nep-ene New Economics Papers
on Energy Economics
Issue of 2012‒02‒01
forty-two papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. A Preliminary Review of the American Recovery and Reinvestment Act's Clean Energy Package By Aldy, Joseph E.
  2. European climate -- energy security nexus: A model based scenario analysis By Patrick Criqui; Silvana Mima
  3. Technological Change, Fuel Efficiency and Carbon Intensity in Electricity Generation: A Cross-Country Empirical Study By Elena Verdolini; Nick Johnstone; Ivan Hašcic
  4. Combining Climate and Energy Policies: Synergies or Antagonism? Modeling Interactions With Energy Efficiency Instruments By Oskar Lecuyer; Ruben Bibas
  5. Is There an Energy Efficiency Gap? By Hunt Allcott; Michael Greenstone
  6. Linkage among the U.S. Energy Futures Markets By Aruga, Kentaka; Managi, Shunsuke
  7. Energy Market Integration in East Asia: A Regional Public Goods Approach By Philip ANDREWS-SPEED
  8. Energy Market Integration and Economic Convergence: Implications for East Asia By Yu SHENG; Xunpeng SHI
  9. Oil Prices, Exhaustible Resources, and Economic Growth By James D. Hamilton
  10. Oil Price Forecast Evaluation with Flexible Loss Functions By Andrea Bastianin; Matteo Manera; Anil Markandya; Elisa Scarpa
  11. Key factors and barriers to the adoption of cold ironing in europe By Giulia Arduino; David G. Carrillo Murillo; David G. Claudio Ferrari
  12. Allocative inefficiencies resulting from subsidies to agricultural electricity use : an illustrative model By Strand, Jon
  13. Why do Firms Hold Oil Stockpiles? By Charles F. Mason
  14. An Evaluation of Overseas Oil Investment Projects under Uncertainty Using a Real Options Based Simulation Model By Lei Zhu; ZhongXiang Zhang; Ying Fan
  15. A Political Economy Approach to Resource Taxation: Weak Sustainability, Revenue Recycling and Regional Planning By Massimiliano Mazzanti; Roberto Zoboli
  16. Cost and E-level analysis of different dwelling types and different heating systems with or without heat exchanger By Audenaert, Amaryllis; De Boeck, Liesje; Geudens, K.; Buyle, M.
  17. The Cost of Improving Gas Supply Security in the Baltic States By Noël, P.; Findlater, S.; Chyong, C. K.
  18. Gas Market Integration: Global Trends and Implications for the EAS Region By Yanrui WU
  19. Land-use Change and Solar Energy Production: A Real Option Approach By Ardjan Gazheli; Luca Di Corato
  20. The Economic Consequences of Shifting Away From Nuclear Energy By Ken Itakura
  21. Nuclear New Build in the United States 1990-2010: A Three State Analysis By Heffron, R. J.
  22. Inducing Low-Carbon Investment in the Electric Power Industry through a Price Floor for Emissions Trading By Alexander Brauneis; Michael Loretz; Roland Mestel; Stefan Palan
  23. Unravelling the Worldwide Pollution Haven Effect By Jean-Marie Grether; Nicole A. Mathys; Jaime de Melo
  24. The Environment and Directed Technical Change: Comment By Jean-Charles Hourcade; Antonin Pottier; Etienne Espagne
  25. Trade in Environmental Goods, with Focus on Climate-Friendly Goods and Technologies By ZhongXiang Zhang
  26. Economics and Climate Change: Integrated Assessment in a Multi-Region World By John Hassler; Per Krusell
  27. Impacts of Border Carbon Adjustments on China’s Sectoral Emissions: Simulations with a Dynamic Computable General Equilibrium Model By Qin Bao; Ling Tang; ZhongXiang Zhang; Han Qiao; Shouyang Wang
  28. The Competitiveness Impacts of Climate Change Mitigation Policies By Aldy, Joseph E.; Pizer, William A.
  29. Energy Balance Climate Models and the Spatial Structure of Optimal Mitigation Policies By Gustav Engstrom; William Brock; Anastasios Xepapadeas
  30. Strictness of Environmental Policy and Investment in Abatement By Maria J. Gil-Molto; Bouwe Dijkstra
  31. The Promise and Problems of Pricing Carbon: Theory and Experience By Joseph E. Aldy; Robert N. Stavins
  32. Using the Market to Address Climate Change: Insights from Theory and Experience By Joseph E. Aldy; Robert N. Stavins
  33. Emission Taxes and the Adoption of Cleaner Technologies: The Case of Environmentally Conscious Consumers By Jesse Matheson
  34. Fiscal implications of climate change By Jones, Benjamin; Keen, Michael; Strand, Jon
  35. Emissions Pricing to Stabilize Global Climate By Valentina Bosetti; Sergey Paltsev; John Reilly; Carlo Carraro
  36. Designing Carbon Taxation Schemes for Automobiles: A Simulation Exercise for Germany By Adamos Adamou; Sofronis Clerides; Theodoros Zachariadis
  37. Evaluating the Impacts of the EU-ETS on Prices, Investments and Profits of the Italian Electricity Market By Francesca Ponenti; Giorgia Oggioni; Elisabetta Allevi; Giacomo Marangoni
  38. Emission Taxes and the Adoption of Cleaner Technologies: The Case of Environmentally Conscious Consumers By Maria José Gil-Moltó; Dimitrios Varvarigos
  39. 2011: Climate Change: Latin America and the Caribbean: Risks for the Microfinance Sector and Opportunities for Adaptation By María Elena Gutierrez; Xavier Mommens
  40. 2C or Not 2C? By Céline Guivarch; Stéphane Hallegatte
  41. Incentives and Stability of International Climate Coalitions: An Integrated Assessment By Valentina Bosetti; Carlo Carraro; Enrica De Cian; Emanuele Massetti; Massimo Tavoni
  42. A Good Opening: The Key to Make the Most of Unilateral Climate Action By Valentina Bosetti; Enrica De Cian

  1. By: Aldy, Joseph E. (Harvard University)
    Abstract: The American Recovery and Reinvestment Act included more than $90 billion in strategic clean energy investments intended to promote job creation and promote deployment of low-carbon technologies. In terms of spending, the clean energy package has been described as the nation's "biggest energy bill in history." To provide a preliminary assessment of the Recovery Act's clean energy package, this paper reviews the rationale, design, and implementation of the act. The paper surveys the policy principles for clean energy stimulus and describes the process of crafting the clean energy package during the 2008-2009 Presidential Transition. Then, the paper reviews the initial employment, economic activity, and energy outcomes associated with these energy investments and provides a more detailed case study on the Recovery Act's support for renewable power through grants and loan guarantees. The paper concludes with lessons learned.
