nep-ene New Economics Papers
on Energy Economics
Issue of 2009‒07‒28
thirty papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. Efficiency Analysis of Energy Networks : An International Survey of Regulators By Brophy Haney, A.; Pollitt, M.G.
  2. A Comment on: Storage and the Electricity Forward Premium By Bloys van Treslong, A. van; Huisman, R.
  3. Dynamics of the UK Natural Gas Industry: System Dynamics Modelling and Long-Term Energy Policy Analysis By Chi, K.C.; Reiner, D.M.; Nuttall, W.J.
  4. Energy consumption and income : a semiparametric panel data analysis. By Phu Nguyen-Van
  5. Is It Fair to Treat China as a Christmas Tree to Hang Everybody’s Complaints? Putting its Own Energy Saving into Perspective By ZhongXiang Zhang
  6. Oil and the Euro Area Economy By G. PEERSMAN; I. VAN ROBAYS
  7. Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation By Aliyu, Shehu Usman Rano , PhD
  8. Pitfalls in estimating asymmetric effects of energy price shocks By Lutz Kilian; Robert Vigfusson
  9. Modelling oil price expectations: evidence from survey data By Georges Prat; Remzi Uctum
  10. Growth and Diversification of the Russian Economy in Light of Input-Output Tables By Kuboniwa, Masaaki
  11. Russian Economic and Integration Prospects By Havlik, Peter
  12. Analysis of Innovation and Energy Profiles in the Turkish Manufacturing Sector By Okay, Nesrin; Konukman, Alp Er S.; Akman, Ugur
  13. Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector By Christopher R. Knittel
  14. Energia solar fotovoltaica: Contributo para um roadmapping do seu desenvolvimento tecnológico [Fotovoltaic solar energy: a contribute to a technological development roadmapping] By Hugo Gil Silva; Marcos Afonso
  15. On the effectiveness of carbon-motivated border tax adjustments By John Whalley
  16. The Outlook for the Global Supply of Oil: Running on Faith? By Olivier Gervais; Ilan Kolet
  17. Total Factor Productivity Growth when Factors of Production Generate Environmental Externalities By Anastasios Xeapapadeas; Dimitra Vouvaki
  18. Dynamic core-theoretic cooperation in a two-dimensional international environmental model By Marc, GERMAIN; Henry, TULKENS; Alphonse, MAGNUS
  19. Efficient Economic and Environmental Policies Combining Multicriteria Techniques and General Equilibrium Modelling. By Francisco J. André; M. Alejandro Cardenete
  20. Options Introduction and Volatility in the EU ETS By Julien Chevallier; Yannick Le Pen; Benoît Sévi
  21. Climate change mitigation options and directed technical change: A decentralized equilibrium analysis By GRIMAUD Andre; LAFFORGUE Gilles; MAGNE Bertrand
  22. Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action By Massimo Tavoni; Valentina Bosetti; Carlo Carraro
  23. Linking Reduced Deforestation and a Global Carbon Market: Impacts on Costs, Financial Flows, and Technological Innovation By Valentina Bosetti; Ruben Lubowski; Alexander Golub; Anil Markandya
  24. Carbon Markets and their Implications for Natural Resource Management in Australia By Andrew Reeson
  25. On the realized volatility of the ECX CO2 emissions 2008 futures contract: distribution, dynamics and forecasting By Julien Chevallier; Benoît Sévi
  26. Climate policy options and the World Trade Organization By Hufbauer, Gary Clyde; Kim, Jisun
  27. Emissions Trends and Labour Productivity Dynamics Sector Analyses of De-coupling/Recoupling on a 1990-2005 Namea By Giovanni Marin; Massimiliano Mazzanti
  28. Ocean Iron Fertilization in the Context of the Kyoto Protocol and the Post-Kyoto Process By Christine Bertram
  29. Climate Change Feedback on Economic Growth: Explorations with a Dynamic General Equilibrium Model By Fabio Eboli; Ramiro Parrado; Roberto Roson
  30. Additive Damages, Fat-Tailed Climate Dynamics, and Uncertain Discounting By Weitzman, Martin L.

  1. By: Brophy Haney, A.; Pollitt, M.G.
    Abstract: Incentive regulation for networks has been an important part of the reform agenda in a number of countries. As part of this regulatory process, incentives are put in place to improve the cost efficiency of network companies by rewarding good performance relative to a predefined benchmark. The techniques used to establish benchmarks are central to the efficiency improvements that are ultimately achieved. Much experience has been gained internationally in the application of benchmarking techniques and we now have a solid understanding of the main indicators of best practice. These include the use of frontier-based methods; a large and high quality dataset; panel data; and bootstrapping techniques. What we are lacking is a more complete understanding of the factors that influence choice of methods by regulators, i.e. characteristics that may encourage or discourage regulators to adopt best practice methods.
