February 13, 2011

Uncertainty in Integrated Assessment Models of Climate Change: Alternative Analytical Approaches

by Alexander Golub, Daiju Narita and Matthias G.W. Schmidt

- We give an overview of the literature on uncertainty in integrated assessment models of climate change and identify some future research needs. In the paper, we pay particular attention to three different and complementary approaches that model uncertainty in association with integrated assessment models: the discrete uncertainty modeling, the most common way to incorporate uncertainty in complex climate-economy models: the real options analysis, a simplified way to identify and value flexibility: the continuous-time stochastic dynamic programming, which is computationally most challenging but necessary if persistent stochasticity is considered.

Golub, A., D. Narita and M.G.W. Schmidt (2011). "Uncertainty in Integrated Assessment Models of Climate Change: Alternative Analytical Approaches." FEEM Note di lavoro No. 2011.002, Jan 2011.

Federal Policies for Renewable Electricity

by Karen L. Palmer, Anthony Paula and Matthew Woerman

- Three types of policies that are prominent in the federal debate over addressing greenhouse gas emissions in the United States are a cap-and-trade program (CTP) on emissions, a renewable portfolio standard (RPS) for electricity production, and tax credits for renewable electricity producers. Each of these policies would have different consequences, and combinations of these policies could induce interactions yielding a whole that is not the sum of its parts. This paper utilizes the Haiku electricity market model to evaluate the economic and technology outcomes, climate benefits, and cost-effectiveness of three such policies and all possible combinations of the policies.

Palmer, K.L., A. Paula and M. Woerman (2010). "Federal Policies for Renewable Electricity." RFF Discussion Paper 10-53, Jan 2011.

Does the Indexing of Government Transfers Make Carbon Pricing Progressive?

by Don Fullerton, Garth Heutel and Gilbert Metcalf

- We analyze both the uses side and the sources side incidence of domestic climate policy using an analytical general equilibrium model, taking into account the degree of government program indexing. When transfer programs such as Social Security are explicitly indexed to inflation, higher energy prices automatically lead to cost-of-living adjustments for recipients. We show results with no indexing, 100 percent indexing, and partial indexing based on our analysis of actual transfer programs. When households are classified by annual income, the indexing of U.S. transfers is not enough to offset the regressive uses side, but when they are classified by annual expenditures as a proxy for permanent income, transfer indexing does offset regressivity across the lowest income groups.

Fullerton, D. (2011). "Does the Indexing of Government Transfers Make Carbon Pricing Progressive?" CESifo Working Paper No. 3315, Jan 2011.

Toward a Sustainable Global Energy Supply Infrastructure: Net Energy Balance and Density Considerations

by Ioannis N. Kessides and David C. Wade

- This paper complements previous work on the economics of different energy resources by examining the growth potential of alternative electricity supply infrastructures as constrained by innate physical limits. Coal-fired generation meets the criteria of longevity (abundance of energy source) and scalability (effective capability to expand to the multi-terawatt level) which are critical for a sustainable energy supply chain, but it carries a very heavy carbon footprint. Renewables and nuclear power meet both the longevity and climate friendliness criteria. However, they vary in terms of their ability to deliver net energy at a scale needed for meeting a huge global energy demand.

Kessides, I.N. and D.C. Wade (2011). "Toward a Sustainable Global Energy Supply Infrastructure: Net Energy Balance and Density Considerations." World Bank Policy Research Working Paper No. WPS 5539, Jan 2011.

A Note on Computational Aspects of Farsighted Coalitional Stability

by Dritan Osmani

- Farsighted stability of Chwe (1994) is discussed while attention is played on the computational framework of finding farsightedly stable coalition structures. The idea of farsightedness means that one should check for multi-step stability by comparing the profits of a coalition member after a series of deviations has come to an end. The deviation is possible only if players display a cooperate attitude by forming a coalition in order to increase their payoffs. The connections of farsighted stabilitywith a positive, negative spillover property and profitability condition are shown. Algorithms are developed, which can find all farsighted stable coalition structures.

Osmani, D. (2011). "A Note on Computational Aspects of Farsighted Coalitional Stability." Hamburg University and Centre for Marine and Atmospheric Science, Working Paper No. FNU-194, Jan 2011.

Energy Transition for Industry: India and the Global Context

by Nathalie Trudeau, Cecilia Tam, Dagmar Graczyk and Peter Taylor

- This information paper further develops the analysis presented in the India chapter of Energy Technology Perspectives 2010 and provides insights on the implications of achieving deep energy and CO2 emission cuts in the industrial sector both for India and globally. It investigates the least-cost combination of options that can significantly reduce energy and CO2 emissions in India’s industrial sector, while enabling the Indian economy to continue to grow and alleviate energy poverty.