    Date: 2011–12
  2. By: Patrick Criqui (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : FRE3389 - Université Pierre Mendès-France - Grenoble II); Silvana Mima (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : FRE3389 - Université Pierre Mendès-France - Grenoble II)
    Abstract: In this research, we provide an overview of the climate-security nexus in the European energy sector, through a model based analysis of scenarios produced with the POLES model. The scenarios describe the consequences of different degrees of GHG emission constraint, at world level, but also for a case where Europe adopts an ambitious climate policy, while the rest of the world sticks to much more modest abatement policies. The analysis shows that under such stringent climate policies, Europe may benefit of a significant double dividend, first in its capacity to develop a new cleaner and climate-friendlier energy model, and second in a lower vulnerability to potential price or supply shocks on the international energy markets.
    Keywords: climate policy ; scenarios ; energy security
    Date: 2012–02
  3. By: Elena Verdolini (Fondazione Eni Enrico Mattei); Nick Johnstone (OECD Environment Directorate); Ivan Hašcic (OECD Environment Directorate)
    Abstract: This paper provides an empirical analysis of the determinants of energy efficiency in fossil fuel electricity generation across 28 OECD countries over the period 1981-2006, with particular attention to the role played by technological development and the availability of energy efficient technologies in the market. This contribution is novel in three respects: first, empirically assess the effects of different determinants of energy efficiency, which include the input mix in electricity generation, the capacity ratio at which power plants are run, as well as the characteristics of the production technology. Second, we focus on the role of technological availability: using patent data for carefully selected innovations in fossil-fuel technologies, we build an indicator which proxies for technological developments in fuel-efficient electricity generation. Third, by formalizing the relationship between fuel efficiency and carbon intensity, we assess the impact of changes in the input mix and in technological availability on CO2 emissions in the electricity sector. Results show that input mix, capacity utilization and new investment in capacity play a significant role in increasing energy efficiency. Increasing the stock of available technologies (or stock of knowledge) is also associated with higher efficiency levels. Given the link between increased efficiency and lower CO2 emissions, we conclude that technological change has a negative and significant effect on carbon intensity, while the changing input mix affects CO2 intensity both through an increase in efficiency as well as by lowering the input-weighted emission factor.
    Keywords: Fossil Fuel Electricity Generation, Energy Efficiency, Carbon Intensity, Technological Change, Patents
    JEL: Q40 O33 O13
    Date: 2011–12
  4. By: Oskar Lecuyer (EDF R&D - EFESE and CIRED); Ruben Bibas (CIRED)
    Abstract: In addition to the already present Climate and Energy package, the European Union (EU) plans to include a binding target to reduce energy consumption. We analyze the rationales the EU invokes to justify such an overlapping and develop a minimal common framework to study interactions arising from the combination of instruments reducing emissions, promoting renewable energy (RE) production and reducing energy demand through energy efficiency (EE) investments. We find that although all instruments tend to reduce emissions and a price on carbon tends to give the right incentives for RE and EE too, the combination of more than one instrument leads to significant antagonisms regarding major objectives of the policy package. The model allows to show in a single framework and to quantify the antagonistic effects of the joint promotion of RE and EE. We also show and quantify the effects of this joint promotion on ETS permit price, on wholesale market price and on energy production levels.
    Keywords: Renewable Energy, Energy Efficiency, Energy Policy, Climate Policy, Policy Interaction
    JEL: Q28 Q41 Q48 Q58
    Date: 2011–12
  5. By: Hunt Allcott; Michael Greenstone
    Abstract: Many analysts have argued that energy efficiency investments offer an enormous “win-win” opportunity to both reduce negative externalities and save money. This overview paper presents a simple model of investment in energy-using capital stock with two types of market failures: first, uninternalized externalities from energy consumption, and second, forces such as imperfect information that cause consumers and firms not to exploit privately-profitable energy efficiency investments. The model clarifies that only if the second type of market failure cannot be addressed directly through mechanisms such as information provision, energy efficiency subsidies and standards may be merited. We therefore review the empirical work on the magnitude of profitable unexploited energy efficiency investments, a literature which frequently does not meet modern standards for credibly estimating the net present value of energy cost savings and often leaves other benefits and costs unmeasured. These problems notwithstanding, recent empirical work in a variety of contexts implies that on average the magnitude of profitable unexploited investment opportunities is much smaller than engineering-accounting studies suggest. Finally, there is tremendous opportunity and need for policy-relevant research that utilizes randomized controlled trials and quasi-experimental techniques to estimate the returns to energy efficiency investments and the welfare effects of energy efficiency programs.
    JEL: D11 D18 D61 D62 H23 L91 L94 Q41
    Date: 2012–01
  6. By: Aruga, Kentaka; Managi, Shunsuke
    Abstract: This study tests the price linkage among the U.S. major energy sources, considering structural breaks in time series. We use the Johansen cointegration method and find that only weak linkage sustains among the NYMEX WTI crude oil, Brent crude oil, gasoline, heating oil, coal, natural gas, uranium, and ethanol futures prices. Our tests reveal that the uranium and ethanol futures prices have very weak linkage with other U.S. major energy source prices. This indicates that the U.S. energy market is still at a stage where none of the probable alternative energy source markets are playing the role as a substitute or a complement market for the fossil fuel energy markets and that the U.S. major energy source markets are not integrated as one primary energy market.
    Keywords: futures market; structural breaks; Johansen cointegration method
    JEL: G14 C32 Q42
    Date: 2011–10–31
  7. By: Philip ANDREWS-SPEED (Philip ANDREWS-SPEED Chatham House, UK)
    Abstract: This study applies a regional public goods approach to the study of energy market integration (EMI) in East Asia, with a view to clarifying the outlook for such integration and the likely obstacles to be encountered. In addition to drawing on theoretical ideas relating to regional public goods, the paper will also draw on the experience of the European Union in its attempts to develop a single energy market. The study shows that many services are needed in order to develop and sustain a regional integrated energy market and that some of these services have characteristics of regional public goods, though some may also be trans-regional or global in nature as well. The study recommends that: EMI in East Asia should be pursued in an incremental manner and mainly at a sub-regional scale; and the specific steps taken towards EMI should be chosen on the basis of their likely positive economic impacts and their likely ease of delivery.
