nep-ene New Economics Papers
on Energy Economics
Issue of 2010‒01‒30
seventeen papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. Eco-innovation - putting the EU on the path to a resource and energy efficient economy By Bleischwitz, Raimund
  2. China and East Asian Energy- Prospects and Issues By Peter Drysdale; Kejun Jiang; Dominic Meagher
  3. Crucial relationship among energy commodity prices By Cristina Bencivenga; Giulia Sargenti
  4. On the Sources of Oil Price Fluctuations By Deren Unalmis; Ibrahim Unalmis; D. Filiz Unsal
  5. Exchange Rate Assessments: Methodologies for Oil Exporting Countries By Irineu E. Carvalho Filho; Rudolfs Bems
  6. Mineral Resources: Stocks, Flows, and Prospects By Faye Duchin; Heather MacLean; Christian Hageluken; Kohmei Halada; Stephen Kesler; Yuichi Moriguchi; Daniel Mueller; Terry Norgate; Markus Reuter; Ester van der Voet
  7. Assessing the Effects of Privatisation, Competition and Regulation on Economic Performance- The Case of Electricity Sector Reform By Yin-Fang Zhang; David Parker; Colin Kirkpatrick
  8. Derivatives and Default Risk By Scholz, Sebastian
  9. Renewables and Innovation - Empirical Assessment and Theoretical Considerations By Leo Wangler
  10. Mapping drought patterns and impacts: a global perspective By Eriyagama, Nishadi; Smakhtin, Vladimir; Gamage, Nilantha
  11. Carbon Emission Values in Cost Benefit Analyses By Mandell, Svante
  12. Can Global De-Carbonization Inhibit Developing Country Industrialization? By Aaditya Mattoo
  13. Incentives to invest in abatement technology. A tax versus emissions trading under imperfect competition By Halvor Briseid Storrøsten
  14. Jump-diffusion modeling in emission markets By K. Borovkov; G. Decrouez; J. Hinz
  15. Stochastic Switching Games and Duopolistic Competition in Emissions Markets By Michael Ludkovski

  1. By: Bleischwitz, Raimund
    Abstract: The objective of this study is to support the European Parliament’s ITRE Committee in its work on the EU's industrial and energy policy and to give advice on the following issues: Why is the issue of resource scarcity back on the agenda? What are the strategic conclusions for the EU? What can the EU expect from eco-innovation in a large range of industrial sectors? Are existing measures meeting the EU aims and expectations, and what new policy initiatives should be set forward? To meet these objectives, this study is structured as follows: Chapter 2 will give an overview on resource scarcities. Chapter 3 elaborates on ecoinnovation, including trends, barriers and driving forces. Chapter 4 outlines proposals for future EU policies. Chapter 5 sketches out a possible vision for the future. Chapter 2 reveals recent findings on resource scarcity: Global extraction of natural resource is steadily increasing. Since 1980, global extraction of abiotic (fossil fuels, minerals) and biotic (agriculture, forestry, fishing) resources has augmented from 40 to 58 billion tonnes in 2005. Scenarios anticipate a total resource extraction of around 80 billion tonnes in 2020 (200 % of the 1980-value), necessary to sustain the worldwide economic growth. On average, a European consumes per year around three times the amount of resources of a citizen in the emerging countries while producing twice as much. Analysis on patterns of current resource use (direct and indirect use) is still in its infancy and shows data gaps. Based on country studies, however, one can arrive at tentative conclusions. A recent study on Germany reveals that ten production sectors account for more than 50 % of German Total Material Requirements (TMR). Industries of three areas are of strategic importance because here a huge number of technological interactions among production sectors take place: • Stones, construction, and housing = housing • Metals and car manufacturing = mobility • Agriculture, food and nutrition = food. The rapidly increasing demand for resources has led to an unprecedented boost in resource prices, especially during the last five years until the breakout of the financial crisis in Fall 2008. The EU is the world region that outsources the biggest part of resource extraction. In comparison to the overall global growth rate (45 % over the last 25 years), Europe’s resource extraction grew only by 3 %, but studies show that these domestic raw materials are increasingly substituted by imports from other world regions. World reserves in fossil fuels and metals are unevenly distributed across the world regions. Additionally, for various commodities, the peak of extraction has already been reached or is currently about to be reached. Not only for oil and gas, but also for critical metals such as Antimon, Gallium, Indium, Platinum and others the supply for European industry is at risk. Natural gas cannot replace oil as main energy source, once the latter is