Nathalie Trudeau, Cecilia Tam, Dagmar Graczyk and Peter Taylor (2011). "Energy Transition for Industry: India and the Global Context." The International Energy Organization, Working Paper, Jan 2011.

How Emission Certificate Allocations Distort Fossil Investments: the German Example

by Michael Pahlea, Lin Fanb and Wolf-Peter Schillc

- Despite political activities to foster a low-carbon energy transition, Germany currently sees a considerable number of new coal power plants being added to its power mix. There are several possible drivers for this "dash for coal", but it is widely accepted that windfall profits gained through free allocation of ETS certificates play an important role. Yet the quantification of allocation-related investment distortions has been limited to back-of-the envelope calculations and stylized models so far. We close this gap with a numerical model integrating both Germany’s particular allocation rules and its specific power generation structure.

Pahlea, M., L. Fanb and W-P Schillc (2011). "How Emission Certificate Allocations Distort Fossil Investments: the German Example." DIW Berlin Discussion Papers No. 1097, Jan 2011.

Inequality, Communication and the Avoidance of Disastrous Climate Change

by Alessandro Tavoni, Astrid Dannenberg, Giorgos Kallis and Andreas Löschel

- International efforts to provide global public goods often face the challenges of coordinating national contributions and distributing costs equitably in the face of uncertainty, inequality, and free-riding incentives. In an experimental setting, we distribute endowments unequally among a group of people who can reach a fixed target sum through successive money contributions, knowing that if they fail they will lose all their remaining money with 50% probability. We find that inequality reduces the prospects of reaching the target, but that communication increases success dramatically. Successful groups tend to eliminate inequality over the course of the game, with rich players signalling willingness to redistribute early on. Our results suggest that coordinative institutions and early redistribution from richer to poorer nations may widen our window of opportunity to avoid global climate calamity.

Tavoni, A., A. Dannenberg, G. Kallis and A. Löschel (2011). "Inequality, Communication and the Avoidance of Disastrous Climate Change." Grantham Research Institute on Climate Change and the Environment Working Paper No. 34, Jan 2011.

Climate Policy and Technological Innovation and Transfer: An Overview of Trends and Recent Empirical Results

by Ivan Hascic, Nick Johnstone, Fleur Watson and Chris Kaminker

- Technological innovation can lower the cost of achieving environmental objectives. As such, understanding the linkages between environmental policy and technological innovation in achieving environmental objectives is important. This is particularly true in the area of climate change, where the economic costs of slowing the rate of change are affected to a great extent by the rate of innovation. This paper provides evidence on the generation and international diffusion of selected climate change mitigation technologies (CCMTs) and their respective links to key policies. The data covers a selection of technology fields (renewable energy and ‘clean’ coal) and all countries over the last 30-35 years.

Hascic, I., N. Johnstone, F. Watson and C. Kaminker (2010). "Climate Policy and Technological Innovation and Transfer: An Overview of Trends and Recent Empirical Results." OECD Environment Working Papers, No. 30, Dec 2010.

Flood Risks, Climate Change Impacts and Adaptation Benefits in Mumbai.

by Stéphane Hallegatte et al

- Managing risks from extreme events will be a crucial component of climate change adaptation. In this study, we demonstrate an approach to assess future risks and quantify the benefits of adaptation options at a city-scale, with application to flood risk in Mumbai. In 2005, Mumbai experienced unprecedented flooding, causing direct economic damages estimated at almost two billion USD and 500 fatalities. Our findings suggest that by the 2080s, in a SRES A2 scenario, an ‘upper bound’ climate scenario could see the likelihood of a 2005-like event more than double. We estimate that total losses (direct plus indirect) associated with a 1-in-100 year event could triple compared with current situation (to $690 - $1890 million USD), due to climate change alone.

Stéphane Hallegatte, Nicola Ranger, Sumana Bhattacharya, Murthy Bachu, Satya Priya, K. Dhore, Farhat Rafique, P. Mathur, Nicolas Naville, Fanny Henriet, Anand Patwardhan, K. Narayanan, Subimal Ghosh, Subhankar Karmakar, Unmesh Patnaik, Abhijat Abhayankar, Sanjib Pohit, Jan Corfee-Morlot, Celine Herweijer (2010). "Flood Risks, Climate Change Impacts and Adaptation Benefits in Mumbai. An Initial Assessment of Socio-Economic Consequences of Present and Climate Change Induced Flood Risks and of Possible Adaptation Options." OECD Environment Working Papers,
No. 27, Nov 2010.