    Date: 2011–11–01
  8. By: Yu SHENG (Yu SHENG Crawford School of Economics and Government, The Australian National University, Canberra, Australia); Xunpeng SHI (Xunpeng SHI Economic Research Institute for ASEAN and East Asia, Jakarta, Indonesia)
    Abstract: Energy Market Integration (EMI) has been pursued by East Asian countries in recent years, but how it could play a role in facilitating economic growth of countries in the region remains to be an empirical question. This paper uses the economic convergence analysis (including both the σ-convergence and β-convergence approaches) to examine the impact of EMI - measured by two newly constructed indexes (namely, the energy trade index and the energy market competition index) - at the country level, on dynamic economic growth path across countries, with a special interest to inform policy makings related to promoting EMI among East Asian countries. The result shows that a more integrated energy market may significantly reduce income disparity across countries and thus help poor countries to catch up with rich countries in economic development. Moreover, a comparison among the three regions including EU, NAFTA and EAS shows that EAS countries are more likely to achieve economic convergence along with the construction of EMI process. An important policy implication is that less developed countries in the EAS region can increase benefits from actively participating into the EMI process.
    Date: 2011–10–01
  9. By: James D. Hamilton
    Abstract: This paper explores details behind the phenomenal increase in global crude oil production over the last century and a half and the implications if that trend should be reversed. I document that a key feature of the growth in production has been exploitation of new geographic areas rather than application of better technology to existing sources, and suggest that the end of that era could come soon. The economic dislocations that historically followed temporary oil supply disruptions are reviewed, and the possible implications of that experience for what the transition era could look like are explored.
    JEL: O40 Q30 Q41 Q43
    Date: 2012–01
  10. By: Andrea Bastianin (Department of Statistics, University of Milan-Bicocca and Fondazione Eni Enrico Mattei); Matteo Manera (Department of Statistics, University of Milan-Bicocca and Fondazione Eni Enrico Mattei); Anil Markandya (BC3 Basque Centre for Climate Change); Elisa Scarpa (Edison Trading)
    Abstract: The empirical literature is very far from any consensus about the appropriate model for oil price forecasting that should be implemented. Relative to the previous literature, this paper is novel in several respects. First of all, we test and systematically evaluate the ability of several alternative econometric specifications proposed in the literature to capture the dynamics of oil prices. Second, we analyse the effects of different data frequencies on the coefficient estimates and forecasts obtained using each selected econometric specification. Third, we compare different models at different data frequencies on a common sample and common data. Fourth, we evaluate the forecasting performance of each selected model using static forecasts, as well as different measures of forecast errors. Finally, we propose a new class of models which combine the relevant aspects of the financial and structural specifications proposed in the literature (“mixed” models). Our empirical findings suggest that, irrespective of the shape of the loss function, the class of financial models is to be preferred to time series models. Both financial and time series models are better than mixed and structural models. Results of the Diebold and Mariano test are not conclusive, for the loss differential seems to be statistically insignificant in the large majority of cases. Although the random walk model is not statistically outperformed by any of the alternative models, the empirical findings seem to suggest that theoretically well-grounded financial models are valid instruments for producing accurate forecasts of the WTI spot price.
    Keywords: Oil Price, WTI Spot and Futures Prices, Forecasting, Econometric Models
    JEL: C52 C53 Q32 Q43
    Date: 2011–12
  11. By: Giulia Arduino (Dipartimento di Economia e Metodi Quantitativi, Università degli Studi di Genova); David G. Carrillo Murillo (Institut für Wirtschaftspolitik und Wirtschaftsforschung, Karslruhe Institute of Technology (KIT)); David G. Claudio Ferrari (Dipartimento di Economia e Metodi Quantitativi, Università degli Studi di Genova)
    Abstract: The first cases of successful implementation of cold ironing can be found in Alaska about twenty years ago. In that case, the energy cost was lower than in Europe where cold ironing has been developed only in the latest years at few ports. The present paper investigates the innovative process of cold ironing at European level. Firstly, its recent development in Europe is documented as well as the main concern of its corresponding legislation. Then, the adoption of this initiative by the “green ports” concept is discussed. Secondly, the technical barriers, such as lack of standardization of electricity parameters are mentioned. And given that port electrical infrastructure needed onshore represents a huge investment that not all ports are financially able to do, the financial problematic is treated explicitly taking into account the cost of energy at ports (directly provided by electric centrals or converted) against the energy cost onboard. Finally, conclusions are drawn covering the main barriers confronted by this technology and the future premises of cold ironing at European ports considering the social and environmental benefits in terms of air and noise pollution.
    Keywords: cold ironing, energy cost, technology barrier, European ports, environmenta
    Date: 2011
  12. By: Strand, Jon
    Abstract: This paper provides an analytical discussion of several interconnected resource allocation problems from under-pricing of electricity used by farmers for groundwater extraction. In these situations, groundwater extraction is inefficiently high even without electricity under-pricing. Moreover, part of the electric power supply intended for farmers is often diverted to other unauthorized uses (notably illicit consumption). The paper demonstrates that unless non-price electricity rationing imposes severe constraints on demand, the range of resource allocation problems includes insufficient incentives to provide high-level service by the power utility, insufficient incentives for farmers to install and operate efficient equipment, and losses due to political"rent seeking"activities to influence water allocations. It also shows that diversion of electricity to illicit uses can increase overall economic efficiency when this leads to less electricity use by farmers, thus somewhat ameliorating the problem of excessive groundwater extraction as well as the inefficiencies related to under-pricing of electricity. Systemic reforms for overcoming these problems may face severe political obstacles.
    Keywords: Energy Production and Transportation,Water and Industry,Economic Theory&Research,Wastewater Treatment,Electric Power
    Date: 2012–01–01
  13. By: Charles F. Mason (H.A. True Chair in Petroleum and Natural Gas Economics, Department of Economics & Finance, University of Wyoming)
    Abstract: Persistent and significant privately-held stockpiles of crude oil have long been an important empirical regularity in the United States. Such stockpiles would not rationally be held in a traditional Hotelling-style model. How then can the existence of these inventories be explained? In the presence of sufficiently stochastic prices, oil extracting firms have an incentive to hold inventories to smooth production over time. An alternative explanation is related to a speculative motive - firms hold stockpiles intending to cash in on periods of particularly high prices. I argue that empirical evidence supports the former but not the latter explanation.