depleted. From this, the following main conclusions are derived: • The European economy is increasingly dependent on resource imports from other world regions. • Scarcity of ‘Critical metals’ will affect the European economy more subtle, but furtherreaching. High-tech industries, in particular the electronic industry, will be affected by deWuppertal Institute et al. Eco-Innovation iv clining availability of precious metals. Also the development of new eco-technologies, such as photovoltaic electricity generation, could be slowed down by resource scarcity. • It can be expected that worldwide competition for these resources will significantly increase in the near future, potentially leading to serious conflicts related to the access to resource reserves. • In order to deal with this increased scarcity of natural resources, a significant reduction of the worldwide resource use will be necessary. Chapter 3 gives a definition of eco-innovation as well as an overview of different types of eco-innovation and deals with measurement issues. Furthermore, it illustrates selected ecoinnovations in key areas, and highlights also trends, drivers and barriers analysed for these examples and illustrated by fishbone diagrams. The scrutinised eco-innovations and the regarding key conclusions are (1) In the area of housing a. “Deep Renovation”, which enables a minimisation of negative impacts on environment and health by system design and choice of components and is possible in nearly every building, though standardisation is limited, and b. “Smart Metering”, for which there is worldwide evidence that giving consumers appropriate, relevant information on their energy and water use is an important basis for additional measures leading to a reduction in this use and thus in GHG emissions. (2) In the area of mobility a. the “Green Electric Car” and b. “Car sharing”; (3) In the area of food and drink (a) the “Community Supported Agriculture” (CSA) and (b) “Sustainable Sourcing of Retailers”. The chapter concludes that eco-innovation has a crucial role to play in putting the EU on the path to a resource and energy efficient economy and thus significantly reducing the environmental impacts in each of the areas, housing, mobility and food and drink. Experts estimate that this is likely to become an $800 billion market worldwide by 2015 and a $ trillion market afterwards. Overcoming the barriers and building up eco-industries for energy and resource efficiency however calls for an active European Union. It requires the engagement of many different actors in society, and strategies should be implemented from many different sides. For an ecoinnovation to be fully accepted and diffused into wider society, a concerted effort must be made to engage people and target the emotional and psychological aspects required to reinforce its uptake. Chapter 4 (How to speed up eco-innovation in the EU) undertakes an attempt to analyse existing EU policies and initiatives; selected member states’ efforts are also considered. This is done via a comparative methodology with a joint format. The annex to this study contains three further briefing notes on this issue written by other authors. The following policies, initiatives and instruments are considered in this study: • The Eco-design Directive (2005/32/EU) – focuses on energy use for a number of products and neglects other environmental dimensions, functional innovation and system innovation are not yet covered; Wuppertal Institute et al. Eco-Innovation v • The Competitiveness and Innovation Framework Programme (CIP) – first experience suggests a bias in favour of recycling technologies and energy along existing technology trajectories, less visibility of resource efficiency and new pathways; • The Seventh Framework Programme for research and technological development (FP7); • The Environmental Technology Action Plan (ETAP) – Despite many achievements, environmental technologies still remain a niche market; further green procurement, greater financial investments, the establishment of technology verification and performance targets systems, and focussing on sectors with high gains is needed; • The Directive on the energy performance of buildings (EPBD) – good ambitions, but a lack of implementation in many Member states, implementation requires both a speeding up and a scaling up, addressing the resource efficiency of buildings is desirable; • The European Union Action Plan on Sustainable Consumption and Production and Sustainable Industrial Policy • The European Directive on Waste from Electrical and Electronic Equipment (WEEE) • The UK Aggregates Levy and Aggregates Levy Sustainability Fund (ALSF) • Environment-driven Business Development in Sweden • The European Union Energy Label. The analysis identifies specific gaps in the areas of entrepreneurship, pre-commercialisation and