    Keywords: Electricity; Gas; Benchmarking; Efficiency analysis; Incentive regulation; Energy networks
    Date: 2009–06–09
  2. By: Bloys van Treslong, A. van; Huisman, R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper examines the robustness of the results found by Douglas and Popova (2008). They examine the electricity forward premium in relation to gas storage inventories and find that, although electricity is not directly storable, electricity forward premiums are lower when gas storage inventories are higher, especially on days with high temperatures. Douglas and Popova (2008) derive their results from a forward premium model that is an extension of the Bessembinder and Lemmon (2002) model. We examine the robustness of their results, by examining whether the gas storage inventory results hold under a different specification of the forward risk premium. Our result support the results found by Douglas and Popova (2008) and show that their results are not influenced by the specification of the forward premium model.
    Keywords: forward premium;electricity
    Date: 2009–07–07
  3. By: Chi, K.C.; Reiner, D.M.; Nuttall, W.J.
    Abstract: We present a dynamic model of the indigenous natural gas industry in the UK. The model has been built using a system dynamics approach. Using the model several scenarios have been analysed. We found that management of the supply-side policy alone cannot substantially postpone the discovery, production and consumption peak. We also found that the dynamics of the main variables, namely, exploration, production and consumption, are sensitive to initial demand conditions. Postponing the onset of gas price increases can therefore be achieved more effectively through efforts to reduce demand growth. One might expect that a low taxation policy would encourage more exploration and production of gas and thereby stimulate higher consumption rates. Instead, there was no overall net effect on production and consumption in the long term. The depletion effect on cost of exploration acts as counterbalance to low taxation policy. Depletion effect causes cost and thus price to rise further which depress consumption rate. The advances in exploration and production technology can delay the peak of exploration, production and consumption. Technological improvements mean lower cost of exploration and production which pressure down long-term pattern of price dynamics.
    Keywords: System Dynamics; Simulation Modelling; natural gas; energy policy; long-term policy analysis
    JEL: Q48 C63 Q41
    Date: 2009–06–09
  4. By: Phu Nguyen-Van
    Abstract: This paper proposes a semiparametric analysis for the study of the relationship between energy consumption per capita and income per capita for an international panel dataset. It shows little evidence for the existence of an environmental Kuznets curve for energy consumption. Energy consumption increases with income for a majority of countries and then stabilizes for very high income countries. Neither changes in energy structure nor macroeconomic cycle/technological change have significant effect on energy consumption.
    Keywords: Energy consumption, environmental Kuznets curve, semiparametric panel model, nonstationarity.
    Date: 2009
  5. By: ZhongXiang Zhang (East-West Center)
    Abstract: China had been the world’s second largest carbon emitter for years. However, recent studies show that China had overtaken the U.S. as the world’s largest emitter in 2007. This has put China on the spotlight, just at a time when the world community starts negotiating a post-Kyoto climate regime under the Bali roadmap. China seems to become such a Christmas tree on which everybody can hang his/her complaints. This paper first discusses whether such a critics is fair by examining China’s own efforts towards energy saving, the widespread use of renewable energy and participation in clean development mechanism. Next, the paper puts carbon reductions of China’s unilateral actions into perspective by examining whether the estimated greenhouse gas emission reduction from meeting the country’s national energy saving goal is achieved from China’s unilateral actions or mainly with support from the clean development mechanism projects. Then the paper discusses how far developing country commitments can go in an immediate post-2012 climate regime, thus pointing out the direction and focus of future international climate negotiations. Finally, emphasizing that China needs to act as a large and responsible developing country and take due responsibilities and to set a good example to the majority of developing countries, the paper articulates what can be expected from China to illustrate that China can be a good partner in combating global climate change.
    Keywords: Energy Saving, Renewable Energy, Post-Kyoto Climate Negotiations, Clean Development Mechanism, China, USA
    JEL: Q42 Q48 Q53 Q54 Q58
    Date: 2009–06
    Abstract: We examine the macroeconomic effects of different types of oil shocks and the oil transmission mechanism in the Euro area. A comparison is made with the US and across individual member countries. First, we find that the underlying source of the oil price shift is crucial to determine the repercussions on the economy and the appropriate monetary policyreaction. Second, the transmission mechanism is considerably different compared to the US. In particular, inflationary effects in the US are mainly driven by a strong direct passthrough of rising energy prices and indirect effects of higher production costs. In contrast, Euro area inflation reacts sluggishly and is much more driven by second-round effects of increasing wages. Third, there are also substantial asymmetries across member countries. These differences are due to different labour market dynamics which are further aggravated by a common monetary policy stance which does not fit all.
