nep-res New Economics Papers
on Resource Economics
Issue of 2017‒11‒12
two papers chosen by
Maximo Rossi
Universidad de la República

  1. The Basic Environmental Economics of The Circular Economy By Peter Birch Sørensen
  2. Permit allocation rules and investment incentives in emissions trading systems By Florens Flues; Kurt van Dender

  1. By: Peter Birch Sørensen (Department of Economics, University of Copenhagen)
    Abstract: This paper sets up a Ramsey model with exhaustible natural resources to study the optimal recycling of polluting raw materials and household waste products. During the process of economic development it is optimal for the economy to go through an initial “linear” phase with no recycling followed by a “circular” phase where some materials and waste products are recycled to alleviate growing natural resource scarcity and environmental degradation. Ensuring the optimal degree of recycling in a market economy requires a Pigouvian tax on non-recycled raw materials combined with a subsidy to recycling of household waste and a tax on man-made wealth to internalize the environmental cost of capital accumulation.
    Keywords: Circular economy, linear economy, optimal recycling, Hotelling rule, Pigouvian taxation, Environmental Kuznets Curve
    JEL: Q53 Q58 H21
    Date: 2017–11
  2. By: Florens Flues (OECD); Kurt van Dender (OECD)
    Abstract: This paper argues that, in situations where choices are made between mutually exclusive investment projects and where there are economic rents, free allocation of tradable emission permits in emissions trading systems can weaken incentives for firms to invest in less carbon-intensive technologies compared to the case where permits would be auctioned. The reason is that permit allocation rules affect economic rents differentially when different product benchmarks apply to products that are close substitutes. Examples of permit allocation rules favouring more emission-intensive technologies for outputs that are close substitutes are found in the California Cap and Trade Program and in the European Union Emissions Trading System. This lack of technology-neutrality is exacerbated in the long run as future patterns of substitutability between technologies are uncertain. Free permit allocation can broaden support for carbon pricing, but this paper shows that this carries a cost in terms of environmental effectiveness if it discourages investment in low-carbon assets.
    Keywords: average carbon prices, benchmarks, California Cap and Trade Program, carbon pricing, decarbonisation, emissions trading systems, EU ETS, permit allocation, technology neutrality
    JEL: D04 H23 H32 L51 Q48
    Date: 2017–11–15

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