has made its contribution to construction on both hardware and software environments for industrial clusters. The major contribution of FDI to the local industrial clustering lies in helping integrating Chinese domestic industries into international division of labor and at the same time forging a relatively integrated production chain for Chinese domestic industries. At present, China has stepped into the new phase of industrial clusters upgrading. Chinese government is gradually improving the local software infrastructure for industry clustering.Industrial Agglomeration, China, Production Networks, FDI, foreign direct investment

The economic cost of mandatory CO2 emission cuts: A reduced-form approach with panel data: Working paper series--12-04

We follow Schmalensee, Stoker, and Judson (1998) to forecast CO2 emissions based on the Environmental Kuznets Curve (EKC). Our findings suggest that the EKC will not lead to significant decreases in CO2 emissions by 2050 for countries with the highest incomes. Therefore, mandatory emissions cuts may be required to limit climate change. Consistent with Horowitz (2009) and Ng and Zhao (2010), we use a reduced-form approach to estimate the economic costs of mandatory emission cuts. Based on our parameter estimates, we find that a 25% mandatory reduction in CO2 emissions from 1990 will lead to a 5.63% decrease in the combined GDP of 19 high-income OECD countries, and a 40% reduction will result in a 12.92% loss in income (holding other relevant variables constant)! Our estimates are substantially higher than those in Paltsev, Reillya, Jacobya, and Morris (2009) and Dellink, Briner and Clapp (2010), and suggest that the economic cost to limit climate change as envisioned in the Copenhagen Accord may be substantial. More research should be done before mandatory emission cuts are implemented