mass market development; in addition, the opportunities to refurbish buildings in Europe have not fully been deployed yet (see Figure 1). Based on this and supported by an expert workshop conducted by the ITRE on 12 November 08, the study formulates proposals that could support the EU to speed up eco-innovation. They promote market-based incentives and the reform of existing initiatives; in addition, new proposals are presented that address specific gaps in the areas of entrepreneurship, pre-commercialisation as well as the opportunities to refurbish buildings in Europe. Bearing in mind the importance of construction as a driving forces of resource use, the relevance of the construction industry in the EU Lead market Strategy and current deficits, and the overall success of market-based instruments, this study proposes to extend the existing eco-tax base in Europe by establishing a minimum tax directive on construction minerals. It is expected to drive up eco-innovation because it gives incentives to improve resource efficiency and to refurbish old buildings. In addition, it generates revenues, which can be utilized for specific eco-innovation programmes. A greening of the EU budget would be the material basis for speeding up eco-innovation beyond 2009. This would have to follow two strategic lines: on the one hand unsustainable spending would have to be cut, on the other hand the money saved by this activity could be shifted to support investments in structural eco-innovation. A budgetary strategy could include the following elements: • Further redirecting CAP from direct payments towards integrated rural development schemes, which support eco-innovation in the area of sustainable production of highquality food and biomass. These integrated rural development schemes should include integrated logistical, economic and technological strategies for adapted sustainable natural resource management in the landscape (food, water, soil, biodiversity and closed-loop biomass production and use). These strategies would have to be highly adapted to local economies and landscape conditions thus inducing local eco-innovation and employment schemes. Wuppertal Institute et al. Eco-Innovation vi • Rigorous environmental appraisal and reduction of Regional Policy schemes for large infrastructure projects which could support long-term unsustainable development paths, shifting towards funding for eco-innovation e.g. in the area of decentralized electricity grids (supporting green electric cars and renewable energies) and lighthouse projects on resource efficient construction and resource recovery. • Redirection of Regional Funds from end-of-pipe technologies towards integrated solutions and eco-innovation (e.g. decentralized water treatment) • More advanced schemes for improving energy and material productivity of economies would require an implementation of the CREST guidelines for improved coordination between Structural Funds, the Research Framework Program and the Competitiveness and Innovation Programme (CIP). Only such a concentration of forces could achieve a measurable improvement of resource productivity in Europe by means of regional eco-innovation clusters and a European network of regional resource efficiency agencies. • Integration spending of the European Investment Bank (EIB) for improved cofinancing of eco-innovation Figure 1: Gaps of current EU programmes on eco-innovation Engaging industry in developing eco innovation for sustainable ways of living is considered to be essential. The study identifies six strategy areas where industry can act: 1. Strategy Area 1: Creating and satisfying demand for green and fair products 2. Strategy Area 2: Communicating for low impact product use 3. Strategy Area 3: Innovative after sales services 4. Strategy Area 4: Product and service innovations Wuppertal Institute et al. Eco-Innovation vii 5. Strategy Area 5: Service-oriented business models 6. Strategy Area 6: Leadership for social change and socially responsible business The study formulates proposals to strengthen the SCP Action Plan accordingly, with a special focus on a framework for smarter consumption and leaner production. green public procurement and international processes. Following the gaps identified above, the study also proposes to establish three new initiatives: • A European Trust Funds for Eco-Entrepreneurship, intended to support system innovation driven by new companies; • A Technology Platform for Resource-light industries, intended to develop new markets for European manufacturing industries; • A Programme to foster energy and resource efficiency in the building sector, intended to foster • The deployment of existing opportunities in that area. Finally, a few thoughts are given to the international dimension of eco-innovation and a possible vision of an eco-innovative Europe.
