November 26, 2007

Greenhouse gas emission trends and projections in Europe 2007.

The latest projections from pre-2004 EU Member States (EU-15) show that the EU-15 can meet, and may even overachieve, its 2008-2012 Kyoto target to reduce greenhouse gas emissions to 8% below 1990 levels if Member States implement now all additional policies being planned.

EEA. "Greenhouse gas emission trends and projections in Europe 2007." Euroepan Environmental Agency Report No 5/2007. Nov 2007.

By Force of Nature: The Catastrophe Bond Market and Katrina.

The catastrophe bond market allows us to observe what individuals are willing to pay to insure themselves against mega-catastrophes. This paper proposes a dynamic equilibrium model that can account for several stylized facts of the catastrophe bond market.

Dieckmann, S. (2007). "By Force of Nature: The Catastrophe Bond Market and Katrina." Available at SSRN, Nov. 2007.

Voluntary Provision of Public Goods for Bads: A Theory of Environmental Offsets.

This paper examines voluntary provision of a public good that is motivated, in part, to compensate for other activities that diminish the public good. Markets for environmental offsets, such as those that promote carbon neutrality to minimize the impact of climate change, provide an increasingly salient example.

Kotchen, M.J. "Voluntary Provision of Public Goods for Bads: A Theory of Environmental Offsets." NBER Working Paper No. 13643, Nov 2007.

Interaction of carbon and electricity prices under imperfect competition.

In line with economic theory, carbon ETS determines a rise in marginal cost equal to the carbon opportunity cost regardless of whether carbon allowances are allocated free of charge or not. Hence, common sense would suggest that in imperfectly competitive markets will pass-through into electricity prices only a part of the increase in cost. Instead, by using the load duration curve approach and the dominant with competitive fringe model, the analysis proposed in this paper shows that the result is ambiguous.

Chernyavs’ka, L. and F., Gullì. "Interaction of carbon and electricity prices under imperfect competition." IEFE Working Paper N.2, Nov 2007.

Perceptions of Environmental Risks in Mozambique: Implications for the Success of Adaptation and Coping Strategies.

Policies to promote adaptation climate risks often rely on the willing cooperation of the intended beneficiaries. If these beneficiaries disagree with policy makers and programme managers about the need for adaptation, or the effectiveness of the measures they are being asked to undertake, then implementation of the policies will fail. A case study of a resettlement programme in Mozambique shows this to be the case.

Schroter, D. and A.G. Patt. "Perceptions of Environmental Risks in Mozambique: Implications for the Success of Adaptation and Coping Strategies." World Bank Policy Research Working Paper No. 4417. Nov 2007.

On Modeling and Interpreting the Economics of Catastrophic Climate Change.

Using climate change as a prototype example, this paper analyzes the implications of structural uncertainty for the economics of low-probability high-impact catastrophes. The paper is an application of the idea that having an uncertain multiplicative para-meter, which scales or amplifies exogenous shocks and is updated by Bayesian learning, induces a critical tail fattening of posterior-predictive distributions. These fattened tails can have very strong implications for situations (like climate change) where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages.

Weitzman, M.L. "On Modeling and Interpreting the Economics of Catastrophic Climate Change." Harvard University, mimeo, Nov 2007.

November 19, 2007

State Efforts to Cap the Commons: Regulating Sources or Consumers?

California’s Global Warming Solutions Act (Assembly Bill 32) requires the state to reduce aggregate greenhouse gas emissions to 1990 levels by 2020. One of the challenges California faces is how the state should regulate the electricity sector. About 80 percent of the state’s electricity consumption is generated in the state, but about 52 percent of the greenhouse gas emissions associated with electricity consumption comes from outside the state. The question addressed in this paper is where to locate the point of compliance in the electricity sector that is, where in the supply chain linking fuel suppliers to generators to the transmission system to retail load-serving entities should the obligation for measurement and compliance be placed.

Burtraw, D. "State Efforts to Cap the Commons: Regulating Sources or Consumers?" Resources for the Future, Discussion Paper 07-49. Nov 2007.

Technology Spillovers and Stability of International Climate Coalitions.

This paper explores how different technology spillover mechanisms among regions can influence the incentive structures to join and stabilise an international agreement. The authors find that while spillovers are a good instrument to improve stability of bilateral agreements, they cannot overcome the strong free rider incentives that are present in larger coalitions.

Nagashima, M. and R. Dellink. "Technology Spillovers and Stability of International Climate Coalitions." FEEM Working Papers 98.07.

The Economic Effects of Energy Price Shocks.

Large fluctuations in energy prices have been a distinguishing characteristic of the U.S. economy since the 1970s. This paper addresses a number of the key issues in this debate. It demonstrates that it is critical to account for the endogeneity of energy prices and to differentiate between the effects of demand and supply shocks in energy markets, when answering these questions.

Lutz, K. "The Economic Effects of Energy Price Shocks." CEPR Discussion Paper DP6559. Nov 2007.

Too Good to Be True? An Examination of Three Economic Assessments of California Climate Change Policy.

California's Global Warming Solutions Act of 2006 limits California's greenhouse gas (GHG) emissions in 2020 to their 1990 level. In 2006, three studies were released indicating that California can meet its 2020 target at no net economic cost - raising questions about whether opportunities truly exist to substantially reduce emissions at no cost, or whether studies reaching such conclusions may simply severely underestimate costs. This paper provides an evaluation of these three California studies and argues that thet do not offer reliable estimates of the cost of meeting California's 2020 target.

Stavins, R. "Too Good to Be True? An Examination of Three Economic Assessments of California Climate Change Policy." NBER Working Paper No. 13587. Nov 2007.

Peaking profiles for achieving long-term temperature targets with more likelihood at lower costs.

