Technological change in economic models of environmental policy: a survey

This paper provides an overview of the treatment of technological change in economic models of environmental policy. Numerous economic modeling studies have confirmed the sensitivity of mid- and long-run climate change mitigation cost and benefit projections to assumptions about technology costs. In general, technical progress is considered to be a noneconomic, exogenous variable in global climate change modeling. However, there is overwhelming evidence that technological change is not an exogenous variable but to an important degree endogenous, induced by needs and pressures. Hence, some environmenteconomy models treat technological change as endogenous, responding to socio-economic variables. Three main elements in models of technological innovation are: (i) corporate investment in research and development, (ii) spillovers from R&D, and (iii) technology learning, especially learning-by-doing. The incorporation of induced technological change in different types of environmental-economic models tends to reduce the costs of environmental policy, accelerates abatement and may lead to positive spillover and negative leakage. --exogenous technological change,induced technological change,environmenteconomy models

EU enlargement and environmental policy

The Eastern European Associates (EEA) have committed to reduce greenhouse gas emissions according to their targets set in the Kyoto Protocol. Furthermore since 1993 trade liberalization has taken place between all associated countries and the EU. There is meanwhile a large quantitative literature on the economic effects of full integration of the associated countries into the EU as well as on the Kyoto Protocol. However, there is a lack of quantitative research on the linkage of trade and the environment in the context of the EU enlargement. In this paper we analyze the interactions of different environmental policies under the Kyoto Protocol and trade liberalization in the process of eastern enlargement using a computable general equilibrium model. We find that trade liberalization provides large gains for EEAs while it holds only modest gains for EU member states. Integration does not show a significant impact on carbon abatement policies, but mitigates associated welfare losses. --EU enlargement,Kyoto Protocol,computable general equilibrium modeling

Measuring Sustainable Development: The Use of Computable General Equilibrium Models

This paper advocates computable general equilibrium models as a methodological tool that is particularly suitable for measuring the impacts of policy interference on the three dimensions of sustainable development, i.e. environmental quality, economic performance (gross efficiency) and equity. These dimensions are inherently intertwined and subject to trade-offs. Computable general equilibrium models can incorporate various important sustainable development indicators in a single consistent framework and allow for a systematic quantitative trade-off analysis. --computable general equilibrium modeling (CGE),sustainability impact assessment (SIA),sustainable development (SD)

Climate policy induced investments in developing countries: the implications of investment risks

International climate policy has assigned the leading role in emissions abatement to the industrialized countries while developing countries remain uncommitted to binding emission reduction targets. However, cooperation between the industrialized and the developing world through joint implementation of emission abatement promises substantial economic gains to both parties. In this context, the policy debate on joint implementation has addressed the question of how investment risks to project-based emission crediting between industrialized countries and developing countries affect the magnitude and distribution of such gains. In our quantitative analysis, we find that the incorporation of country-specific investment risks induces rather small changes vis-?-vis a situation where investment risks are neglected. Only if investors go for high safety of returns is there a distinct decline in the overall volume of emission crediting and the associated total economic benefits. While the welfare effects of risk incorporation for industrialized countries are unequivocally negative, the implications across developing countries are ambiguous. Whereas low-risk developing countries attract higher project volumes and benefit from higher effective prices per emission credit compared to a reference scenario without risk, the opposite applies to high-risk countries. Sensitivity analysis with respect to higher risk estimates show that shifts in the comparative advantage of emission abatement against high-risk countries may become dramatic as only very low-cost mitigation projects will be realized, driving down the country?s benefits from emission crediting to the advantage of low-risk developing countries. This result is supported by empirical evidence on regional imbalances of activities implemented jointly under the pilot phase of the Kyoto Protocol. --international climate policy,investment risks

Climate Policy Beyond Kyoto: Quo Vadis? A Computable General Equilibrium Analysis Based on Expert Judgements

Despite of the apparent failure of the Kyoto Protocol with respect to environmental effectiveness, it has established a broad international mechanism that might be able to provide a global reduction of greenhouse gas emissions during a second commitment period. In this paper we investigate the likely future of post-Kyoto policies. Our primary objective is to identify policy-relevant abatement scenarios and to quantify the associated economic implications across major world regions. Based on a cross-impact analysis we first evaluate an expert poll to select the most likely post-Kyoto climate policy scenarios. We then use a computable general equilibrium model to assess the economic implications of these key scenarios. We find that post-Kyoto agreements are likely to cover only small reductions in global greenhouse gas emissions with abatement duties predominantly assigned to the industrialized countries while developing countries do not make any commitments, but can sell emission abatement to the industrialized world. Equity rules to allocate abatement duties are mainly based on the sovereignty principle or ability-to-pay. Global adjustment costs arising from post-Kyoto policies are very moderate but fuel exporting countries are likely to face quite considerable costs because of adverse terms-of-trade effects on fossil fuel markets. --climate policy,cross-impact analysis,computable general equilibrium modeling

The Economic and Environmental Implications of the US Repudiation of the Kyoto Protocol and the Subsequent Deals in Bonn and Marrakech

Taking account of sinks credits as agreed in Bonn and Marrakech, this paper illustrates how market power could be exerted in the absence of the US ratification under Annex 1 trading and explores the potential implications of non-competitive supply behavior for the international market of tradable permits, compliance costs for the remaining Annex 1 countries to meet their revised Kyoto targets, and the environmental effectiveness. Our results show that the US withdrawal from the Kyoto Protocol has great impact on the economic costs and environmental effectiveness of the Protocol since it would lead to no real emission reduction in all remaining Annex 1 regions. Depending on how market power is exerted by the dominant permit suppliers, the former Soviet Union and the Eastern European countries, the overall compliance costs of all remaining Annex 1 regions differ significantly. Moreover, curtailing permit supply by market power increases substantially the overall environmental effectiveness by cutting the amount of hot air being emitted into the atmosphere by more than half, although to much less extent than in the case of the US compliance. --climate policy,emission trading,market power,Kyoto Protocol