Environmental R&D

by Michael Hoel

- The topic of this note is issues related to R&D expenditures leading to improved technologies for reducing environmentally harmful emissions. The focus is on the following questions: Will a market economy where environmental policies are restricted to taxes or quotas give the socially efficient outcome for such R&D? Does the answer to this question depend on whether one uses taxes or quotas to regulate emissions? Are market failures associated with environmental innovation different than for innovations elsewhere in the economy?

Hoel, M. (2011). "Environmental R&D." Department of Economics, University of Oslo, Working Paper No. 12.2010, Sept 2010.

Plan or React? Analysis of Adaptation Costs and Benefits Using Integrated Assessment Models

by Shardul Agrawala, Francesco Bosello, Carlo Carraro, Kelly de Bruin, Enrica De Cian, Rob Dellink and E. Lanzi

- Financing for adaptation is a core element in the ongoing international negotiations on climate change. This has motivated a number of recent global estimates of adaptation costs. While important from an agenda setting perspective, many of these estimates nevertheless have a number of limitations. They are typically static (i.e. estimated for one specific year), do not differentiate between investments in various types of adaptation or quantify the resulting benefits, and are delinked from policies and investments in greenhouse gas mitigation.

Agrawala, S., F. Bosello, C. Carraro, K. de Bruin, E. De Cian, R. Dellink and E. Lanzi (2010). "Plan or React? Analysis of Adaptation Costs and Benefits Using Integrated Assessment Models." OECD Environment Working Papers, No. 23, Aug 2010.

February 6, 2011

Egypt Country Analysis Brief

by the Energy Information Administration

- Hydrocarbons play a sizeable role in Egypt’s economy. Although Egypt’s crude oil production has declined in recent years, natural gas production has increased significantly allowing Egypt to remain a net energy exporter. The Suez Canal and SUMED Pipeline are strategic routes oil and LNG shipments, making Egypt an important transit corridor for world energy markets. For all the latest information on the energy sector in Egypt, please see our updated Country Analysis Brief.

EIA (2011). "Egypt Country Analysis Brief." Energy Information Administration, Feb 2011.

Incorporating Climate Change Impacts and Adaptation in Environmental Impact Assessments Opportunities and Challenges

by Shardul Agrawala, Arnoldo Matus Kramer, Guillaume Prudent-Richard and Marcus Sainsbury

- National governments and development agencies have invested considerable effort in recent years to develop methodologies and tools to screen their projects for the risks posed by climate change. However, these tools have largely been developed by the climate change community and their application within actual project settings remains quite limited. An alternate and complementary approach would be to examine the feasibility of incorporating consideration of climate change impacts and adaptation within existing modalities for project design, approval, and implementation. Environmental Impact Assessments (EIA) are particularly relevant in this context.

Agrawala, S., A.M. Kramer, G. Prudent-Richard and M. Sainsbury (2010). "Incorporating Climate Change Impacts and Adaptation in Environmental Impact Assessments Opportunities and Challenges." OECD Environmental Working Paper No. 24, Aug 2010.

The Economics of Transmission Constraints on Wind Farms: Some Evidence from South Australia

by Nicholas Boerema and Ian MacGill

- There are many potential wind farm sites across Australia with excellent wind regimes yet only limited transmission capacity. Current market rules do not guarantee dispatch to an existing wind farm as more wind generation connects to the same transmission. Given the expense of transmission network extension and augmentation, there are interesting questions of what economic impacts such constraints might have for wind farm operators. This paper examines this issue in the context of the South Australian region of the Australian National Electricity Market (NEM). The State currently hosts almost half of total Australian wind generation capacity and has significant transmission capacity limitations for further development.

Boerema, N. and I. MacGill (2010). >"The Economics of Transmission Constraints on Wind Farms: Some Evidence from South Australia." Environmental Economics Research Hub Research Report No. 89, Sept 2010.

Cities and Carbon Market Finance

by Christa Clapp, Alexia Leseur, Olivier Sartor, Gregory Briner and Jan Corfee-Morlot

- This paper reviews 10 in-depth case studies of urban projects proposed and operating within the realm of Joint Implementation (JI) and the Clean Development Mechanism (CDM) of the Kyoto Protocol. It explores the drivers of success for projects, examining in particular: types of projects that have been successful and their profitability; leadership and other roles of various actors in project initiation development and operation (i.e. local, regional and national governments as well as international, private sector or other non-governmental organisations); the role of local cobenefits; and project financial structure and risk management approaches.