    Date: 2009–04
  7. By: Aliyu, Shehu Usman Rano , PhD
    Abstract: This paper seeks to assess the impact of oil price shock and real exchange rate volatility on real economic growth in Nigeria on the basis of quarterly data from 1986Q1 to 2007Q4. The empirical analysis starts by analyzing the time series properties of the data which is followed by examining the nature of causality among the variables. Furthermore, the Johansen VAR-based cointegration technique is applied to examine the sensitivity of real economic growth to changes in oil prices and real exchange rate volatility in the long-run while the short run dynamics was checked using a vector error correction model. Results from ADF and PP tests show evidence of unit root in the data and Granger pairwise causality test revealed unidirectional causality from oil prices to real GDP and bidirectional causality from real exchange rate to real GDP and vice versa. Findings further show that oil price shock and appreciation in the level of exchange rate exert positive impact on real economic growth in Nigeria. The paper recommends greater diversification of the economy through investment in key productive sectors of the economy to guard against the vicissitude of oil price shock and exchange rate volatility.
    Keywords: Cointegration; Granger Causality; Oil price shock; Exchange Rate Volatility; VECM
    JEL: F40 F41 F43
    Date: 2009–05–03
  8. By: Lutz Kilian; Robert Vigfusson
    Abstract: A common view in the literature is that the effect of energy price shocks on macroeconomic aggregates is asymmetric in energy price increases and decreases. We show that widely used asymmetric vector autoregressive models of the transmission of energy price shocks are misspecified, resulting in inconsistent parameter estimates, and that the implied impulse responses have been routinely computed incorrectly. As a result, the quantitative importance of unanticipated energy price increases for the U.S. economy has been exaggerated. In response to this problem, we develop alternative regression models and methods of computing responses to energy price shocks that yield consistent estimates regardless of the degree of asymmetry. We also introduce improved tests of the null hypothesis of symmetry in the responses to energy price increases and decreases. An empirical study reveals little evidence against the null hypothesis of symmetry in the responses to energy price shocks. Our analysis also has direct implications for the theoretical literature on the transmission of energy price shocks and for the debate about policy responses to energy price shocks.
    Date: 2009
  9. By: Georges Prat; Remzi Uctum
    Abstract: Using Consensus Forecast survey data on WTI oil price expectations for three and twelve month horizons over the period November 1989 – December 2008, we find that the rational expectation hypothesis is rejected and that none of the traditional extrapolative, regressive and adaptive processes fits the data. We suggest a mixed expectation model defined as a linear combination of these traditional processes, which we interpret as the aggregation of individual mixing behavior and of heterogenous groups of agents using simple processes. This approach is consistent with the economically rational expectations theory. We show that the target price included in the regressive component of this model depends on macroeconomic fundamentals whose effects are subject to structural changes. The estimation results led to validate the mixed expectational model for the two horizons.
    Keywords: Expectations formation, oil price
    JEL: D84 G14 Q43
    Date: 2009
  10. By: Kuboniwa, Masaaki
    Abstract: This paper addresses the issues of measurement of Russia's dependence on oil and gas as well its attempts for diversification with shift toward a technology-centered economy. It further develops the Russia's input-output system to provide a better understanding of these issues. First, it clarifies the extent of the GDP of the mining (oil and gas) sector in Russia by modifying the original supply and use tables. Second, it provides an analysis of the diversification attempts through development of light automobiles by extending the supply and use tables. Third, it presents an attempt of multi-sectoral growth accounting based on our estimations of capital stock, focusing on the capital and TFP (Total Factor Productivity) contributions to growth.
    Keywords: Russia, oil dependence, diversification, input-output, growth accounting
    Date: 2009–06
  11. By: Havlik, Peter
    Abstract: This paper provides an overview of Russian economic developments during the period 2000-2007 and analyses key patterns and drivers of the recent economic growth. The growth sustainanbility is addressed as well, in particular with respect to the role played by energy prices and the growing involvement of the state in the economy, including attempts to implement tools of industrial policy and the public-private project financing schemes. Next, the resurgence of Russia as a regional power in the Commonwealth of Independent States (CIS) and the complicated relations with the European Union (EU) after recent EU enlargements with countries from Central and Eastern Europe are addressed. The paper discusses also prospects for and challenges of the future Russian integration in the European economy and outlines alternative scenarios for a medium-term economic outlook. Finally, the likely policies of the new Russian President Dmitry Medvedev are briefly discussed as well.