Market power in international emissions trading : the impact of U.S. withdrawal from the Kyoto Protocol

This paper investigates the implications of U.S. withdrawal on environmental effectiveness, economic efficiency, and the distribution of compliance costs taking into account market power of the Former Soviet Union (FSU) on emission permit markets. While exercise of market power on behalf of FSU under U.S. compliance has no environmental impact as compared to competitive permit trade, it prevents the Kyoto Protocol from boiling down to business-as-usual after U.S. withdrawal. Non-compliance of the U.S. increases the efficiency losses from FSU market power and reduces the compliance costs of remaining OECD countries but these gains must be weighted against a dramatic loss in overall environmental effectiveness. Clearly, the big losers from U.S. withdrawal are FSU and its competitive fringe (Central and Eastern Europe) that suffer from a huge decline in permit sales revenues. --climate policy,emission trading,market power

Recycling of eco-taxes, labor market Effects and the true cost of labor - A CGE analysis

Computable general equilibrium (CGE) modeling has provided a number of important insights about the interplay between environmental tax policy and the pre-existing tax system. In this paper, we emphasize that a labor market policy of recycling tax revenues from an environmental tax to lower employers’ non-wage labor cost depends on how the costs of labor are modeled. We propose an approach, which combines neoclassical substitutability and fixed factor proportions. Our concept implies a user cost of labor which consists of the market price of labor plus the costs of inputs associated with the employment of a worker. We present simulation results based on a CO2 tax and the recycling of its revenues to reduce the non-wage labor cost. One simulation is based on the market price of labor and the other on the user cost of labor. We found a double dividend under the first approach but not under the second one.market-based environmental policy, carbon taxes, double dividend, computable general equilibrium modeling

On the Self-serving Use of Equity Principles in International Climate Negotiations

This paper puts forward equity as an important structural element to understanding negotiation outcomes. We first advance bargaining theory to incorporate the self-serving use of equity. Agents are predicted to push equity principles which benefit them more than other parties, in particular those which are disadvantageous to parties with large bargaining power. Based on unique data from a world-wide survey of agents involved in international climate policy, we then study how participants assess the support of the equity criteria by major parties in the climate negotiations. Comparing these results with cost estimates from a POLES model, we find that the perceived equity preferences of the respective countries or groups of countries are in general consistent with our hypothesis of a self-serving use of equity criteria and thereby lend support for our theoretical model. While this self-interest is recognized by the participants of our survey for the positions of the USA and the G77/China as well as Russia, the EU manages to be seen as choosing (self-serving) equity arguments out of fairness concerns and in order to facilitate the negotiations. --bargaining theory,equity criteria,self-serving bias,climate policy,survey data

Technological Uncertainty and Cost-effectiveness of CO2 Emission Trading Schemes

This paper studies implications of uncertainty about the arrival date of a competitive CO2 backstop technology for the design of cost-effective CO2 emission trading schemes. For this purpose, we develop a dynamic general equilibrium model that captures empirical links between CO2 emissions associated with energy use, the rate and direction of technical change and the economy. We specify CO2 capture and storage (CCS) as the backstop technology whose competitiveness is anticipated or not. We find that the discounted welfare loss associated with the environmental target is lower if CCS is not anticipated and that CO2 shadow prices are then relatively high in the years before CCS is competitive. By not simply postponing the implementation of an emission reduction strategy until CCS is competitive, one relies more on economy-wide technical change and its welfare-enhancing technology externalities, thus allowing for a higher steady state. -- Dieses Papier untersucht die Implikationen von Unsicherheit bezüglich der Verfügbarkeit einer kompetitiven Technologie zur Kohlenstoffabscheidung und ?speicherung auf die Ausgestaltung kosteneffektiver CO2 Emissionshandelssysteme. Zu diesem Zweck wird ein dynamisches rechenbares allgemeines Gleichgewichtsmodell entwickelt, welches den empirischen Zusammenhang zwischen CO2 Emissionen, Rate und Richtung des technischen Wandels und wirtschaftlichen Aktivitäten berücksichtigt. Kohlenstoffabscheidung und ?speicherung wird als sogenannte Backstop-Technologie modelliert, deren Wirtschaftlichkeit antizipiert wird oder eben nicht. Die Simulationsergebnisse zeigen, dass die diskontierten Wohlfahrtsverluste der Klimapolitik niedriger sind, wenn die Technologie zur Kohlenstoffabscheidung und ?speicherung nicht antizipiert wird. In diesem Fall sind die Preise für CO2 Emissionszertifikate vor der unerwarteten Einführung der Backstop-Technologie relativ hoch. Es wird nicht einfach auf die Wirtschaftlichkeit der Kohlenstoffabscheidung und ? speicherung gewartet. Vielmehr wird ohne die Berücksichtigung von Kohlenstoffabscheidung und ? speicherung ein strikterer Politikpfad zur Erreichung der klimapolitischen Ziele implementiert, der die Internalisierung von technologischen Externalitäten und somit ein höheres Wohlfahrtsniveau ermöglicht. Die Umweltpolitik sollte gegeben der großen technologischen Unsicherheiten vorsichtig sein, Vermeidungsanstrengungen zu verschieben und auf eine Wunderwaffe zu Lösung des Klimaproblems im Energiesektor zu warten.CO2 capture and storage,computable general equilibrium modeling,directed technical change,emission trading,technological uncertainty