Clapp, C., A. Leseur, O. Sartor, G. Briner and J. Corfee-Morlot (2010). "Cities and Carbon Market Finance. Taking Stock of Cities' Experience With Clean Development Mechanism (CDM) and Joint Implementation (JI)." OECD Environment Working Papers, No. 29, Nov 2010.

Spending Adaptation Money Wisely

by Samuel Fankhauser and Ian Burton

- The discussions about adaptation finance have mostly been about process: how money should be raised and how adaptation spending should be governed and monitored. This paper seeks to move the focus of the debate back towards the substance of adaptation by asking what "good adaptation" in developing countries would look like. We argue that the best use of funds in the short term may be for "soft", or less tangible developmental activities that increase adaptive capacity. Building a minimum level of adaptive capacity everywhere is central to efficient, effective and equitable adaptation and yields immediate benefits irrespective of future climate regimes.

Fankhauser, S. and I. Burton (2010). "Spending Adaptation Money Wisely." Grantham Research Institute on Climate Change and the Environment Working Paper No. 37, Dec 2010.

Mapping the Impacts of Natural Hazards and Technological Accidents in Europe

by the European Environmental Agency

- The report assesses the occurrence and impacts of disasters and the underlying hazards such as storms, extreme temperature events, forest fires, water scarcity and droughts, floods, snow avalanches, landslides, earthquakes, volcanoes and technological accidents in Europe for the period 1998-2009.

EEA (2011). "Mapping the Impacts of Natural Hazards and Technological Accidents in Europe." Technical report No 13/2010, Jan 2011.

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Development of Energy Efficiency Indicators in Russia

by Nathalie Trudeau and Isabel Murray

- Russia is sometimes referred to as "the Saudi Arabia of energy efficiency"; its vast potential to reduce energy consumption can be considered a significant "energy reserve". Russia, recognising the benefits of more efficient use of energy, is taking measures to exploit this potential. The president has set the goal to reduce energy intensity by 40% between 2007 and 2020. In the past few years, the IEA has worked closely with Russian authorities to support the development of energy efficiency indicators in Russia, critical to an effective implementation and monitoring of Russia’s ambitious energy intensity and efficiency goals. The key findings of the IEA work with Russia on developing energy efficiency indicators form the core of this report.

Trudeau, N. and I. Murray (2011). "Development of Energy Efficiency Indicators in Russia." The International Energy Organization, Working Paper, Jan 2011.

Short-Term Energy Outlook

by the Energy Information Administration

- This edition of the Short-Term Energy Outlook is the first to include forecasts (monthly, quarterly and annual) through December 2012. EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $93 per barrel in 2011, $14 higher than the average price last year. For 2012, EIA expects WTI prices to continue to rise, with a forecast average price of $99 per barrel in the fourth quarter 2012. EIA’s forecast assumes U.S. real gross domestic product (GDP) grows 2.2 percent in 2011 and 2.9 percent in 2012, while world real GDP (weighted by oil consumption) grows by 3.3 percent and 3.7 percent in 2011 and 2012, respectively.

EIA (2011). "Short-Term Energy Outlook." The Energy Information Administration, January 11, 2011 Release, Jan 2011.

Path Dependence: Biofuels Policy Under Uncertainty About Greenhouse Gas Emissions

by Johanna Jussila Hammes

- We study the effect of uncertainty about the greenhouse gas emissions arising from the production of biofuels on trade policy, in the presence of lobby groups and two policy instruments, trade policy and biofuels mandates. We show how policy may be path dependent, i.e., that earlier tariff rates in part determine future tariff rates if the government is susceptible to lobbying and given that the domestic price of biofuels does not fall. The model can, e.g., shed light on why the EU does not lower the tariffs on Brazilian ethanol in the face of new information.

Hammes, J.J. (2011). "Path Dependence: Biofuels Policy Under Uncertainty About Greenhouse Gas Emissions." Swedish National Road & Transport Research Institute (VTI) Working Paper No. 2001.1, Jan 2011.