    Keywords: Russia, economic growth, energy, European integration, economic forecast
    JEL: F15 F5 L52 N1 O11 O5 Q4
    Date: 2008–04
  12. By: Okay, Nesrin; Konukman, Alp Er S.; Akman, Ugur
    Abstract: We present Turkey’s manufacturing-sector innovation data and, for the first time, analyze likely relationships among GDP growth, sectoral innovation intensities, energy consumptions, and energy-saving potentials. We detect a power-law-like relationship between the projected energy-saving potentials and realized energy consumptions of the manufacturing-sector groups. We observe that the energy consumptions of the sectors do not change significantly despite varying innovation levels during transitions from economic crisis and recovery periods. We conclude that the Turkey’s manufacturing sectors’ energy consumptions are insensitive to their innovation levels, or their innovation activities are not energy-efficiency- and energy-saving-oriented, reflecting Turkey’s past supply-oriented energy policy. The leader innovating sectors are, nevertheless, expected to contribute more to Turkey’s energy-saving and energyefficiency policies if their innovation potentials can be directed to achieve higher energy savings and energy efficiencies via government incentives within the agenda of the recent energy-efficiency and R&D laws.
    Keywords: Manufacturing sector; Innovation; Energy consumption; Energy saving potential; Energy efficiency; R&D; GDP; Turkey
    JEL: Q48 Q55 L52 O3 Q43 L60 Q4
    Date: 2009–07–19
  13. By: Christopher R. Knittel
    Abstract: New car fleet fuel economy, weight and engine power have changed drastically since 1980. These changes represent both movements along and shifts in the "fuel economy/weight/engine power production possibilities frontier". This paper estimates the technological progress that has occurred since 1980 and the trade-offs that manufacturers and consumers face when choosing between fuel economy, weight and engine power characteristics. The results suggest that if weight, horsepower and torque were held at their 1980 levels, fuel economy for both passenger cars and light trucks could have increased by nearly 50 percent from 1980 to 2006; this is in stark contrast to the 15 percent by which fuel economy actually increased. I also find that once technological progress is considered, meeting the CAFE standards adopted in 2007 will require halting the observed increases in weight and engine power characteristics, but little more; in contrast, the standards recently announced by the new administration, while certainly attainable, require non-trivial "downsizing". I also investigate the relative efficiencies of manufacturers. I find that US manufacturers tend to be above the median in terms of their passenger vehicle fuel efficiency conditional on weight and engine power, and are among the top for light duty trucks; Honda is the most efficient manufacturer for both passenger cars, while Volvo is the most efficient manufacturer of light duty trucks. However, I also find that over time, US manufacturers' relative efficiency in both passenger cars and light trucks has degraded. These results may provide insight into their current financial troubles.
    JEL: L5 L62
    Date: 2009–07
  14. By: Hugo Gil Silva (Universidade Nova de Lisboa, Faculdade de Ciências e Tecnologia); Marcos Afonso (Universidade Nova de Lisboa, Faculdade de Ciências e Tecnologia)
    Abstract: The main goal for this report is to alert for the need of a continuous investment in policies that should be developed worldwide, with respect to research and development (R&D), at all levels, in photovoltaic energy. The R&D in this area leads to a strong and possible solution to the actual environmental problems. Such problems are based on the climate change due to polluted gas emissions and due to the non-renewable resources exhaustion. Therefore, this contribution for a roadmap of photovoltaic technology aims to support the knowledge on projects that allow photovoltaic module cost reduction, efficiency and longevity improvement. In this paper we analyze the implemented policies and projects that were and are being developed worldwide. A development monitoring is done in photovoltaic energy since its origin, in order to predict its evolution in actual market. The data was analyzed and the conclusion was drawn that the solar energetic consumption evolution is related to the efficiency improvement and cost reduction in photovoltaic technologies, mainly due to the rising competitiveness among other sources of energy. The non-dependency on non-renewable and pollutant resources implies a significant rising of hope for a better future.
