September 25, 2011

An Approximate Dynamic Programming Framework for Modeling Global Climate Policy under Decision-Dependent Uncertainty

by Mort Webster, Nidhi Santen and Panos Parpas

- In this paper, we present a stochastic dynamic programming formulation of the Dynamic Integrated Model of Climate and the Economy (DICE), and the application of approximate dynamic programming techniques to numerically solve for the optimal policy under uncertain and decision-dependent technological change. We compare numerical results using two alternative value function approximation approaches, one parametric and one non-parametric. Using the framework of dynamic programming, we show that an additional benefit to near-term emissions reductions comes from a probabilistic lowering of the costs of emissions reductions in future stages, which increases the optimal level of near-term actions.

Webster, M., N. Santen and P. Parpas (2011). "An Approximate Dynamic Programming Framework for Modeling Global Climate Policy under Decision-Dependent Uncertainty." MIT CEEPR Working Paper No. WP-2011-018, Sept 2011.

The Impacts of the Climate Change Levy on Manufacturing: Evidence from Microdata

by Ralf Martin, Laure B. de Preux and Ulrich J. Wagner

- We estimate the impacts of the Climate Change Levy (CCL) on manufacturing plants using panel data from the UK production census. Our identification strategy builds on the comparison of outcomes between plants subject to the CCL and plants that were granted an 80% discount on the levy after joining a Climate Change Agreement (CCA). Exploiting exogenous variation in eligibility for CCA participation, we find that the CCL had a strong negative impact on energy intensity and electricity use. We cannot reject the hypothesis that the tax had no detrimental effects on economic performance and on plant exit.

Martin, R., L.B. de Preux and U.J. Wagner (2011). "The Impacts of the Climate Change Levy on Manufacturing: Evidence from Microdata." NBER Working Paper No. 17446, Sept 2011.

Climate Change and Individual Decision Making: An Examination of Knowledge, Risk Perception, Self-interest and Their Interplay

by Francesca Pongiglione

- In this essay, three separate yet interconnected components of pro-environmental decision making are considered: (a) knowledge, in the form of basic scientific understanding and procedural knowledge, (b) risk perception, as it relates to an individual’s direct experience of climate change and (c) self-interest, either monetary or status-driven. Drawing on a variety of sources in public policy, psychology, and economics, I examine the role of these concepts in inducing or discouraging pro-environmental behavior.

Pongiglione, F. (2011). "Climate Change and Individual Decision Making: An Examination of Knowledge, Risk Perception, Self-interest and Their Interplay." FEEM Note di Lavoro No. 72.2011, Sept 2011.

Sustainable Cooperation in Global Climate Policy: Specific Formulas and Emission Targets to Build on Copenhagen and Cancun

by Valentina Bosetti and Jeffrey Frankel

- We offer a framework to assign quantitative allocations of emissions of greenhouse gases (GHGs), across countries, one budget period at a time.  Under the two-part plan: (i) China, India, and other developing countries accept targets at Business as Usual (BAU) in the coming budget period, the same period in which the US first agrees to cuts below BAU; and (ii) all countries are asked in the future to make further cuts in accordance with a common numerical formula to all.  The formula is expressed as the sum of a Progressive Reductions Factor, a Latecomer Catch-up Factor, and a Gradual Equalization Factor.

Bosetti, V. and J. Frankel (2011). "Sustainable Cooperation in Global Climate Policy: Specific Formulas and Emission Targets to Build on Copenhagen and Cancun." FEEM Note di Lavoro No. 66.2011, Sept 2011.

Who Should Bear the Cost of China’s Carbon Emissions Embodied in Goods for Exports_

by ZhongXiang Zhang

- While estimates of the embedded CO2 emissions in China’s trade differ, both single country studies for China and global studies show a hefty chunk of China’s CO2 emissions embedded in trade. This portion of CO2 emissions had helped to turn China into the world’s largest carbon emitter, and is further widening its gap with the second largest emitter. This raises the issue of who should be responsible for this portion of emissions and bearing the carbon cost of exports. China certainly wants importers to cover some, if not all, of those costs. While China’s stance is understandable, this paper has argued from a broad and balanced perspective that if this is pushed too far, it will not help to find solutions to this issue.

ZhongXiang, Zhang (2011). "Who Should Bear the Cost of China’s Carbon Emissions Embodied in Goods for Exports?" FEEM Note di lavoro No. 71.2011, Sept 2011.