    Keywords: Petroleum Economics, Stochastic Dynamic Optimization
    JEL: Q2 D8 L15
    Date: 2011–12
  14. By: Lei Zhu (Center for Energy and Environmental Policy Research, Institute of Policy and Management, Chinese Academy of Sciences); ZhongXiang Zhang (Research Program, East-West Center); Ying Fan (Center for Energy and Environmental Policy Research, Institute of Policy and Management, Chinese Academy of Sciences)
    Abstract: This paper applies real options theory to establish an overseas oil investment evaluation model that is based on Monte Carlo simulation and is solved by the Least Squares Monte-Carlo method. To better reflect the reality of overseas oil investment, our model has incorporated not only the uncertainties of oil price and investment cost but also the uncertainties of exchange rate and investment environment. These unique features have enabled our model to be best equipped to evaluate the value of oil overseas investment projects of three oil field sizes (large, medium, small) and under different resource tax systems (royalty tax and production sharing contracts). In our empirical setting, we have selected China as an investor country and Indonesia as an investee country as a case study. Our results show that the investment risks and project values of small sized oil fields are more sensitive to changes in the uncertainty factors than the large and medium sized oil fields. Furthermore, among the uncertainty factors considered in the model, the investment risk of overseas oil investment may be underestimated if no consideration is given of the impacts of exchange rate and investment environment. Finally, as there is an important trade-off between oil resource investee country and overseas oil investor, in medium and small sized oil investment negotiation the oil company should try to increase the cost oil limit in production sharing contract and avoid the term of a windfall profits tax to reduce the investment risk of overseas oil fields.
    Keywords: Overseas Oil Investment, Project Value, Real Options, Least Squares Monte-Carlo
    JEL: Q41 Q43 Q48 G31 O13 O22 C63
    Date: 2011–11
  15. By: Massimiliano Mazzanti; Roberto Zoboli
    Abstract: We present conceptual and empirical insights on the issue of resource taxation, an intrinsic regional environmental policy. It deals with the implementation of environmental taxes and environmental planning at regional level, as tools aimed at achieving weak sustainability for non renewable resources like aggregates, extracted for a diverse set of economic aims. We frame the discussion in the spirit of refreshing the need of ecological and resource tax reforms at national and regional level-. We do note and discuss the intrinsic peculiarities of resource taxes with respect to emission taxes, namely the integration with regional planning, the use of revenue for weak sustainability objectives, the different role by played technology and efficiency. Factors that are to be taken into account in any specific implementation. We empirically investigate resource taxation issues by focusing on aggregate extraction management and policy of two large Northern Italian regions, Lombardy and Emilia-Romagna. We conclude that the possible effects of extraction charges for the aggregate market development in Italy can be very limited. The level of charges is generally too low to be expected to have an effect on demand (through aggregate prices) and supply of aggregates. The environmental objectives of planning are, at least for the moment, other than reducing extraction, and they generally consist of minimising external impacts, to support sustainable management of landscapes, and to provide multi-value public goods within the local area. The evidence shows that even more for resource taxes a political economy analysis that encompasses institutional and planning issues is needed to effectively shape environmental policies. The complementarity of land use planning and economic instruments is a key driver of sustainability performances and witness reciprocal influences. The unintended effects of economic instruments are also a crucial thing for evaluating effectiveness and efficiency. Those include positive effects of ‘institutional kind’ on the governance and organizational performance of the integrated policy-planning framework.
    Keywords: Resource tax reforms; Aggregates; environmental charges; regional planning; sustainability; ex post compensations; Political economy; unintended effects; environmental federalism
    JEL: Q32 R11 R52
    Date: 2012–01–20
  16. By: Audenaert, Amaryllis (Artesis Hogeschool Antwerpen, Antwerp, Belgium); De Boeck, Liesje (Hogeschool-Universiteit Brussel (HUB), Belgium); Geudens, K. (Artesis Hogeschool Antwerpen, Antwerp, Belgium); Buyle, M. (Artesis Hogeschool Antwerpen, Antwerp, Belgium)
    Abstract: Improving energy performance of buildings has become a key goal in managing energy demand. In this context, Europe produced the Energy Performance of Buildings Directive (EPBD). Flanders (Belgium) converted this directive into the ‘Energy Performance and Interior Climate’ (EPB). Taking into account this EPB standard, this study will undertake a cost analysis of different heating systems (condensing gas boiler, non-condensing gas boiler, oil boiler, and heat pump) and ventilation systems (C and D) and investigate their influence on the E-level. The analysis is performed for three representative types of dwellings in Flanders: a terraced, semi-detached and detached dwelling. The analysis clearly indicates that a condensing gas boiler in combination with the heat exchanger is most advantageous: it is the cheapest heating system and generates the lowest E-level. This makes the condensing gas boiler the best choice for all dwelling types.
    Date: 2011–12
  17. By: Noël, P.; Findlater, S.; Chyong, C. K.
    Abstract: The Baltic States (Estonia, Latvia and Lithuania) are three amongst the smallest gas markets in Europe. They import all the gas they consume from Russia, with whom they have difficult political relationships. A disruption of their supply from Russia, whatever the cause, would have severe consequences as a large share of their peak winter consumption could not be replaced by alternative gas or other fuels. The three governments want to invest in improving gas supply security and the European Commission pushes in the same direction. But what should they do? We present an assessment of the cost of various national and regional options – dual-fuel for heat plants and CHPs; strategic gas storage; strategic LNG terminals – to increase gas supply security. The cost is calculated over thirty years for different scenarios of supply disruptions. Uncertainty in commodity prices and interest rates is taken into account through Monte Carlo simulations. We draw the policy conclusions, taking into account the regional political context.
    JEL: O13 P28 Q48
    Date: 2012–01–23
  18. By: Yanrui WU (Yanrui WU UWA Business School, University of Western Australia)
    Abstract: East Asia is already the main destination of the world's commercial liquefied natural gas (LNG). However, the gas markets in the EAS area are either underdeveloped or fragmented. The objectives of this study are twofold, namely, i) to present a review of the trends in global gas market integration and ii) to draw implications and make recommendations for gas market development in the EAS area. To achieve the goal of an integrated gas market in the EAS region, governments in member economies must work together to implement a plan. Specifically, four recommendations are made to the EAS states: adopt a formal program to promote and nurture the development of gas markets in member states and phased sectoral reforms in relatively mature markets; set targets to gradually harmonise regulatory and technical standards in the gas sector; coordinate better to promote their "gas" causes; and boost cross-border connectivity and trading within the area and eventually achieve regional gas market integration.
    Date: 2011–11–01
  19. By: Ardjan Gazheli (Department of Economics, SLU); Luca Di Corato (Department of Economics, SLU)
    Abstract: In this paper a real option model is developed to examine the critical factors affecting the decision to lease agricultural land to a company installing a PV power plant. The leasing payment is certain while the net revenues from agriculture are uncertain. We identify the profit values at which the farmer decides to lease his plot vs. continue farming it. By applying the model to the province of Bologna (Italy), we illustrate the possible land-use change scenarios in this area. We conclude by discussing the importance of PV energy production as a source of income for farmers and its implications from a social perspective.