    Keywords: Eco-Inovation; Energy efficiency; EU Policy
    JEL: Q55
    Date: 2009–03
  2. By: Peter Drysdale; Kejun Jiang; Dominic Meagher (Australian National University)
    Abstract: In October 2005, the Crawford School (then the Asia Pacific School of Economics and Government) within the Australian National University (ANU) initiated a major research project on China and East Asian Energy. The project is being undertaken under the school’s East Asia Forum in conjunction with the China Economy and Business Program. The first conference in the series being organised under the auspices of the China and East Asian Energy Strategies Research Program was hosted in Beijing by the Energy Research Institute and the ANU on 10–11 October 2005. It was the first of five annual conferences in the program. This book brings together the key papers presented at that conference.
    Date: 2010–01
  3. By: Cristina Bencivenga; Giulia Sargenti (Department of Economic Theory and Quantitative Methods for Political Choices,Sapienza University of Rome,)
    Abstract: This study investigates the short and long run relationship between crude oil, natural gas and electricity prices in US and in European commodity markets. The relationship between energy commodities may have several implications for the pricing of derivative products and for risk management purposes. Using daily price data over the period 2001-2009 we perform a correlation analysis to study the short run relationship, while the long run relationship is analyzed using a cointegration framework. The results show an erratic relationship in the short run while in the long run an equilibrium may be identi ed having di erent features for the European and the US markets.
    Keywords: Energy, commodities, prices.
    Date: 2010
  4. By: Deren Unalmis; Ibrahim Unalmis; D. Filiz Unsal
    Abstract: Analyzing macroeconomic impacts of oil price changes requires first to investigate different sources of these changes and their distinct effects. Kilian (2009) analyzes the effects of an oil supply shock, an aggregate demand shock, and a precautionary oil demand shock. The paper's aim is to model macroeconomic consequences of these shocks within a new Keynesian DSGE framework. It models a small open economy and the rest of the world together to discover both accompanying effects of oil price changes and their international transmission mechanisms. Our results indicate that different sources of oil price fluctuations bring remarkably diverse outcomes for both economies.
    Keywords: Demand , Economic models , External shocks , Fiscal policy , Inflation targeting , Monetary policy , Oil prices , Oil production , Price increases , Productivity , Supply ,
    Date: 2009–12–28
  5. By: Irineu E. Carvalho Filho; Rudolfs Bems
    Abstract: Are the current account fluctuations in oil-exporting countries "excessive"? How should their real exchange rate respond to the evolution of external (and domestic) fundamentals? This paper proposes methodologies tailored to the specific features of oil-exporting countries that help address these questions. Price-based methodologies (based on the time series of real effective exchange rates) identify a strong link between the real exchange rate and the terms of trade, but have relatively limited explanatory power. On the other hand, an empirical model of the current account, which fits oil exporting countries' data well, and an intertemporal model that takes into account the stock of oil reserves provide useful benchmarks for oil exporters' external balances.
