May 25, 2008

Evolution in time of Farsightedly Stable Coalitions: An Application of FUND.

by Dritan Osmani and Richard S.J. Tol

Game theory is used to analyze the formation and stability of coalitions for environmental protection. The integrated assessment model FUND provides data for different time horizons as well as the cost-benefit function of pollution abatement. This allows for analysis of the evolution in time of farsightedly stable coalitions and their improvement to environment and welfare. Considering multiple farsightedly stable coalitions, the participation in coalitions for environmental protection is significantly increased. But the farsighted behavior can not be sustained for a long term which implies that it is not possible to have big coalitions for environmental protection even in "a farsighted world".

Osmani, D. and R.S.J. Tol (2008). "Evolution in time of Farsightedly Stable Coalitions: An Application of FUND." Working Paper FNU 162, May 2008.

The Behavioural Economics of Climate Change.

by Kjell Arne Brekke and Olof Johansson-Stenman

This paper attempts to bring some central insights from behavioural economics into the economics of climate change. In particular, it discusses (i) implications of prospect theory, the equity premium puzzle and time inconsistent preferences in the choice of discount rate used in climate change cost assessments, and (ii) the implications of various kinds of social preferences for the outcome of climate negotiations.

Brekke, K.A. and O. Johansson-Stenman (2008). "The Behavioural Economics of Climate Change." University of Gothenburg. School of Business, Economics and Law, Working Papers in Economics 305, May 2008.

Socioeconomic Vulnerability in China’s Hydropower Development.

by Philip H Brown, Darrin Magee and Yilin Xu

After providing a detailed account of China’s electricity supply, this paper quantifies China’s hydropower potential. A series of dams has been proposed for the middle and lower reaches of the Nu River (Upper Salween) in Yunnan Province. If completed, the 13-dam cascade would have greater power-generating potential than the Three Gorges Dam. However, many of the proposed dams are located in an environmentally-sensitive area. Moreover, approximately 50,000 people would be forced to resettle by the resulting reservoirs. Finally, the economic status of northwestern Yunnan is quite low, suggesting that socioeconomic vulnerabilities among the displaced population would be quite large.

Brown, P.H., D. Magee and Y. Xu (2008). "Socioeconomic Vulnerability in China's Hydropower Development." Available at SSRN, May 2008.

Promoting Clean Technologies: The Energy Market Structure Crucially Matters.

by Théophile T. Azomahou, Raouf Boucekkine and Phu Nguyen-Van

The paper develops a general equilibrium vintage capital model with embodied energy-saving technological progress and an explicit energy market to study the impact of investment subsidies on investment and output. Energy and capital are assumed to be complementary in the production process. New machines are less energy consuming and scrapping is endogenous. It is shown that the impact of investment subsidies heavily depends on the structure of the energy market, the mechanism explaining this outcome relying on the tight relationship between the lifetime of capital goods and energy prices via the scrapping conditions inherent to vintage models.

Azomahou, T.T., R. Boucekkine and P. Nguyen-Van (2008). "Promoting clean technologies: The energy market structure crucially matters." Thema, Université de Cergy-Pontoise, Working Paper 2008-19, Apr 2008.

Optimal Firm Behavior Under Environmental Constraints.

by Raouf Boucekkine, Natali Hritonenko and Yuri Yatsenko

The paper examines the Porter and induced-innovation hypotheses in a firm model where: (i) the firm has a vintage capital technology with two complementary factors, energy and capital ; (ii) scrapping is endogenous; (iii) technological progress is energy-saving and endogenous through purposive R&D investment; (iv) the innovation rate increases with R&D investment and decreases with complexity; (v) the firm is subject to emission quotas which put an upper bound on its energy consumption at any date; (vi) energy and capital prices are exogenous.

Boucekkine, R., N. Hritonenko and Y. Yatsenko (2008). "Optimal Firm Behavior Under Environmental Constraints." Core Discussion Paper 2008/24, Apr 2008.

Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2006.

by United States Environmental Protection Agency

This report presents estimates by the United States government of U.S. anthropogenic greenhouse gas emissions and sinks for the years 1990 through 2006. A summary of these estimates is provided in Table 2-1 and Table 2-2 by gas and source category in the Trends in Greenhouse Gas Emissions chapter. The emission estimates in these tables are presented on both a full molecular mass basis and on a Global Warming Potential (GWP) weighted basis in order to show the relative contribution of each gas to global average radiative forcing. This report also discusses the methods and data used to calculate these emission estimates.