    Keywords: Land Allocation, Real Options, Renewable Energy, Solar farm, Uncertainty
    JEL: C61 D81 Q24 Q42
    Date: 2011–12
  20. By: Ken Itakura (Ken Itakura Associate Professor, Faculty of Economics, Nagoya City University)
    Abstract: In the aftermath of the devastating nuclear fallout in Japan, there has been a harsh debate surrounding the role of nuclear energy in electricity generation. A changing role will have economic consequences on production, consumption, and international trade. To quantity these effects, we implemented simulations with a global CGE model and database. The simulation results show that reductions in the use of nuclear for electric power generation may have profound negative impacts on the Japanese economy. A nuclear accident at the Fukushima power plant changed the future direction of Japanese energy policy as well as Asian energy policy. These policies are integrated via technological, financial, and nuclear energy knowledge sharing activities within the region. The main objective of this policy brief is to shed some light on the following question: what would be the economic consequences of altering the source of power generation from nuclear to fossil fuels? This Japanese case study offers policy implications for both Japan and the region as a whole.
    Date: 2011–12–01
  21. By: Heffron, R. J.
    Date: 2012–01–23
  22. By: Alexander Brauneis (Institute of Financial Management, Alpen-Adria-University Klagenfurt); Michael Loretz (Institute of Banking and Finance, Karl-Franzens-University Graz); Roland Mestel (Institute of Banking and Finance, Karl-Franzens-University Graz); Stefan Palan (Institute of Banking and Finance, Karl-Franzens-University Graz)
    Abstract: Uncertainty about long-term climate policy is a major driving force in the evolution of the carbon market price. Since this price enters the investment decision process of regulated firms, this uncertainty increases the cost of capital for investors and might deter invest-ments into new technologies at the company level. We apply a real options-based approach to assess the impact of climate change policy in the form of a constant or growing price floor on investment decisions of a single firm in a competitive environment. This firm has the opportunity to switch from a high-carbon “dirty” technology to a low-carbon “clean” technology. Using Monte Carlo simulation and dynamic programming techniques for real market data, we determine the optimal CO2 price floor level and growth rate in order to induce investments into the low-carbon technology. We show these findings to be robust to a large variety of input parameter settings.
    Keywords: Carbon price, price floor, technological change, investment decision, real option approach
    JEL: D81 O38 Q55
    Date: 2011–10
  23. By: Jean-Marie Grether (University of Neuchâtel); Nicole A. Mathys (Swiss Federal Office of Energy, Bern and University of Neuchâtel); Jaime de Melo (University of Geneva and CEPR)
    Abstract: This paper tackles the “pollution haven” argument by estimating the pollution content of imports (PCI). The PCI is then decomposed into three components: (i) a “deep” component (i.e. traditional variables unrelated to the environmental debate); (ii) a factor endowment component and (iii) a “pollution haven” component reflecting the impact of differences in environmental policies. The estimation is carried out for 1987 for an extensive data set covering 10 pollutants, 48 countries and 79 ISIC 4-digit sectors. Decompositions based on cross-section econometric estimates suggest a significant pollution haven effect which increases the PCI of the North because of stricter environmental regulations in the North. At the same time, the factor endowment effect lowers the PCI of the North, as the North is relatively well-endowed in capital and pollution-intensive activities are capital intensive. On a global scale, because the bulk of trade is intra-regional with a high North-North share, these effects are small relative to the “deep” determinants of the worldwide PCI. In sum, differences in factor endowments and environmental policies have only marginally affected the PCI of world trade at the end of the eighties.
    Keywords: Trade and The Environment, Pollution Haven Effect, Factor Endowment Effect
    JEL: F18 Q56
    Date: 2011–10
  24. By: Jean-Charles Hourcade (CIRED, Centre International de Recherche sur l'Environnement et le Développement); Antonin Pottier (CIRED, Centre International de Recherche sur l'Environnement et le Développement); Etienne Espagne (CIRED, Centre International de Recherche sur l'Environnement et le Développement)
    Abstract: This paper discusses the growth model with environmental constraints recently presented in (Acemoglu et al., 2011) which focuses on the redirection of technical change by climate policies with research subsidies and a carbon tax. First, Acemoglu et al.'s model and chosen parameters yield numerical results that do not support the conclusion that ambitious climate policies can be conducted “without sacrificing (much or any) long-run growth”. Second, they select unrealistic key parameters for carbon sinks and elasticity of substitution. We find that more realistic parameters lead to very different results. Third, the model leads to an unrealistic conclusion when used to analyse endogenous growth, suggesting specification problems.
    Keywords: Technological Change, Endogenous Growth, Climate, Energy Substitutability
    JEL: O30 O33 Q43 Q54 Q56
    Date: 2011–12
  25. By: ZhongXiang Zhang (East-West Center)
    Abstract: Paragraph 31(iii) of the Doha Ministerial Declaration mandates to the liberalization of environmental goods and services. This mandate offers a good opportunity to put climate-friendly goods and services on a fast track to liberalization. Agreement on this paragraph should represent one immediate contribution that the WTO can make to fight against climate change. This paper presents the key issues surrounding the liberalization of trade in climate-friendly goods and technologies in WTO environmental goods negotiations. It begins with discussing what products to liberalize and how. Given that WTO Members are divided by this key issue, the paper explores options to move current negotiations on the liberalization of trade in environmental goods and technologies forward, both within and outside the WTO. Recognizing that there is no one-size-fits-all strategy for tariff liberalization for all countries and for all environmental goods, the paper suggests the need for a high degree of flexibility to accommodate different situations and stakes in the liberalization of trade in environmental goods. Given that there are simply not enough environmental markets or these markets are weak in many developing countries, the paper emphasizes that creating markets for environmental goods in developing countries is far more important than just improving market-access conditions for associated goods, and discusses how to best serve the interests and concerns of developing countries.
    Keywords: Environmental Goods and Services, Low-Carbon Goods and Technologies, Market Access, Doha Round, WTO, Renewable Energy Technologies
    JEL: F18 F13 P28 Q42 Q48 Q56 Q54 Q58 Q48
    Date: 2011–11
  26. By: John Hassler; Per Krusell
    Abstract: This paper develops a model that integrates the climate and the global economy---an integrated assessment model---with which different policy scenarios can be analyzed and compared. The model is a dynamic stochastic general-equilibrium setup with a continuum of regions. Thus, it is a full stochastic general-equilibrium version of RICE, Nordhaus's pioneering multi-region integrated assessment model. Like RICE, our model features traded fossil fuel but otherwise has no markets across regions---there is no insurance nor any intertemporal trade across them. The extreme form of market incompleteness is not fully realistic but arguably not a decent approximation of reality. Its major advantage is that, along with a set of reasonable assumptions on preferences, technology, and nature, it allows a closed-form model solution. We use the model to assess the welfare consequences of carbon taxes that differ across as well as within oil-consuming and -producing regions. We show that, surprisingly, only taxes on oil producers can improve the climate: taxes on oil consumers have no effect at all. The calibrated model suggests large differences in views on climate policy across regions.