    Keywords: photovoltaic energy; renewable resources
    JEL: O31 Q29
    Date: 2009–07
  15. By: John Whalley (the University of Western Ontario)
    Abstract: As governments consider commitments to reduce carbon emissions, an accompanying question is what adjustments are appropriate to counteract any competitive disadvantage to domestic producers resulting from such commitments, particularly in the European Union, the United States and other Organisation for Economic Co-operation and Development countries.1 Considering the widely diverging levels of commitments in the area of carbon reductions, many specialists consider that some form of remedy is reasonable in order to maintain the competitiveness of domestic industries. Current thinking in global environmental policy circles is that border tax adjustments (BTAs) could be one solution, and may be included in an agreement that might emerge from Copenhagen in 2009 as part of the post-Kyoto world/United Nations Framework Convention on Climate Change post-Bali process (see also Walsh and Whalley, 2008). This text is based on more extensive research2 and focuses only on the issue of effectiveness of BTAs in relation to policies on carbon emission reductions. This debate carries important lessons for developed as well as developing countries in the Asia-Pacific region.
    Keywords: carbon tax adjustments, WTO, GATT
    JEL: F1
    Date: 2009–03
  16. By: Olivier Gervais; Ilan Kolet
    Abstract: The dramatic reduction in global demand, and the decline in the spot price of crude oil in the second half of last year, may have significant implications for the future supply of oil. Investments in conventional methods of extraction have been constrained, since easily accessible oil reserves are typically concentrated in countries with geopolitical uncertainty and/or state-run oil companies. Moreover, nearly half of all global oil production, and roughly 75 per cent of proven reserves, are accounted for by the Organization of the Petroleum Exporting Countries (OPEC). In this paper, the authors assess the implications of recent developments for the future supply of oil. They find that (i) the OPEC cuts announced in December 2008 could provide important support for prices in the coming year, and (ii) low prices have depressed, and may continue to depress, oil infrastructure investment, and thus could amplify existing supply constraints.
    Keywords: Business fluctuations and cycles; Inflation and prices; International topics
    JEL: Q41 Q43
    Date: 2009
  17. By: Anastasios Xeapapadeas (Athens University of Economics and Business); Dimitra Vouvaki (University of Crete)
    Abstract: Total factor productivity growth (TFPG) has been traditionally associated with technological change. We show that when a factor of production, such as energy, generates an environmental externality in the form of CO2 emissions which is not internalized because of lack of environmental policy, then TFPG estimates could be biased. This is because the contribution of environment as a factor of production is not accounted for in the growth accounting framework. Empirical estimates confirm this hypothesis and suggest that part of what is regarded as technology’s contribution to growth could be attributed to the use of environment in output production.
    Keywords: Total Factor Productivity, Sources of Growth, Environmental Externalities, Energy, Environmental Policy
    JEL: O47 Q20 Q43
    Date: 2009–03
  18. By: Marc, GERMAIN (UNIVERSITE DE LILLE-3, Laboratoire EQUIPPE and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Henry, TULKENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Alphonse, MAGNUS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de MathŽmatique)
    Abstract: This article deals with cooperation issues in international pollution problems in a two dimensional dynamic framework implied by the accumulation of the pollutant and of the capital goods. Assuming that countries do reevaluate at each period the advantages to cooperate or not given the current stocks of pollutant and capital, and under the assumption that damage cost functions are linear, we deøne at each period of time a transfer scheme between countries, which makes cooperation better for each of them than non-cooperation. This transfer scheme is also strategically stable in the sense that it discourages partial coalitions.
    Keywords: stock pollutant, capital accumulation, international environmental agreements, dynamic core solution
    JEL: Q54 Q58 F42 F53 O21
    Date: 2009–03
  19. By: Francisco J. André (Department of Economics, Universidad Pablo de Olavide); M. Alejandro Cardenete (Department of Economics, Universidad Pablo de Olavide)
    Abstract: In this paper we propose an analytical approach to obtain so-called efficient policies in terms of environmental and economic objectives. A policy is said to be efficient if any environmental or economic achievement is obtained with the minimum possible detriment to other relevant objectives. We apply this concept obtain the minimum possible environmental impact for a given growth rate or, symmetrically, the maximum economic growth for a given amount of polluting emissions. We present an application to Spanish economy with 2000 data using a Computable General Equilibrium model. We evaluate the efficiency of the observed policy and give some policy recommendations. Finally, we give an idea about how to enlarge the analysis by including additional objectives.
    Keywords: Efficient policies, Computable general equilibrium, multicriteria decision making.
