The Incentives to Participate in and the Stability of International Climate Coalitions: A Game-Theoretic Approach Using the WITCH Model

by Valentina Bosetti, Carlo Carraro, Enrica De Cian, Romain Duval, Emanuele Massetti and Massimo Tavoni

- This paper uses WITCH, an integrated assessment model with a game-theoretic structure, to explore the prospects for, and the stability of broad coalitions to achieve ambitious climate change mitigation action. Only coalitions including all large emitting regions are found to be technically able to meet a concentration stabilisation target below 550 ppm CO2eq by 2100. Once the free-riding incentives of non-participants are taken into account, only a "grand coalition" including virtually all regions can be successful. This grand coalition is profitable as a whole. However, neither the grand coalition nor smaller but still environmentally significant coalitions appear to be stable.

Bosetti, V., C. Carraro, E. De Cian, R. Duval, E. Massetti and M. Tavoni (2009). "The Incentives to Participate in and the Stability of International Climate Coalitions: A Game-Theoretic Approach Using the WITCH Model." OECD Economics Department Working Papers No. 702, June 2009.

Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action

by Valentina Bosetti, Carlo Carraro and Massimo Tavoni

- This paper builds on the assumption that OECD countries are (or will soon be) taking actions to reduce their greenhouse gas emissions. These actions, however, will not be sufficient to control global warming, unless developing countries also get involved in the cooperative effort to reduce GHG emissions. This paper investigates the best short-term strategies that emerging economies can adopt in reacting to OECD countries’ mitigation effort, given the common long-term goal to prevent excessive warming without hampering economic growth.

Bosetti, V., C. Carraro and M. Tavoni (2009). "Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action." Fondazione Eni Enrico Matteri Working Paper 53.2009, June 2009.

The Logic of Collective Action and Australia’s Climate Policy

by John.C.V.Pezzey, Salim Mazouz and Frank Jotzo

- We analyse the efficiency of the target and of the provisions to prevent carbon leakage in the Australian Government's Carbon Pollution Reduction Scheme (CPRS), as proposed in March 2009, and the nature and likely cause of changes to these features during 2008. The target range of 5-15% national emission cuts during 2000-2020 is weak, and on balance likely to increase the cost of mitigation in Australia in the long run. The free allocation of output-linked, tradable permits to Emissions-Intensive, Trade-Exposed (EITE) sectors was much higher than proposed earlier, and than shown to be needed to prevent carbon leakage.

Pezzey, J.C.V, S. Mazouz and F. Jotzo (2009). "The logic of collective action and Australia’s Climate Policy." EERH Research Report No.24, May 2009.

The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction

by Dallas Burtraw, Richard Sweeney and Margaret A. Walls

- This paper evaluates the effects of a carbon dioxide (CO2) cap-and-trade program on households in each of 11 regions of the United States and sorted into annual income deciles. We find important variation in the incidence (the distribution of cost) of the policy. The most important feature that affects households is how the policy distributes the value created by placing a price on CO2 emissions.

Dallas Burtraw, Richard Sweeney and Margaret A. Walls (2009). "The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction." RFF Discussion Paper 09-17-REV, June 2009.

An Experimental Analysis of Auctioning Emissions Allowances under a Loose Cap

by William Shobe, Karen L. Palmer, Erica Myers, Charles Holt, Jacob Goeree, Dallas Burtraw

- This study is motivated by the observation that all of the major implementations of cap-and-trade regulations for the control of air pollution have started with a generous allocation of allowances relative to recent emissions history, a situation we refer to as a "loose cap." Typically more stringent reductions are achieved in subsequent years of a program. We use an experimental setting to investigate the effects of a loose cap environment on a variety of auction types.

Shobe, W., K.L. Palmer, E. Myers, C. Holt, J. Goeree, D. Burtraw (2009). "An Experimental Analysis of Auctioning Emissions Allowances under a Loose Cap." RFF Discussion Paper 09-25, June 2009.

On a Boundedly Rational Pareto-Optimal Trade in Emission Reduction

by Kryazhimskiy A

- We consider the emission reduction process involving several countries, in which the countries negotiate, in steps, frequently enough, on small, local emission reductions and implement their decisions right away. In every step, the countries either find a mutually acceptable local emission reduction vector and use it as a local emission reduction plan, or terminate the emission reduction process. We prove that the process necessarily terminates in some step and the final total emission reduction vector lies in a small neighborhood of a certain Pareto maximum point in the underlying emission reduction game.

Kryazhimskiy, A. (2009). On a Boundedly Rational Pareto-Optimal Trade in Emission Reduction."" IASA Interim Report IR-09-017, June 2009.