    JEL: H23 O44 Q0
    Date: 2012–01
  27. By: Qin Bao (Institute of Systems Science, Academy of Mathematics and Systems Science, Chinese Academy of Sciences); Ling Tang (Institute of Policy and Management, Chinese Academy of Sciences, Graduate University of Chinese Academy of Sciences); ZhongXiang Zhang (Institute of Policy and Management, Chinese Academy of Sciences, Center for Energy Economics and Strategy Studies; and Research Institute for the Changing Global Environment, Fudan University, Research Program, East-West Center); Han Qiao (College of Economics, Qingdao University, Institute of Systems Science, Academy of Mathematics and Systems Science, Chinese Academy of Sciences); Shouyang Wang (Institute of Systems Science, Academy of Mathematics and Systems Science, Chinese Academy of Sciences)
    Abstract: Carbon-based border tax adjustments (BTAs) have recently been proposed by some OECD countries to level the carbon playing field and target major emerging economies. This paper applies a multi-sector dynamic computable general equilibrium (CGE) model to estimate the impacts of the BTAs implemented by US and EU on China’s sectoral carbon emissions. The results indicate that BTAs will cut down export prices and transmit the effects to the whole economy, reducing sectoral output-demands from both supply side and demand side. On the supply side, sectors might substitute away from exporting toward domestic market, increasing sectoral supply; while on the demand side, the domestic income may be strikingly cut down due to the decrease in export price, decreasing sectoral demand. Furthermore, such shrinkage of demand may similarly reduce energy prices, which leads to energy substitution effect and somewhat stimulates carbon emissions. Depending on the relative strength of the output-demand effect and energy substitution effect, sectoral carbon emissions and energy demands will vary across sectors, with increasing, decreasing or moving in a different direction. These results suggest that an incentive mechanism to encourage the widespread use of environment-friendly fuels and technologies will be more effective.
    Keywords: Border Carbon Tax Adjustments, Computable General Equilibrium Model, Carbon Emissions
    JEL: D58 F18 Q43 Q48 Q52 Q54 Q56 Q58
    Date: 2011–12
  28. By: Aldy, Joseph E. (Harvard University); Pizer, William A. (Duke University)
    Abstract: The pollution haven hypothesis suggests that unilateral domestic emission mitigation policies could cause adverse "competitiveness" impacts on domestic manufacturers as they lose market share to foreign competitors and relocate production activity--and emissions--to unregulated economies. We construct a precise definition of competitiveness impacts appropriate for climate change regulation that can be estimated exclusively with domestic production and net import data. We use this definition and a 20+ year panel of 400+ U.S. manufacturing industries to estimate the effects of energy prices, which is in turn used to simulate the impacts of carbon pricing policy. We find that a U.S.-only $15 per ton CO2 price will cause competitiveness effects on the order of a 1.0 to 1.3 percent decline in production among the most energy-intensive manufacturing industries. This amounts to roughly one-third of the total impact of a carbon pricing policy on these firms' economic output.
    JEL: F18 Q52 Q54
    Date: 2011–12
  29. By: Gustav Engstrom; William Brock; Anastasios Xepapadeas
    Abstract: We develop a one-dimemsional energy balance climate model with heat transportation across locations. We introduce the concept of po- tential world GDP at time t, and we introduce, through the temper- ature function, spatial characteristics into the damage function which make damages latitude dependent. We solve the social planner��s prob- lem and characterize the competitive equilibrium. We de��ne optimal taxes on fossil fuels and pro��t taxes on ��rms that extract fossil fuels. Our results suggest that if the implementation of international trans- fers across latitudes is not possible, then optimal taxes are spatially non homogeneous and tend to be lower at the poor latitudes. The degree of spatial di�¤erentiation of optimal taxes depend on heat trans- portation. We also locate su�¢ cient conditions for optimal mitigation policies to have rapid ramp-up initially and then decrease over time. By employing the properties of the spatial model and approximating solutions, we show how to study the impact of thermal transport across latitudes on welfare inequality.
    Keywords: Energy Balance Climate Models, Heat Di¤usion, Tem- perature Distribution, Spatial Optimal Taxes
    JEL: Q54 Q58
    Date: 2012–01–22
  30. By: Maria J. Gil-Molto; Bouwe Dijkstra
    Abstract: In this paper we model an oligopoly where .rms invest in abatement technologies and emissions are taxed by the government. We show that a stricter environmental policy does not necessarily lead to an increase in .rms.R&D investment into cleaner production methods. In fact, the emission-to-output ratio may be a U-shaped function of the environmental damage parameter. This result holds both when the government can commit and in the social optimum. When the government cannot commit, this relationship is ambiguous except in markets with few .rms. Our results further suggest that if the emission-to-output ratio is decreasing throughout, output is a U-shaped function of the environmental damage.
    Keywords: Environmental innovation; environmental taxation; commitment; oligopoly
    JEL: L12 Q55 Q58
    Date: 2011–07
  31. By: Joseph E. Aldy (Assistant Professor of Public Policy, Harvard Kennedy School; Nonresident Fellow, Resources for the Future; and Faculty Research Fellow, National Bureau of Economic Research); Robert N. Stavins (Albert Pratt Professor of Business and Government, Harvard Kennedy School; University Fellow, Resources for the Future; and Research Associate, National Bureau of Economic Research)
    Abstract: Because of the global commons nature of climate change, international cooperation among nations will likely be necessary for meaningful action at the global level. At the same time, it will inevitably be up to the actions of sovereign nations to put in place policies that bring about meaningful reductions in the emissions of greenhouse gases. Due to the ubiquity and diversity of emissions of greenhouse gases in most economies, as well as the variation in abatement costs among individual sources, conventional environmental policy approaches, such as uniform technology and performance standards, are unlikely to be sufficient to the task. Therefore, attention has increasingly turned to market-based instruments in the form of carbon-pricing mechanisms. We examine the opportunities and challenges associated with the major options for carbon pricing: carbon taxes, cap-and-trade, emission reduction credits, clean energy standards, and fossil fuel subsidy reductions.