    JEL: C61 C68 D78
    Date: 2009–07
  20. By: Julien Chevallier (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre); Yannick Le Pen (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Benoît Sévi (GRANEM LEMNA - Université d'Angers - Université de Nantes)
    Abstract: To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.
    Keywords: EU ETS, Option prices, Volatility, GARCH, Rolling Estimation, Endogenous Structural Break Detection
    Date: 2009–07–20
  21. By: GRIMAUD Andre; LAFFORGUE Gilles; MAGNE Bertrand
    Date: 2009–07
  22. By: Massimo Tavoni (Fondazione Eni Enrico Mattei); Valentina Bosetti (Princeton University, Fondazione Eni Enrico Mattei and CMCC); Carlo Carraro (University of Venice, Fondazione Eni Enrico Mattei, CEPR, CESifo and CMCC)
    Abstract: This paper builds on the assumption that OECD countries are (or will soon be) taking actions to reduce their greenhouse gas emissions. These actions, however, will not be sufficient to control global warming, unless developing countries also get involved in the cooperative effort to reduce GHG emissions. This paper investigates the best short-term strategies that emerging economies can adopt in reacting to OECD countries’ mitigation effort, given the common long-term goal to prevent excessive warming without hampering economic growth. Results indicate that developing countries would incur substantial economic losses by following a myopic strategy that disregards climate in the short-run, and that their optimal investment behaviour is to anticipate the implementation of a climate policy by roughly 10 years. Investing in innovation ahead of time is also found to be advantageous. The degree of policy anticipation is shown to be important in determining the financial transfers of an international carbon market meant to provide incentives for the participation of developing countries. This is especially relevant for China, whose recent and foreseeable trends of investments in innovation are consistent with the adoption of domestic emission reduction obligations in 2030.
    Keywords: Energy-economy Modeling, Climate Policy, Developing Countries
    JEL: Q54 Q55 Q43
    Date: 2009–07
  23. By: Valentina Bosetti (Fondazione Eni Enrico Mattei); Ruben Lubowski (limate and Air Program, Environmental Defense Fund); Alexander Golub (Climate and Air Program, Environmental Defense Fund); Anil Markandya (Basque Center for Climate Change (BC3) and University of Bath)
    Abstract: Discussions over tropical deforestation are currently at the forefront of climate change policy negotiations at national, regional, and international levels. This paper analyzes the effects of linking Reduced Emissions from Deforestation and Forest Degradation (REDD) to a global market for greenhouse gas emission reductions. We supplement a global climate-energy-economy model with alternative cost estimates for reducing deforestation emissions in order to examine a global program for stabilizing greenhouse gas concentrations at 550 ppmv of CO2 equivalent. Introducing REDD reduces global forestry emissions through 2050 by 20-22% in the Brazil-only case and by 64-88% in the global REDD scenarios. At the same time, REDD lowers the total costs of the climate policy by an estimated 10-25% depending on which tropical countries participate and whether the “banking” of excess credits for use in future periods is allowed. As a result, REDD could enable additional reductions of at least 20 ppmv of CO2-equivalent concentrations with no added costs compared to an energy-sector only policy. The cost savings from REDD are magnified if banking is allowed and there is a need to increase the stringency of global climate policy in the future in response, for example, to new scientific information. Results also indicate that REDD decreases carbon prices in 2050 by 8-23% with banking and 11-26% without banking. While developing regions, particularly Latin America, gain the value of REDD opportunities, the decrease in the carbon price keeps the value of international carbon market flows relatively stable despite an increase in volumes transacted. We also estimate that REDD generally reduces the total portfolio of investments and research and development of new energy technologies by 1-10%. However, due to impacts on the relative prices of different fossil fuels, REDD has a slight positive estimated effect on investments in coal-related technologies (IGCC and CCS) as well as, in some cases, non-electric energy R&D. This research confirms that integrating REDD into global carbon markets can provide powerful incentives for the preservation of tropical forests while lowering the costs of global climate change protection and providing valuable policy flexibility.