International Cooperation on Climate-Friendly Technologies

by Rolf Golombek and Michael Hoel

- We examine international cooperation on technological development as a supplement to, or an alternative to, international cooperation on emission reductions. R&D should be increased beyond the non-cooperative level if (i) the technology level in one country is positively affected by R&D in other countries, (ii) the domestic carbon tax is lower than the Pigovian level, or (iii) the domestic carbon tax is set directly through an international tax agreement.

Rolf Golombek and Michael Hoel (2009). "International Cooperation on Climate-Friendly Technologies." CesIfo Workikng Paper 2677, June 2009.

Evaluating Emission Trading as a Policy Tool: Evidence from Conditional Jump Models

by Marc Gronwald and Janina Ketterer

- This paper, first, empirically investigates European emission allowance (EUA) prices and, second, evaluates emission trading as a policy measure. Applying combined jump GARCH models yields strong evidence of conditional jump behavior. This implies that EUA prices are subject to unexpected movements and that a considerable degree of uncertainty is present. According to the real option literature, uncertainty has adverse effects on investment decisions. Thus, investments in abatement technologies are likely to be postponed due to the peculiar characteristics of emission allowance prices.

Gronwald, M. and J. Ketterer (2009). "Evaluating Emission Trading as a Policy Tool: Evidence from Conditional Jump Models." CesIfo Working Paper 2682, June 2009.

The Role of Information Provision as a Policy Instrument to Supplement Environmental Taxes: Empowering Consumers to Choose Optimally

by Eftichios S. Sartzetakis, Anastasios Xepapadeas and Emmanuel Petrakis

- The present paper examines, within a dynamic framework, the use of information provision as a policy instrument to supplement environmental taxation. We assume that at least a fraction of consumers do not posses the required information to make the optimal choices, and that their behavior at each time period depends on the accumulated stock of information. We show that, as the accumulated stock of information provision increases, both the optimal level of information provided at each period of time and the optimal tax rate decline over time.

Sartzetakis, E.S., A. Xepapadeas and E. Petrakis (2009). "The Role of Information Provision as a Policy Instrument to Supplement Environmental Taxes: Empowering Consumers to Choose Optimally." FEEM Working Paper, 46.09, June 2009.

The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction

by Dallas Burtraw, Richard Sweeney and Margaret A. Walls

- Federal policies intended to slow global warming would impose potentially significant costs on households, and the costs would vary depending on the policy approach used. This paper evaluates the effects of a carbon dioxide (CO2) cap-and-trade program on households in each of 11 regions of the country and sorted into annual income deciles.

Dallas Burtraw, Richard Sweeney, Margaret A. Walls (2009). "The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction." RFF Discussion Paper 09-17-REV, June 2009.

Taxes, Permits and the Adoption of Abatement Technology under Imperfect Compliance

by Clara Villegas

- This paper analyzes the effects of the choice between price-based and quantity-based emission regulations on compliance incentives and social welfare in the presence of incomplete enforcement and technology adoption. We show that in contrast to taxes, the extent of violations under tradable emission permits (TEPs) decreases with the rate of technology adoption.

Villegas, C. (2009). "Taxes, Permits and the Adoption of Abatement Technology under Imperfect Compliance." Göteborgs Universitet School of Business, Economics and Law, Working Papers in Economics No 368, June 2009.

The Impact of the EU Emissions Trading System on CO2 Intensity in Electricity Generation

by Anna Widerberg and Markus Wråke

- Prior to the launch of the EU Emissions Trading System (EU ETS) in 2005, the electricity sector was widely proclaimed to have more low-cost emission abatement opportunities than other sectors. If this were true, effects of the EU ETS on carbon dioxide (CO2) emissions would likely be visible in the electricity sector. Our results do not indicate any link between the price of EUA and the CO2 emissions of Swedish electricity production.

Widerberg, A. and M. Wråke (2009). "The Impact of the EU Emissions Trading System on CO2 Intensity in Electricity Generation." Göteborgs Universitet School of Business, Economics and Law, Working Papers in Economics No 361, June 2009.

Suggestions for the Road to Copenhagen

by Larry Karp and Jinhua Zhao

- We provide a unified discussion of the issues that confront negotiators of the next international climate agreement. We offer a novel proposal that entitles countries to discharge their treaty obligations by paying a "fine". This escape clause provides cost insurance, simplifies the problem of enforcing compliance, and increases incentives to participate in the agreement. We explain why developed country obligations should rely on a cap and trade commitment rather than carbon taxes. A Central Bank maintains stability of carbon prices by defending a price ceiling and floor.