    Keywords: : Global Climate Change, Market-Based Instruments, Carbon Pricing, Carbon Taxes, Cap-and-Trade, Emission Reduction Credits, Energy Subsidies, Clean Energy Standards
    JEL: Q54 Q58 Q40 Q48
    Date: 2011–11
  32. By: Joseph E. Aldy (Assistant Professor of Public Policy, Harvard Kennedy School, Nonresident Fellow, Resources for the Future, and Faculty Research Fellow, National Bureau of Economic Research); Robert N. Stavins (Albert Pratt Professor of Business and Government, Harvard Kennedy School, University Fellow, Resources for the Future, and Research Associate, National Bureau of Economic Research)
    Abstract: Emissions of greenhouse gases linked with global climate change are affected by diverse aspects of economic activity, including individual consumption, business investment, and government spending. An effective climate policy will have to modify the decision calculus for these activities in the direction of more efficient generation and use of energy, lower carbon-intensity of energy, and – more broadly – a more carbon-lean economy. The only approach to doing this on a meaningful scale that would be technically feasible and cost-effective is carbon pricing, that is, market-based climate policies that place a shadow-price on carbon dioxide emissions. We examine alternative designs of three such instruments – carbon taxes, cap-and-trade, and clean energy standards. We note that the U.S. political response to possible market-based approaches to climate policy has been and will continue to be largely a function of issues and structural factors that transcend the scope of environmental and climate policy.
    Keywords: Global Climate Change, Market-Based Instruments, Carbon Pricing, Carbon Taxes, Cap-And-Trade, Clean Energy Standards
    JEL: Q54 Q58 Q40 Q48
    Date: 2011–10
  33. By: Jesse Matheson
    Abstract: We model a market with environmentally conscious consumers and a duopoly in which firms consider the adoption of a clean technology. We show that as pollution increases, consumers shift more resources to the environmental activities, thereby affecting negatively the demand faced by the duopoly. This effect generates incentives for firms to adopt the clean technology even in the absence of emissions taxes. When such taxes are considered, our results indicate that the benefit of adopting the clean technology is initially increasing and then decreasing in the emission tax. The range of values for which the emission tax increases this benefit becomes narrower when the consumers’ environmental awareness is stronger.
    Keywords: Aboriginal Canadians; smoking; tobacco tax; social interactions
    JEL: D12 I10 I38
    Date: 2011–11
  34. By: Jones, Benjamin; Keen, Michael; Strand, Jon
    Abstract: This paper provides a primer on the fiscal implications of climate change, in particular the policies for responding to it. Many of the complicated challenges that arise in limiting climate change (through greenhouse gas emissions mitigation), and in dealing with the effects that remain (through adaptation to climate change impacts), are of a fiscal nature. While mitigation has the potential to raise substantial public revenue (through charges on greenhouse gas emissions), adaptation largely leads to fiscal outlays. Policies may unduly favor public spending (on technological solutions to limit emissions, and on adaptation), over policies that lead to more public revenue being raised (emissions charges). The pervasive uncertainties that surround climate change make the design of proper policy responses even more complex. This applies especially to policies for mitigation of emissions, since agreement on and international enforcement of cooperative abatement policies are exceedingly difficult to achieve, and there is as yet no common view on how to compare nearer-term costs of mitigation to longer-term benefits.
    Keywords: Climate Change Mitigation and Green House Gases,Climate Change Economics,Carbon Policy and Trading,Energy Production and Transportation,Environment and Energy Efficiency
    Date: 2012–01–01
  35. By: Valentina Bosetti (Fondazione Eni Enrico Mattei); Sergey Paltsev (Massachusetts Institute of Technology (MIT)); John Reilly (Massachusetts Institute of Technology (MIT)); Carlo Carraro (University of Venice)
    Abstract: In the absence of significant greenhouse gas (GHG) mitigation, many analysts project that atmospheric concentrations of species identified for control in the Kyoto protocol could exceed 1000 ppm (carbon-dioxide-equivalent) by 2100 from the current levels of about 435 ppm. This could lead to global average temperature increases of between 2.5 and 6°C by the end of the century. There are risks of even greater warming given that underlying uncertainties in emissions projections and climate response are substantial. Stabilization of GHG concentrations that would have a reasonable chance of meeting temperature targets identified in international negotiations would require significant reductions in GHG emissions below “business-as-usual” levels, and indeed from present emissions levels. Nearly universal participation of countries is required, and the needed investments in efficiency and alternative energy sources would entail significant costs. Resolving how these additional costs might be shared among countries is critical to facilitating a wide participation of large-emitting countries in a climate stabilization policy. The 2°C target is very ambitious given current atmospheric concentrations and inertia in the energy and climate system. The Copenhagen pledges for 2020 still keep the 2°C target within reach, but very aggressive actions would be needed immediately after that.
    Keywords: Emissions Pricing, Climate Stabilization
    JEL: Q54 Q58
    Date: 2011–11
  36. By: Adamos Adamou (University of Cyprus); Sofronis Clerides (University of Cyprus and CEPR); Theodoros Zachariadis (Cyprus University of Technology)
    Abstract: Vehicle taxation based on CO2 emissions is increasingly being adopted worldwide in order to shift consumer purchases to low-carbon cars, yet little is known about the effectiveness and overall economic impact of these schemes. We focus on feebate schemes, which impose a fee on high-carbon vehicles and give a rebate to purchasers of low-carbon automobiles. e estimate a discrete choice model of demand for automobiles in Germany and simulate the impact of alternative feebate schemes on emissions, consumer welfare, public revenues and firm profits. The analysis shows that a well-designed scheme can lead to emission reductions without reducing overall welfare.
    Keywords: CO2 emissions, German Automobile Market, Feebates, Carbon Taxation
    JEL: Q5 Q53 Q58
    Date: 2011–12
  37. By: Francesca Ponenti (Department of Quantitative Methods, University of Brescia); Giorgia Oggioni (Department of Quantitative Methods, University of Brescia,); Elisabetta Allevi (Department of Quantitative Methods, University of Brescia,); Giacomo Marangoni (Fondazione Eni Enrico Mattei)
    Abstract: In this paper we investigate the economic impacts of the European Emission Trading Scheme (EU-ETS) on the Italian electricity market by a power generation expansion model. In particular, we assume that generators make their capacity expansion decisions in a Cournot or in a perfect competition manner. This model is used to measure the effects of the EU-ETS Directives on electricity prices and demand, investments and generators' profits both in an oligopolistic and in a perfectly competitive organization of the power market. We adopt a technological representation of the energy market which is discretized into six geographical zones (North, Center-North, Center-South, South, Sicily, Sardinia) and five virtual poles (Monfalcone, Foggia, Brindisi, Rossano, Priolo) with limited production for a total of eleven zones. We assume that generators operate in different zones connected by interconnections with limited capacity and produce energy by running existing or new plants in which they directly invest. We consider several investment scenarios under the CO2 regulation with and without incentives to renewables. The scenarios also include simulations on future effects of the third EU-ETS phase on the system. Our analysis shows that perfect competition induces generators to invest more than in an oligopolistic framework, but in both market configurations, investments are mainly concentrated in fossil-red plants (CCGT and coal), leaving a small proportion to new wind plants. This happens also in presence of incentives given to renewable technologies. We can thus conclude that investments in a secure and efficient technology like CCGT are preferable compared to those in renewables that cannot be used with continuity. This investment policy affects electricity prices that significantly increase in 2020 compared to their 2009 levels. The raise of electricity prices in 2020 is particularly favorable for generators operating as Cournot players which are able to increase their profits compared to 2009, despite the full auctioning system foreseen for the allocation of CO2 allowance to the power sector in the third EU-ETS phase. The solution of the overall system is found by exploiting the mixed complementarity theoretical framework and solution algorithms. The developed model is implemented as complementarity problems and solved in GAMS using the PATH solver.