USEPA (2008). "Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2006." Report #430-R-08-005, Apr 2008.

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May 18, 2008

Indexed Regulation.

by Richard G. Newell, William A. Pizer

- Seminal work by Weitzman (1974) revealed prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. This paper extends this comparison to indexed policies, where quantities are proportional to an index, such as output. Applied to climate change policy, the ranking of an emissions intensity cap (indexed to GDP) compared to a fixed emission cap is not uniform across countries; neither policy clearly dominates the other.

Newell, R.G. and W.A. Pizer (2008). "Indexed Regulation." NBER Working Paper No. 13991, May 2008.

Two Conceptions of Irreversible Environmental Harm.

by Cass R. Sunstein

- The concept of "irreversibility" plays a large role in the theory and practice of environmental protection. Indeed, the concept is explicit in some statements of the Precautionary Principle. But the idea of irreversibility remains poorly defined. On one approach irreversibility might be understood as a reference to the value associated with taking precautionary steps that maintain flexibility for an uncertain future ("option value"). On another approach irreversibility might be understood to refer to the qualitatively distinctive nature of certain environmental harms, a point that raises a claim about incommensurability. The paper discusses both these two conceptions.

Sunstein, C.R. (2008). "Two Conceptions of Irreversible Environmental Harm." Reg-Markets Center Working Paper 08-16, May 2008.

Second Best Analysis in a General Equilibrium Climate Change Model

by André Grimaud and Gilles Lafforgue

- The paper considers a general equilibrium climate change model with two endogenous R&D sectors. The main results of the paper are the following: i) the effect of the green research subsidy on resource extraction, and thus on the flow of pollution, can overrides the carbon tax one; ii) R&D subsidies have a very large impact on the total social welfare, as compared with the carbon tax; iii) Third, those subsidies allow to spare the earlier generations who are, on the other hand, strongly penalized by a carbon tax.

Grimaud, A. and G. Lafforgue (2008). "Second Best Analysis in a General Equilibrium Climate Change Model." UMR-Lerna, Toulouse, Apr 2008.

The Effect of Ethanol Production on the U.S. National Corn Price.

by T. Randall Fortenbery and Hwanil Park

- A system of equations representing corn supply, feed demand, export demand, food, alcohol and industrial (FAI) demand, and corn price is estimated by three-stage least squares. A price dependent reduced form equation is then formed to investigate the effect of ethanol production on the national average corn price. The elasticity of corn price with respect to ethanol production is then obtained. Results suggest that ethanol production has a positive impact on the national corn price and that the demand from FAI has a greater impact on the corn price than other demand categories. Thus, significant growth in ethanol production is important in explaining corn price determination.

Randall Fortenbery, T. and H. Park (2008). "The Effect of Ethanol Production on the U.S. National Corn Price." University of Wisconsin-Madison Department of Agricultural & Applied Economics Staff Paper No. 523, April 2008.

Greenhouse Gas Auctions and Taxes: Some Practical Considerations.

by Robert W. Hahn

- This paper evaluates various arguments for auctions and taxes in light of political realities. It argues that economists are likely to be overly optimistic in their support for auctions and taxes, and that many potential uses of these revenues are unlikely to result in economic benefits. It then offers some general guidance for governments on the role of auctions in a cap-and-trade mechanism and offers recommendations for participating firms.

Hahn, Robert W. (2008). "Greenhouse Gas Auctions and Taxes: Some Practical Considerations." Reg-Markets Center Working Paper No. 08-12, available at SSRN, Apr 2008.

A Regression on Climate Policy: The European Commission’s Proposal to Reduce CO2 Emissions from Transport.

by Manuel Frondel, Christoph M. Schmidt and Colin Vance

- The European Commission is currently considering a new directive to reduce the per-kilometer CO2 emissions of newly registered automobiles. This paper critically assesses this proposal with respect to its economic and technological underpinnings. It argues that the proposal’s reliance on targets based on per-kilometer emissions not only conceals the true costs of compliance and thereby stifles informed public discourse, but is also less cost-effective than alternative measures such as emissions trading.

Frondel, M., C.M. Schmidt and C. Vance (2008). A Regression on Climate Policy: The European Commission’s Proposal to Reduce CO2 Emissions from Transport." Ruhr Economic Papers #44, Apr 2008.

May 11, 2008

The European Union's Emissions Trading System in Perspective .