Karp, L. and J. Zhao (2009). http://repositories.cdlib.org/are_ucb/1085
"Suggestions for the Road to Copenhagen." Department of Agricultural & Resource Economics, UCB. CUDARE Working Paper 1085, June 2009.

Sacrifice, Discounting and Climate Policy: Five Questions

by Larry Karp

- I provide a selective review of discounting and climate policy. After reviewing evidence on the importance of the discount rate in setting policy, I ask whether standard models tend to exaggerate the sacrifices that the current generation needs to undertake in order to internalize climate damages. I then consider whether the risk of catastrophic damage really overwhelms discounting, in the determination of optimal policy. I revisit the question of how we actually think about the distant future.

Karp, L. (2009). "Sacrifice, Discounting and Climate Policy: Five Questions." Department of Agricultural & Resource Economics, UCB. CUDARE Working Paper 1086, June 2009.

International Environmental Agreements: Emissions Trade, Safety Valves and Escape Clauses

by Larry Karp and Jinhua Zhao

- We explain how the structure of multi-national or multi-regional environmental agreements affect their chance of success. Trade in emissions permits has ambiguous and in some cases surprising effects on both the equilibrium level of abatement, and on the ability to persuade nations or regions to participate in environmental agreements. An escape clause policy and a safety valve policy have essentially the same properties when membership in environmental agreement is pre-determined, but they create markedly different effects on the incentives to join such an agreement.

Karp, L. and J. Zhao (2009). "International Environmental Agreements: Emissions Trade, Safety Valves and Escape Clauses." Department of Agricultural & Resource Economics, UCB. CUDARE Working Paper 1084, May 2009.

An Economic and Environmental Assessment of Carbon Capture and Storage (CCS) Power Plants: A Case Study for the City of Kiel

by Sören Lindner, Sonja Peterson and Wilhelm Windhorst

- In the next years several power plants throughout Europe have to be replaced and the questions is whether to build coal fired power plants with carbon capture and storage (CCS). In a study for the city of Kiel in northern Germany only a 800 MW coal power plant reaches a required minimum rentability. We use the study for an additional economic and environmental evaluation of a coal plant with CCS.

Lindner, S., S. Peterson and W. Windhorst (2009). "An Economic and Environmental Assessment of Carbon Capture and Storage (CCS) Power Plants: A Case Study for the City of Kiel." Kiel Working Paper No. 1527, June 2009.

Who Pays for a Price on Carbon?

by Corbett A. Grainger and Charles D. Kolstad

- We use the 2003 Consumer Expenditure Survey and emissions estimates from an input-output model to estimate the incidence of a price on carbon induced by a cap-and-trade program or carbon tax in the US context. We illustrate the main determinant of the regressivity: consumption patterns for energy-intensive goods. We find that a policy targeting CO2 from energy consumption is more regressive than a price on all emissions. Furthermore, on a per-capita basis a carbon price is much more regressive than calculations at the household level.

Grainger, C.A. and C.D. Kolstad (2009). "Who Pays for a Price on Carbon?" University of California at Santa Barbara, Department of Economics, Mimeo, May 2009.

A Free Lunch in the Commons

by Matthew J. Kotchen and Stephen W. Salant

- We derive conditions under which cost-increasing measures - consistent with either regulatory constraints or fully expropriated taxes - can increase the profits of all agents active within a common-pool resource. This somewhat counterintuitive result is possible regardless of whether price is exogenously fixed or endogenously determined. Consumers are made no worse-off and, in the case of an endogenous price, can be made strictly better-off. The results simply require that total revenue be decreasing and convex in aggregate effort.

Kotchen, M.J. and S.W. Salant (2009). "A Free Lunch in the Commons." NBER Working Paper No. 15086, June 2009.

Assessing the Macroeconomic Impacts of Natural Disasters: Are There Any?

by Stefan Hochrainer

- This paper aims to assess whether and by what mechanisms disasters have the potential to cause significant GDP impacts. The analysis first studies the counterfactual versus the observed gross domestic product. Second, the analysis assesses disaster impacts as a function of hazard, exposure of assets, and, importantly, vulnerability. In a medium-term analysis (up to 5 years after the disaster event), comparing counterfactual with observed gross domestic product, the authors find that natural disasters on average can lead to negative consequences.

Hochrainer, S. (2009). "Assessing the Macroeconomic Impacts of Natural Disasters: Are There Any?" World Bank Policy Research Working Paper no. WPS 4968, June 2009.