    Keywords: Commodity price fluctuations , Current account , Economic models , Exchange rates , Fiscal policy , Oil exporting countries , Oil prices , Oil revenues , Real effective exchange rates ,
    Date: 2009–12–18
  6. By: Faye Duchin (Department of Economics, Rensselaer Polytechnic Institute, Troy NY 12180-3590, USA); Heather MacLean (University of Toronto); Christian Hageluken (Umicore Precious Metals Refining); Kohmei Halada (Kohmei Halada, National Institute of Materials Science, Japan); Stephen Kesler (University of Michigan); Yuichi Moriguchi (National Institute for Environmental Studies, Japan); Daniel Mueller (Norwegian University of Science and Technology); Terry Norgate (Commonwealth Scientific and Industrial Research Organisation); Markus Reuter (Ausmelt, Inc.); Ester van der Voet (University of Leiden)
    Abstract: This chapter focuses on metals as they provide the clearest example of the challenges and opportunities that mineral resources present to society, in terms of both primary production and recycling. Basic concepts, information requirements and sources of consumer and industrial resource demand are described as well as the destabilizing effects of volatile resource prices and supply chain disruptions. Challenges facing extraction of in-ground resources and production of secondary resources are discussed and scenarios for the future considered. The results of the scenarios indicate that particularly energy and, as well, water and land requirements could become increasingly constraining factors for metal production. Key research questions are posed and modeling and data priorities discussed, with an emphasis on areas that require novel concepts and analytic tools to help lessen negative environmental impacts associated with minerals. The challenge of sustainability requires collaboration of practitioners and analysts with a multidisciplinary understanding of a broad set of issues, including economics, engineering, geology, ecology, and mathematical modeling, to name a few, as well as policy formulation and implementation.
    JEL: Q3 Q5
    Date: 2010–01
  7. By: Yin-Fang Zhang; David Parker; Colin Kirkpatrick (Singapore Centre for Applied and Policy Economics)
    Abstract: Over the last two decades electricity sectors in both developed and developing countries have been subject to restructuring to introduce private capital and increase competition. This has been accompanied by the introduction of new regulatory regimes. Although the effects of such reforms in a number of the developed economies are now well documented, apart from a few case studies the experience of developing countries is much less well researched. This is important because privatisation, competition and the reform of state regulation are key themes of donor aid programmes, notably those of the World Bank. This paper provides an econometric assessment of the effects of privatisation, competition and regulation on the performance of the electricity generation industry using panel data for 36 developing and transitional countries, over the period 1985 to 2003. The study identifies the impact of these reforms on generating capacity, electricity generated, labour productivity in the generating sector and capacity utilisation. The main conclusions are that on their own privatisation and regulation do not lead to obvious gains in economic performance, though there are some positive interaction effects. By contrast, introducing competition does seem to be effective in stimulating performance improvements.
    Keywords: Privatisation, competition, regulation, developing economies, electricity sector.
    JEL: L33 L43 L44 L50 O12 O38 O50
    Date: 2010–01
  8. By: Scholz, Sebastian
    Abstract: Upstream producers that possess market power, sell forwards with a lengthy duration to regional electricity companies (REC). As part of the liberalization of the electricity market, RECs have been privatized and exposed to a possible bankruptcy threat if spot prices have fallen below their expected value. The downstream firms’ expected profit is larger, when it is less likely to be bailed out, the effect on upstream profits is ambiguous while consumers loose. Options are less welfare increasing than forwards, but the difference is minimal. In the presence of bankruptcy, options are the preferred welfare maximizing market instrument.
    Keywords: Forwards; Options; Default Risk; Market Efficiency
    JEL: D43 G33 G34 G35
    Date: 2010–01
  9. By: Leo Wangler (University of Jena, School of Economics and Business Administration)
    Abstract: This study is about structural change in the energy system. In a first step an econometric model is presented and in a second step diffusion of GTs is embedded theoretically. By focusing on different green technology industries (GT sector) in Germany, we analyze how policy induced demand stimulates innovation. Taking the size of the market as a proxy for demand and patent counts as a proxy for innovation, we find support that the presence of institutions enabling diffusion of GTs are correlated with innovative activity. Public R&D expenditures also play a significant role. We additionally control for a structural break by comparing the two institutional settings incorporated into the legal system in Germany, namely the Stromeinspeisegesetz (SEG) and the Erneuerbare Energiengesetz (EEG). We cannot find support for the supposition that innovative activity significantly differs for diffusion under the SEG and EEG. The empirical findings also show that electricity prices are not the driving force for innovative activity within the GT sector. The discussion at the end of the paper comes to the result that diffusion of GTs - under the EEG - is difficult to be justified theoretically.