This report examines the development, structure, and performance of the EU-ETS to date, and provides insightful analysis regarding the controversies and lessons emerging from the initial trial phase. Authors Denny Ellerman and Paul Joskow argue that the system has so far worked as it was envisioned. The development of the EU-ETS has not, however, proceeded without its challenges. The authors explain some of the controversies regarding the early performance of the EU-ETS and describe potential remedies planned for later compliance periods.

Ellerman, A.D. and P.L. Joskow. "The European Union's Emissions Trading System in Perspective." The Pew Center on Global Climate Change, Reports, May 2008.

Economic Incentives in a New Climate Agreement.

The first section of this paper describes various economic-incentive policy instruments to ensure that polluters face direct cost incentives to mitigate emissions at the lowest possible cost. The second section discusses their potential application in the design of an international climate policy agreement.

Aldy, J. and R.N. Stavins. "Economic Incentives in a New Climate Agreement." Harvard University, Belfer Center for Science and International Affairs, May 2008.

Insights Not Numbers: The Appropriate Use of Economic Models.

Economic modeling has played a prominent role in the climate-change policy debate to assess the costs of different strategies for reducing greenhouse gas (GHG) emissions. Models are an invaluable tool for exploring alternative policy choices and for generating insights about how the economy is might respond to different types and forms of regulation. They cannot, however, predict future events, nor can they produce precise projections of the consequences of specific policy. A proper understanding of economic models, their uses and limitations, is therefore critical in furthering a constructive debate about options for climate policy.

Peace, J. and J. Weyant. "Insights Not Numbers: The Appropriate Use of Economic Models." The Pew Center on Global Climate Change, White Paper, Apr 2008.

The Economic Costs of a Market-based Climate Policy.

Authors employ the Inter-temporal General Equilibrium Model (IGEM) to provide estimates of the economic costs of a market-based mitigation policy in the United States. IGEM is a dynamic general equilibrium model of the U.S. economy that assumes economic agents operate with perfect foresight. It uses functional relationships that are econometrically estimated from observed market behavior.

Jorgenson, D.W., Goettle R.J., P.J. Wilcoxen and M. Sing Ho. "The Economic Costs of a Market-based Climate Policy." The Pew Center on Global Climate Change, White Paper, Apr 2008.

The EU Emissions Trading Scheme: Disentangling the Effects of Industrial Production and CO2 Emissions on Carbon Prices.

This article examines the impact of industrial production for sectors covered by the EU Emissions Trading Scheme (EU ETS) on emissions allowance spot prices during Phase I (2005-2007). It shows that carbon price changes react not only to energy prices forecast errors and extreme temperatures events, but also to industrial production in three sectors covered by the EU ETS: combustion, paper and iron.

Alberola, E., Chèze Benoit and J. Chevallier. "The EU Emissions Trading Scheme: Disentangling the Effects of Industrial Production and CO2 Emissions on Carbon Prices." EconomiX, Document de Travail 2008-12, Apr 2008.

State-Level Economic Impacts of a National Climate Change Policy.

This report analyzes the potential costs of a moderate U.S. national cap-and-trade policy that seeks to stabilize emissions at the level seen in the year 2000. Results indicate that the impacts of a moderate GHG policy on the United States would be minimal.

Ross, M.T., B.C. Murray , R.H. Beach, B.M. Depro. "State-Level Economic Impacts of a National Climate Change Policy." The Pew Center on Global Climate Change, White Paper, Apr 2008.

Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007.

This report responds to a request from Senators Lieberman and Warner for an analysis of S. 2191, the Lieberman-Warner Climate Security Act of 2007. One of the key findings is that the electric power sector accounts for the vast majority of the emissions reductions, with new nuclear, renewable, and fossil plants with CCS serving as the key compliance technologies in most cases.

EIA. "Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007." Energy Information Administration Office of Integrated Analysis and Forecasting U.S. Department of Energy Washington, DC, Apr 2008.

Key Elements of a Global Deal on Climate Change.

The purpose of this paper is to support the negotiations of a post-2012 global treaty. Nicholas Stern, author of the report, puts forward a coheren set of underlying principles that are consistent with the latest scientific evidence, and which explicitly define options and suggest which are more likely to be suitable.

Stern, N. "Key Elements of a Global Deal on Climate Change." The London School of Economics and Political Science, London, Apr 2008.

Adapting to Climate Change: A Business Approach.

This report outlines a sensible business approach to analyzing and adapting to the physical risks of climate change. It focuses on a critical first step in assessing these climate impacts: understanding the potential risks to business and the importance of taking action to mitigate those risks. Not all businesses need to take action now; this paper develops a qualitative screening process to assess whether a business is likely to be vulnerable to the physical risks associated with climate change, and whether a more detailed risk assessment is warranted.