    Keywords: Carbon market, Climate change, Innovation, Mitigation, Policy costs, Offsets, Reduced Emissions from Deforestation and Degradation (REDD), Technological change, Tropical deforestation
    JEL: Q23 Q24 Q42 Q52 Q54 Q55
    Date: 2009–07
  24. By: Andrew Reeson (CSIRO Sustainable Ecosystems, Australia)
    Abstract: Just as the world must adapt to climate change, it must also adapt to carbon markets. While some industries see carbon markets as a threat, many conservationists see a major opportunity. This paper considers implications of carbon markets for natural resource management (NRM) in Australia. There are in fact a range of distinct, but overlapping carbon markets. These range from international compliance markets (the Kyoto Protocol flexibility mechanisms) through national compliance markets (such as Australia’s proposed emissions trading scheme) to unregulated voluntary markets. While NRM is intimately linked to the global carbon cycle, it has a very limited role in existing and proposed carbon markets. The only significant direct impact likely up to 2015 is a small increase in tree planting. While trees have excellent potential to sequester carbon, the incentives for tree planting will be relatively small, given the limited scope of Australia’ proposed emissions reductions and the ability to import carbon credits from international markets. NRM managers should continue to manage carbon as one of a suite of issues without expecting rivers of gold to flow from carbon markets. Some may choose to participate directly in carbon markets, although this is inherently risky given their ill-defined and rapidly evolving nature. There is a need to develop improved understanding of carbon stocks and flows in the landscape, at both national and local scales. New institutions will be needed to secure carbon opportunities from agriculture and land management while also recognising other social and environmental objectives.
    Keywords: carbon trading; emissions trading; environment; agriculture
    JEL: Q50 Q52 Q54 Q57 Q58
    Date: 2009–06
  25. By: Julien Chevallier; Benoît Sévi
    Abstract: The recent implementation of the EU Emissions Trading Scheme (EU ETS) in January 2005 created new financial risks for emitting firms. To deal with these risks, options are traded since October 2006. Because the EU ETS is a new market, the relevant underlying model for option pricing is still a controversial issue. This article improves our understanding of this issue by characterizing the conditional and unconditional distributions of the realized volatility for the 2008 futures contract in the European Climate Exchange (ECX), which is valid during Phase II (2008-2012) of the EU ETS. The realized volatility measures from naive, kernel-based and subsampling estimators are used to obtain inferences about the distributional and dynamic properties of the ECX emissions futures volatility. The distribution of the daily realized volatility in logarithmic form is shown to be close to normal. The mixture-of-distributions hypothesis is strongly rejected, as the returns standardized using daily measures of volatility clearly departs from normality. A simplified HAR-RV model (Corsi, 2009) with only a weekly component, which reproduces long memory properties of the series, is then used to model the volatility dynamics. Finally, the predictive accuracy of the HAR-RV model is tested against GARCH specifications using one-step-ahead forecasts, which confirms the HAR-RV superior ability. Our conclusions indicate that (i) the standard Brownian motion is not an adequate tool for option pricing in the EU ETS, and (ii) a jump component should be included in the stochastic process to price options, thus providing more efficient tools for risk-management activities.
    Keywords: CO2 Price, Realized Volatility, HAR-RV, GARCH, Futures Trading, Emissions Markets, EU ETS, Intraday data, Forecasting
    JEL: C5 G1 Q4
    Date: 2009
  26. By: Hufbauer, Gary Clyde; Kim, Jisun
    Abstract: This paper examines whether the climate policy options policymakers are contemplating are compatible with core principles of the world trading system set forth in the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), and Appellate Body decisions. The authors argue that border measures—both import restrictive measures and export subsidies—contemplated in US climate bills and the climate policies of other countries stand a fair chance of being challenged in the WTO. Given the prospect of foreseeable conflicts with WTO rules, the authors suggest that key WTO members should attempt to negotiate a new code that delineates a large “green space” for measures that are designed to limit GHG emissions both within the member country and globally. By “green space,” the authors mean policy space for climate measures that are imposed in a manner broadly consistent with core WTO principles even if a technical violation of WTO law could occur. To encourage WTO negotiating efforts along these lines, the authors recommend a time-limited “peace clause” to be adopted into climate legislation of major emitting countries. The peace clause would suspend the application of border measures or other extraterritorial controls for a defined period while WTO negotiations are under way.