    Keywords: Renewable Energies, Demand Pull, Structural Change
    JEL: L52 O31 O32 Q01 Q5
    Date: 2010–01–15
  10. By: Eriyagama, Nishadi; Smakhtin, Vladimir; Gamage, Nilantha (International Water Management Institute; International Water Management Institute; International Water Management Institute)
    Keywords: Drought / Impact assessment / Indicators / Hydrology / Mapping / Climate change / River basins / Dams / Water scarcity / Disasters / Risks / Precipitation / Runoff / Soil degradation
    Date: 2009
  11. By: Mandell, Svante (vti – Swedish National Road and Transport Research Institute)
    Abstract: New infrastructure projects may affect CO2 emissions and, thus, cost benefit analyses for these projects require a value to apply for CO2. The value may be based on the marginal social cost associated with emissions or on the shadow price resulting from present and future policies geared towards CO2 emissions. In the present paper it is argued that the social cost approach should be seen as preceding the shadow price approach. Both are thus necessary, but for cost benefit analysis of infrastructure projects we argue for the shadow price approach as the primary tool. There is a series of complications involved when applying this principle in practice. Several of these are discussed in the paper, including non-marginal projects that affect permit prices, non-transparent permit markets, different instruments capturing different aspects of a CO2-value, multiple policies present simultaneously etc.
    Keywords: Climate change; policy; cost-benefit analysis; carbon value
    JEL: H54 Q51 R42
    Date: 2010–01–20
  12. By: Aaditya Mattoo
    Abstract: In this paper, we seek to make a twofold contribution. On outcomes, we focus on manufacturing exports as well as on manufacturing output both in the aggregate and in selected sectors. On policy, the impact of three distinct actions—emissions reductions per se; emissions tradability; and transfers are isolated. [WP No. 188].
    Keywords: manufacturing, India, exports, industrialization, developing country, output, tradability, climate change, development, public private transfers, growth externalities, financial globalization
    Date: 2010
  13. By: Halvor Briseid Storrøsten (Statistics Norway)
    Abstract: In the longer run, effects on R&D and the implementation of advanced abatement technology may be at least as important as short-run cost effectiveness when we evaluate public environmental policy. In this paper, we show that the number of firms that adopt advanced abatement technology could be higher with emissions trading than with a tax if there is imperfect competition in the permits market. Under perfect competition, the number would always be higher with a tax, given that the regulator is myopic. If we allow for environmental policy response, the ranking is still ambiguous under imperfect competition, while the regimes become equal with perfect competition.
    Keywords: Auctioned permits; Emissions taxes; technology adoption; Cournot competition
    JEL: H23 Q55 Q58
    Date: 2010–01
  14. By: K. Borovkov; G. Decrouez; J. Hinz
    Abstract: Mandatory emission trading schemes are being established around the world. Participants of such market schemes are always exposed to risks. This leads to the creation of an accompanying market for emission-linked derivatives. To evaluate the fair prices of such financial products, one needs appropriate models for the evolution of the underlying assets, emission allowance certificates. In this paper, we discuss continuous time diffusion and jump-diffusion models, the latter enabling one to model information shocks that cause jumps in allowance prices. We show that the resulting martingale dynamics can be described in terms of non-linear partial differential and integro-differential equations and use a finite difference method to investigate numerical properties of their discretizations. The results are illustrated by a small numerical study.