Sussman, F.G. and J. Randall Freed. "Adapting to Climate Change: A Business Approach." The Pew Center on Global Climate Change, Markets and Business Strategy Paper, Apr 2008.

Florida and Climate Change: The Costs of Inaction.

The report is the first detailed analysis on the potential consequences of continued climate change for the Florida’s economy. The report concludes that if left unchecked, climate change will significantly harm Florida’s economy in the next several decades, and that impacts on just three sectors - tourism, electric utilities, and real estate - together with effects of hurricanes would shrink Florida’s Gross State Product by 5% by the end of this century.

Stanton, E. and F. Ackerman. "Florida and Climate Change: The Costs of Inaction." Global Development and Environment Institute at Tufts University, Nov 2007.

May 4, 2008

Emissions in the Platinum Age: The Implications of Rapid Development for Climate Change Mitigation.

Rapid global economic growth, centred in Asia but now spread across the world, is driving rapid greenhouse gas emissions growth, making earlier projections unrealistic. This paper develops new, illustrative projections for carbon dioxide (from fossil fuels and other sources) and for non-CO2 greenhouse gases. Making adjustments to 2007 World Energy Outlook projections to reflect more fully recent trends, annual emissions by 2030 are projected to be almost double current volumes, 11 per cent higher than in the most pessimistic scenario developed by the IPCC, and at a level reached only in 2050 in the business-as-usual scenario used by the Stern Review.

Garnaut, R., S. Howes, F. Jotzo and P. Sheehan. "Emissions in the Platinum Age: The Implications of Rapid Development for Climate Change Mitigation." Garnaut Climate Change Review, May 2008.

How Can One Allocation Provision Undermine a Cap-and-Trade Program?

This paper describes an important exception to the conventional wisdom that allocation decisions do not affect a cap-and-trade program’s societal cost. While this wisdom holds for many types of allocations, it does not apply to conditional allocations in which the number of allowances that a firm receives is conditioned on the firm’s future operational or investment decisions. To demonstrate this point, this paper examines an allocation provision in the draft of the Lieberman-Warner Climate Security Act of 2008 that was reported out of the Senate Environment and Public Works Committee in December 2007 (the Lieberman-Warner bill).

Jaffe, J. ."How Can One Allocation Provision Undermine a Cap-and-Trade Program? Section 3902 of the Lieberman-Warner Bill Offers a Warning about Risks in the Allowance Allocation Debate." Reg-Markets Center, Regulatory Analysis 08-02, Apr 2008.

Analysis of U.S. Greenhouse Gas Tax Proposals.

The U.S. Congress is considering a set of bills designed to limit the nation's greenhouse gas (GHG) emissions. Several of these proposals call for a cap-and-trade system; others propose an emissions tax. This paper complements the analysis by Paltsev et al. (2007) of cap-and-trade bills and applies the MIT Emissions Prediction and Policy Analysis (EPPA) model to carry out an analysis of the tax proposals.

Metcalf, G.E., S. Paltsev, J. M. Reilly, H.D. Jacoby and J. Holak. "Analysis of U.S. Greenhouse Gas Tax Proposals." MIT Global Change Joint Program, Report 160, Apr 2008. [Report PDF: 800 kB] [Appendix: 1.6 MB]

Instrument Choice in Environmental Policy.

This paper examines the extent to which various environmental policy instruments meet major evaluation criteria, including cost-effectiveness, distributional equity, minimization of risk in the presence of uncertainty, and political feasibility. Instruments considered include emissions taxes, tradable emissions allowances, subsidies for emissions reductions, performance standards, technology mandates, and research and development subsidies.

Goulder, L.H. and I.W.H. Parry. "Instrument Choice in Environmental Policy." Resources For the Future, RFF DP 08-07, Apr 2008.

Air Pollution from Electricity-Generating Large Combustion Plants.

This report presents the results of a study that assesses the theoretical potential to reduce air emissions of SO2 and NOX that might have occurred had the best available techniques (BAT) (3) and associated emission levels (AELs), as described in the large combustion plant best available techniques reference document (4) (LCP BREF), been fully introduced in a set of electricity-generating large combustion plants (LCP) within the European Union (EU-25) in 2004.

EEA. "Air Pollution from Electricity-Generating Large Combustion Plants." Technical report No 4/2008, May 2008.