    Keywords: Global warming climate change, climate policy options, world trading system, world trade organization, WTO, border measures
    JEL: F13 F53 K33 Q54 Q58
    Date: 2009
  27. By: Giovanni Marin (University of Ferrara); Massimiliano Mazzanti (University of Ferrara)
    Abstract: This paper provides new empirical evidence on Environmental Kuznets Curves (EKC) for greenhouse gases (GHGs) and air pollutants at sector level. A panel dataset based on the Italian NAMEA over 1990-2005 is analysed, focusing on both emission efficiency (EKC model) and total emissions (IPAT model). Results show that looking at sector evidence, both decoupling and also eventually re-coupling trends could emerge along the path of economic development. CH4 is moderately decreasing in recent years, but being a minor gas compared to CO2, the overall performance on GHGs is not compliant with Kyoto targets, which do not appear to have generated a structural break in the dynamics at least for GHGs. SOx and NOx show decreasing patterns, though the shape is affected by some outlier sectors with regard to joint emission-productivity dynamics, and for SOx exogenous innovation and policy related factors may be the main driving force behind observed reductions. Services tend to present stronger delinking patterns across emissions. Trade expansion validates the pollution haven in some cases, but also show negative signs when only EU15 trade is considered: this may due to technology spillovers and a positive ‘race to the top’ rather than the bottom among EU15 trade partners (Italy and Germany as the main exporters and trade partner in the EU). Finally, general R&D expenditure show weak correlation with emissions efficiency. EKC and IPAT derived models provide similar conclusions overall; the emission-labour elasticity estimated in the latter is generally different from 1, suggesting that in most cases, and for both services and industry, a scenario characterised by emissions saving technological dynamics. Further research should be directed towards deeper investigation of trade relationship at sector level, increased research into and efforts to produce specific sectoral data on ‘environmental innovations’, and to verifying the value of heterogeneous panel models capturing sector heterogeneity.
    Keywords: Greenhouse Gases, Air Pollutants, NAMEA, Trade Openness, Labour Productivity, EKC, STIRPAT, Delinking
    JEL: C23 O4 Q55 Q56
    Date: 2009–06
  28. By: Christine Bertram
    Abstract: Ocean iron fertilization is currently discussed as a potential measure to mitigate climate change by enhancing oceanic CO2 uptake. Its mitigation potential is not yet well explored, and carbon offsets generated through iron fertilization activities could currently not be traded on regulated carbon markets. Still, commercial interests in ocean iron fertilization already exist, which underlines the need to investigate a possible regulatory framework for it. To this end, I first discuss important basic aspects of ocean iron fertilization, namely its scientific background, quantitative potential, side effects, and costs. In a second step, I review regulatory aspects connected to ocean iron fertilization, like its legal status and open access issues. Moreover, I analyze how the regulations for afforestation and reforestation activities within the framework of the Kyoto Clean Development Mechanism (CDM) could be applied to ocean iron fertilization. Main findings are that the quantitative potential of ocean iron fertilization is limited, that costs are higher than initially hoped, and that potential adverse side effects are severe. Moreover, the legal status of ocean iron fertilization is currently not well defined, open access might cause inefficiencies, and the CDM regulations could not be easily applied to ocean iron fertilization
    Keywords: Ocean Iron Fertilization, Kyoto Protocol, CDM
    JEL: D62 K33 Q54 Q58
    Date: 2009–06
  29. By: Fabio Eboli (Fondazione Eni Enrico Mattei); Ramiro Parrado (Fondazione Eni Enrico Mattei and Ca’ Foscari University); Roberto Roson (Ca’ Foscari University, Venice)
    Abstract: Human-generated greenhouse gases depend on the level of economic activity. Therefore, most climate change studies are based on models and scenarios of economic growth. Economic growth itself, however, is likely to be affected by climate change impacts. These impacts affect the economy in multiple and complex ways: changes in productivity, resource endowments, production and consumption patterns. We use a new dynamic, multi-regional Computable General Equilibrium (CGE) model of the world economy to answer the following questions: Will climate change impacts significantly affect growth and wealth distribution in the world? Should forecasts of human-induced greenhouse gases emissions be revised, once climate change impacts are taken into account? We found that, even though economic growth and emission paths do not change significantly at the global level, relevant differences exist at the regional and sectoral level. In particular, developing countries appear to suffer the most from climate change impacts.
    Keywords: Computable General Equilibrium Models, Climate Change, Economic Growth
    JEL: C68 E27 O12 Q54 Q56
    Date: 2009–06
  30. By: Weitzman, Martin L.
    Abstract: This paper in applied theory argues that there is a loose chain of reasoning connecting the following three basic links in the economics of climate change: 1) additive damages may be more appropriate for analyzing the impacts of global warming than multiplicative damages; 2) an uncertain feedback-forcing coefficient, which might be near one with infinitesimal probability, can cause the distribution of the future time trajectory of global temperatures to have fat tails and a high variance; 3) when highvariance additive damages are discounted at an uncertain rate of pure time preference, which might be near zero with infinitesimal probability, it can make expected present discounted disutility very large. Some possible implications for welfare analysis and climate-change policy are briefly noted.
    Keywords: Climate change, fat tails
    JEL: Q54
    Date: 2009

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