    Date: 2010–01
  15. By: Michael Ludkovski
    Abstract: We study optimal behavior of energy producers under a CO_2 emission abatement program. We focus on a two-player discrete-time model where each producer is sequentially optimizing her emission and production schedules. The game-theoretic aspect is captured through a reduced-form price-impact model for the CO_2 allowance price. Such duopolistic competition results in a new type of a non-zero-sum stochastic switching game on finite horizon. Existence of game Nash equilibria is established through generalization to randomized switching strategies. No uniqueness is possible and we therefore consider a variety of correlated equilibrium mechanisms. We prove existence of correlated equilibrium points in switching games and give a recursive description of equilibrium game values. A simulation-based algorithm to solve for the game values is constructed and a numerical example is presented.
    Date: 2010–01
  16. By: Huifang Tian; John Whalley (Institute of World Economics & Politics)
    Abstract: In the paper we discuss China's participation in both the 2009 Copenhagen negotiations on a post-Kyoto global climate change regime currently under way and out beyond Copenhagen in further negotiations likely to follow. China is now both the largest and most rapidly growing carbon emitter, and has much higher emission intensity relative to GDP than OECD countries. In the Copenhagen negotiation, there will be strong pressure on China to take on emissions reduction commitments and China's concern will be to do so in ways that allow continuation of a high growth rate and fast development. Central to this will be maintaining access to OECD markets for manufactured exports in face of potential environmental protectionism. Thus the broad approach seems likely to be to take on environmental commitments in part in return for stronger guarantees of access to export markets abroad. This involves directly linked trade and environmental commitments although how linkage can be made explicit is a major issue. More narrowly, the issues that seem likely to dominate the climate change negotiating agenda from China's viewpoint are the interpretation of the common but differentiated responsibilities (CBDR) principle adopted in Kyoto, the choice of negotiating instruments and form of emission commitments, and the size (and form) of accompanying financial funds for adaptation and innovation. We suggest that a possible interpretation of CBDR reflecting China's desire to leave room to grow when undertaking emission reduction commitments might be for China to take on emission intensity commitments while OECD countries take on emission level commitments. Larger funds and flexibility in their use will also raise China's willingness to make commitments.
    Keywords: post-Kyoto, emissions reduction, Copenhagen negotiation, China,
    JEL: Q54 Q56
    Date: 2010–01
  17. By: Yan Dong; John Whalley (Institute of World Economics & Politics)
    Abstract: This paper discusses both the potential contribution that trade policy initiatives can make towards the achievement of significant global carbon emissions reduction and the potential impacts of proposals now circulating for carbon reduction motivated geographical trade arrangements, including carbon free trade areas. We first suggest that trade policy is likely to be a relatively minor consideration in climate change containment. The dominant influence on carbon emissions globally for next several decades will be growth more so than trade and its composition, and in turn, the size of trade seemingly matters more than its composition given differences in emission intensity between tradables and nontradables. We also note that differences in emissions intensity across countries are larger than across products or sectors and so issues of country discrimination in trade policy (and violations of MFN) arises. We next discuss both unilateral and regional carbon motivated trade policy arrangements, including three potential variants of carbon emission reduction based free trade area arrangements. One is regional trade agreements with varying types of trade preferences towards low carbon intensive products, low carbon new technologies and inputs to low carbon processes. A second is the use of joint border measures against third parties to counteract anti-competitive effects from groups of countries taking on deeper emission reduction commitments. A third is third country trade barriers along with free trade or other regional trade agreements as penalty mechanisms to pressure other countries to join emission reducing environmental agreements. We differentiate among the objectives, forms and possible impacts of each variant. We also speculate as to how the world trading system may evolve in the next few decades as trade policy potentially becomes increasingly dominated by environmental concerns. We suggest that the future evolution of the trading system will likely be with environmentally motivated arrangements acting as an overlay on prevailing trade and financial arrangements in the WTO and IMF, and eventually movement to linked global trade and environmental policy bargaining.
    Keywords: carbon, trade policy, WTO, regional trade agreements, trade barriers, anti-competitive effects
    JEL: F13 F14 F10
    Date: 2010–01

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