Climate Policy and Innovation in the Absence of Commitment

by Ashokankur Datta and E. Somanathan

- It is well-recognized that new technology is a crucial part of any solution to the problem of climate change. But since investments in research and development take time to mature, price and quantity instruments, i.e., carbon taxes and cap-and-trade, run into a commitment problem. We assume that the government cannot commit to the level of a policy instrument in advance, but sets the level to be optimal ex-post. Under these assumptions, we show that when the supply curve of dirty energy is flat, then an emissions tax is ineffective in promoting R&D into green energy while an emissions quota can be effective. A subsidy to R&D is welfare-reducing. More realistically, when the supply curve of dirty energy is upward-sloping, then both tax and quota regimes can be effective in promoting R&D into emission-free technology. In this case, a tax generally induces more R&D than a quota.

Datta, A. and E. Somanathan (2011). "Climate Policy and Innovation in the Absence of Commitment." Discussion Paper 11-45, Harvard Project on International Climate Agreements, Belfer Center for Science and International Affairs, Harvard Kennedy School, Jan 2011.

Six Distributional Effects of Environmental Policy

by Don Fullerton

- While prior literature has identified various effects of environmental policy, this note uses the example of a proposed carbon permit system to illustrate and discuss six different types of distributional effects: (1) higher prices of carbon-intensive products, (2) changes in relative returns to factors like labor, capital, and resources, (3) allocation of scarcity rents from a restricted number of permits, (4) distribution of the benefits from improvements in environmental quality, (5) temporary effects during the transition, and (6) capitalization of all those effects into prices of land, corporate stock, or house values. The note also discusses whether all six effects could be regressive, that is, whether carbon policy could place disproportionate burden on the poor.

Fullerton, D. (2010). "Six Distributional Effects of Environmental Policy." CESifo Working Paper No. 3299, Dec 2010.

The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness?

by Stefan Ambec, Mark A Cohen, Stewart Elgie and Paul Lanoie

- Over the past 20 years, much has been written about what has since become known simply as the Porter Hypothesis (PH). Yet even today, we find conflicting evidence and alternative theories that might explain the PH, and oftentimes a misunderstanding of what the PH does and does not say. This paper provides an overview of the key theoretical and empirical insights into the PH to date, draws policy implications from these insights, and sketches out major research themes going forward.

Ambec, S., M.A. Cohen, S. Elgie and P. Lanoie (2011). "The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness?" RFF Discussion Paper 11-01, Jan 2011.

Financing a National Transmission Grid: What Are the Issues?

by Gilbert E. Metcalf

- This paper makes three points. First, the historical pace of transmission investments will not be adequate to enhance grid reliability or to allow largescale penetration of renewable generating capacity. Second, the replacement of a vertically integrated electric utility industry in many parts of the country by a more disaggregated one composed of merchant generators has added to the challenge of transmission planning and investment. Third, the focus on federal funding for grid improvements is misplaced. There is no evidence that the private sector is incapable of raising the funds needed for critical investment, provided a rationalized regulatory structure is put into place.

Metcalf, G.E. (2010). "Financing a National Transmission Grid: What Are the Issues?" MIT CEEPR Working Papers No. WP-2010-015, Oct 2010.

Efficiency Improving Fossil Fuel Technologies for Electricity Generation: Data Selection and Trends

by Elisa Lanzi, Elena Verdolini and Ivan Hascic

- This paper studies innovation dynamics in efficiency improving electricity generation technologies as an important means of mitigating climate change impacts. Relevant patents are identified and used as an indicator of innovation. Our results shows that there is significant technology transfer in the field of efficiency improving technologies for electricity production. This flow of know-how is likely to contribute to mitigation of greenhouse gases emissions in emerging economies in the long run.

Lanzi, E., E. Verdolini and I. Hascic (2011). "Efficiency Improving Fossil Fuel Technologies for Electricity Generation: Data Selection and Trends." FEEM Note di Lavoro No. 2011.010, Jan 2011.

Afforestation and Timber Management Compliance Strategies in Climate Policy. A Computable General Equilibrium Analysis

by Melania Michetti and Renato Nunes Rosa

- This paper analyzes the role of afforestation-reforestation and timber management activities, and their major and secondary economic effects in stabilizing climate during the first commitment period of the Kyoto Protocol. In particular, with a Computable General Equilibrium framework, the ICES model, it is inferred how forest carbon sequestration fits within the European domestic portfolio of a 2020-20 and 2020-30 climate stabilization policy. Afforestation and land use are accounted for by introducing their effects in the model.

Michetti, M. and R. Nunes Rosa (2011). "Afforestation and Timber Management Compliance Strategies in Climate Policy. A Computable General Equilibrium Analysis." FEEM Note di lavoro No. 2011.004, Jan 2011.