    Keywords: Complementarity Conditions, General Equilibrium Models, EU-ETS, Italian Electricity Market
    JEL: Q4 Q48
    Date: 2011–12
  38. By: Maria José Gil-Moltó; Dimitrios Varvarigos
    Abstract: We model a market with environmentally conscious consumers and a duopoly in which firms consider the adoption of a clean technology. We show that as pollution increases, consumers shift more resources to the environmental activities, thereby affecting negatively the demand faced by the duopoly. This effect generates incentives for firms to adopt the clean technology even in the absence of emissions taxes. When such taxes are considered, our results indicate that the benefit of adopting the clean technology is initially increasing and then decreasing in the emission tax. The range of values for which the emission tax increases this benefit becomes narrower when the consumers’ environmental awareness is stronger.
    Keywords: Environmentally Conscious Consumers; Technology Choice; Environmental Taxation
    JEL: L13 Q55 Q58
    Date: 2011–11
  39. By: María Elena Gutierrez; Xavier Mommens
    Abstract: The purpose of this study is to show how microfinance services may undergo the impacts of climate change, to analyze the opportunities available for MFIs and to propose concrete actions. This paper was commissioned by the Inter-American Development Bank (IDB) in coordination with the Sustainable Energy and Climate Change Unit (ECC) and the Multilateral Investment Fund (MIF), and it was prepared on the basis of bibliographic reviews, experience in the Latin American region, and interviews that were carried out during missions in Peru and Guatemala.
    Keywords: Environment & Natural Resources :: Climate Change, Private Sector :: Microbusinesses & Microfinance, Social Development :: Poverty, Financial Sector :: Financial Services, MFI, microfinance sector, CC, microfinance institutions, microcredits
    Date: 2011–10
  40. By: Céline Guivarch (Centre International de Recherche sur l’Environnement et le Développement); Stéphane Hallegatte (Centre International de Recherche sur l’Environnement et le Développement and Ecole Nationale de la Météorologie, Météo-France)
    Abstract: Political attention has increasingly focused on limiting warming to 2°C. However, to date the only mitigation commitments accompanying this target are the so-called Copenhagen pledges, and these pledges appear to be inconsistent with the 2°C objective. Diverging opinions on whether this inconsistency can or should be resolved have been expressed. This paper clarifies the alternative assumptions underlying these diverging view points and explicits their implications. It first gives simple visualizations of the challenge posed by the 2°C target. It then proposes a “decision tree”, linking different beliefs on climate change, the achievability of different policies, and current international policy dynamics to various options to move forward on climate change.
    Keywords: Feasibility of 2°C Target, Climate Change Negotiations
    JEL: Q5 Q58
    Date: 2011–12
  41. By: Valentina Bosetti (Fondazione Eni Enrico Mattei and CMCC); Carlo Carraro (Fondazione Eni Enrico Mattei, University of Venice, CEPR, CESifo and CMCC); Enrica De Cian (Fondazione Eni Enrico Mattei and CMCC); Emanuele Massetti (Fondazione Eni Enrico Mattei and CMCC); Massimo Tavoni (Fondazione Eni Enrico Mattei and CMCC)
    Abstract: This paper analyses the incentives to participate in and the stability of international climate coalitions. Using the integrated assessment model WITCH, the analysis of coalitions’ profitability and stability is performed under alternative assumptions concerning the pure rate of time preference, the social welfare aggregator and the extent of climate damages. We focus on the profitability, stability, and “potential stability” of a number of coalitions which are “potentially effective” in reducing emissions. We find that only the grand coalition under a specific sets of assumptions finds it optimal to stabilise GHG concentration below 550 ppm CO2-eq. However, the grand coalition is found not to be stable, not even “potentially stable” even through an adequate set of transfers. However, there exist potentially stable coalitions, but of smaller size, which are also potentially environmentally effective. Depending on the assumptions made, they could achieve up to 600 ppm CO2-eq. More ambitious targets lead to the collapse of the coalition.
    Keywords: Climate Policy, Climate Coalition, Game Theory, Free Riding
    JEL: C68 C72 D58 Q54
    Date: 2011–12
  42. By: Valentina Bosetti (Fondazione Eni Enrico Mattei (FEEM) and Centro Euro-Mediterraneo per i Cambiamenti Climatici (CMCC)); Enrica De Cian (Fondazione Eni Enrico Mattei (FEEM) and Centro Euro-Mediterraneo per i Cambiamenti Climatici (CMCC))
    Abstract: In this paper we argue that when a subgroup of countries cooperate on emission reduction, the optimal response of non-signatory countries reflects the interaction between three potentially opposing factors, the incentive to free-ride on the benefits of cooperation, the incentive to expand the demand of fossil fuels, and the incentive to adopt cleaner technologies introduced by the coalition. Using an Integrated Assessment Model with a game theoretic structure we find that cost-benefit considerations would lead OECD countries to undertake a moderate, but increasing abatement effort (in line with the pledges subscribed in Copenhagen). Even if emission reductions are moderate, OECD countries find it optimal to allocate part of their resources to energy R&D and investments in cleaner technologies. International spillovers of knowledge and technology diffusion then lead to the deployment of these technologies in non-signatory countries as well, reducing their emissions. When the OECD group follows more ambitious targets, such as 2050 emissions that are 50% below 2005 levels, the benefits of technology externalities do not compensate the incentives deriving from the lower fossil fuels prices. This suggests that, when choosing their unilateral climate objective, cooperating countries should take into account the possibility to induce a virtuous behaviour in non-signatory countries. By looking at a two-phase negotiation set-up, we find that free-riding incentives spurred by more ambitious targets can be mitigated by means of credible commitments for developing countries in the second phase, as they would reduce lock-in in carbon intensive technologies.
    Keywords: Technology Spillovers, Climate Change, Partial Cooperation
    JEL: Q54 Q55 C72
    Date: 2011–11

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