Earlier publications have focused on the probability of keeping global mean temperature change below certain thresholds by stabilizing greenhouse gas concentrations at particular levels. This study compares the results of such "stabilization profiles" with a set of "peaking profiles" that reduce emissions further after stabilization and thus result in a concentration peak. Given the inertia in the climate system, stabilization profiles lead to ongoing warming beyond 2100 until the temperature reaches equilibrium. This warming partly can be prevented for peaking profiles.

Den Elzen, M.G.J. and D.P. van Vuuren. "Peaking profiles for achieving long-term temperature targets with more likelihood at lower costs." Proceedings of the National Academy of Sciences (PNAS), Nov 2007.

November 12, 2007

Risk Aversion and International Environmental Agreements.

Uncertainty and risk aversion is introduced in the study of international environmental agreements. The paper shows that a stable treaty with positive action always exists. While uncertainty lowers the actions of signatories, it may increase participation. In addition, uncertainty may generate multiple equilibria. A treaty with low action and low participation may coexist with one with high action and high participation. Overall, and despite risk aversion, the impact of uncertainty on welfare may be positive. A reduction in uncertainty may hurt international cooperation.

Boucher, V. and Y. Bramoulle. "Risk Aversion and International Environmental Agreements." CIRPEE Working Paper No. 07-39. Nov. 2007.

Do Equity Preferences Matter in Climate Negotiations? An Experimental Investigation.

This paper investigates in how far equity preferences may matter for climate negotiations. For this purposes a simple experiment with people who have been involved in international climate policy was conducted.

Dannenberg A., B. Sturm and C. Vogt. "Do Equity Preferences Matter in Climate Negotiations? An Experimental Investigation". ZEW Center for European Economic Research Discussion Paper No. 07-063, Nov 2007.

Environmental Economics.

This article provides an overview of the economics of environmental policy, including the setting of goals and targets, notably the Kaldor-Hicks criterion and the related method of assessment known as benefit-cost analysis. Also reviewed are the means of environmental policy, that is, the choice of specific policy instruments, featuring an examination of potential criteria for assessing alternative instruments, with focus on cost-effectiveness. The theoretical foundations and experiential highlights of individual instruments are reviewed, including conventional command-and-control mechanisms and market-based instruments.

Stavins, R. "Environmental Economics." NBER Working Paper No. W13574, Nov 2007.

A U.S. Cap-and-Trade System to Address Global Climate Change.

The need for a domestic U.S. policy that seriously addresses climate change is increasingly apparent. A cap-and-trade system is the best approach in the short to medium term. The paper proposes a specific cap-and-trade system with several key features, including an upstream cap on CO2 emissions, with gradual inclusion of other greenhouse gases, a gradual downward trajectory of emissions ceilings over time, to minimize disruption and allow firms and households time to adapt, and mechanisms to reduce cost uncertainty.

Stavins, R. "A U.S. Cap-and-Trade System to Address Global Climate Change." The Hamilton Project Discussion Paper No. 2007-13, available at SSRN, Nov 2007.

November 10, 2007

Dynamic Behavior of CO2 Spot Prices

This paper presents a tractable stochastic equilibrium model reflecting stylized features of the EU ETS and analyze the resulting CO2 spot price dynamics. Our main findings are that CO2 prices do not have to follow any seasonal patterns, discounted prices should possess the martingale property, and an adequate CO2 price process should exhibit a time- and price-dependent volatility structure.

Seifert, J., M. Uhrig-Homburg and M.W. Wagner. "Dynamic Behavior of CO2 Spot Prices" Available at SSRN, Nov 2007.

November 6, 2007

The Benefits and Costs of Ethanol.

This paper provides the first thorough benefit-cost analysis of increasing ethanol use beyond four billion gallons a year in the United States, and finds that the costs of increased production are likely to exceed the benefits by about three billion dollars annually. It also suggests that earlier attempts aimed at promoting ethanol would have likely failed a benefit-cost test, and that Congress should consider repealing the ethanol tariff and tax credit.

Hahn, R.W. and C. Cecot. "The Benefits and Costs of Ethanol." AEI-Brookings Joint Center Working Paper No. 07-17, Nov 2007.

November 5, 2007

Combating Global Warming.

The favored federal policy to address climate change is a domestic cap-and-trade system. However, a vocal minority of political leaders have begun arguing in favor of a carbon tax. Carbon taxes seem particularly attractive both for fiscal reasons and because they provide certainty over the price of emissions. But permit systems can be designed to capture the potential advantages of carbon taxes.

Parry, I.H.W. and W.A. Pizer. "Combating Global Warming." Available at SSRN, Nov 2007.

Neither Renewable Nor Reliable.

If ethanol were to be produced in a truly sustainable manner, it would take all the corn in the United States to displace about 3.5 percent of our gasoline consumption. Furthermore, ethanol would not necessarily be a more reliable source of fuel. By displacing gasoline with ethanol, we are displacing geo-political risk with yield risk, and historical corn yields have been about twice as volatile as oil imports.

Eaves, J. and S. Eaves. "Neither Renewable Nor Reliable." Available at SSRN, Nov 2007.

Climate Policy and Ancillary Benefits - A Survey and Integration into the Modelling of International Negotiations on Climate Change.

This paper identifies ancillary benefits of climate policy to provide important incentives to attend a new international protocol and to positively affect the likelihood of accomplishing a post-Kyoto agreement which includes commitments of developing countries.

Rubbelke D.T.G. and K. Pittel. "Climate Policy and Ancillary Benefits - A Survey and Integration into the Modelling of International Negotiations on Climate Change." ZEW - Centre for European Economic Research Discussion Paper No. 07/064, Nov 2007.