Adaptation Can Help Mitigation: An Integrated Approach to Post-2012 Climate Policy

by Francesco Bosello, Carlo Carraro and Enrica De Cian

- The latest round of international negotiations in Copenhagen led to a set of commitments on emission reductions which are unlikely to stabilise global warming below or around 2°C. As a consequence, in the absence of additional ambitious policy measures, adaptation will be needed to address climate-related damages. What is the role of adaptation in this setting? How is it optimally allocated across regions and time? To address these questions, this paper analyses the optimal mix of adaptation and mitigation expenditures in a cost-effective setting in which countries cooperate to achieve a long-term stabilisation target (550 CO2-eq).

Bosello, F., C. Carraro and E. De Cian (2011). "Adaptation Can Help Mitigation: An Integrated Approach to Post-2012 Climate Policy." FEEM Note di lavoro No. 69.2011, Sept 2011.

Energy Access Scenarios to 2030 for the Power Sector in Sub-Saharan Africa

by Morgan Bazilia et al.

- We present several ‘high-level’, transparent, and economy-wide scenarios for the sub-Saharan African power sector to 2030. We construct these simple scenarios against the backdrop of historical trends and various interpretations of universal access. They are designed to provide the international community with an indication of the overall scale of the effort required. We find that most existing projections, using typical long-term forecasting methods for power planning, show roughly a threefold increase in installed generation capacity occurring by 2030, but more than a tenfold increase would likely be required to provide for full access - even at relatively modest levels of electricity consumption. This equates to approximately a 13% average annual growth rate, compared to a historical one (in the last two decades) of 1.7%.

Bazilia, M., P. Nussbaumer, H-H Rogner, A. Brew-Hammond, V. Foster, S. Pachauri, E. Williams, M. Howells, P. Niyongabo, L. Musaba, B.Ó. Gallachóir, M. Radka, D.M. Kammen (2011). "Energy Access Scenarios to 2030 for the Power Sector in Sub-Saharan Africa." FEEM Note di lavoro No. 68.2011, Sept 2011.

The Political Economy of Deforestation in the Tropics

 by Robin Burgess, Matthew Hansen, Benjamin A. Olken, Peter Potapov, Stefanie Sieber

- Tropical deforestation accounts for almost one-fifth of greenhouse gas emissions worldwide and threatens the world's most diverse ecosystems. The prevalence of illegal forest extraction in the tropics suggests that understanding the incentives of local bureaucrats and politicians who enforce forest policy may be critical to understanding tropical deforestation. We find support for this thesis using a novel satellite-based dataset that tracks annual changes in forest cover across eight years of institutional change in post-Soeharto Indonesia. Increases in the numbers of political jurisdictions are associated with increased deforestation and with lower prices in local wood markets, consistent with a model of Cournot competition between jurisdictions.

Burgess, R., M. Hansen, B.A. Olken, P. Potapov, S. Sieber (2011). "The Political Economy of Deforestation in the Tropics." NBER Working Paper No. 17417, Sept 2011.

The Fossil Endgame: Strategic Oil Price Discrimination and Carbon Taxation

by Jiegen Wie, Magnus Wenlock, Daniel J.A. Johansson and Thomas Sterner

- This paper analyzes how fossil fuel-producing countries can counteract climate policy. We analyze the exhaustion of oil resources and the subsequent transition to a backstop technology as a strategic game between the consumers and producers of oil, which we refer to simply as OECD and OPEC, respectively. The consumers, OECD, derive benefits from oil, but worry about climate effects from carbon dioxide emissions. OECD has two instruments to manage this: it can tax fuel consumption and decide when to switch to a carbon-neutral backstop technology. The tax reduces climate damage and also appropriates some of the resource rent. OPEC retaliates by choosing a strategy of price discrimination, subsidizing oil in its domestic markets.

Wie, J., M. Wenlock, D.J.A. Johansson and T. Sterner (2011). "The Fossil Endgame: Strategic Oil Price Discrimination and Carbon Taxation." RFF Discussion Paper 11-26, Sept 2011.

Climate Change and Tourism in Tuscany, Italy. What if heat becomes unbearable?

by Mattia Cai, Roberto Ferrise, Marco Moriondo, Paulo A.L.D. Nunes and Marco Bindi

- This paper investigates the empirical magnitude of climate conditions on tourist flows in Tuscany, exploring the use of a fine spatial scale analysis. We explore the use of an 8-year panel dataset of Tuscany’s 254 municipalities, examining how tourist inflows respond to variation in local weather conditions. In particular, as the area enjoys a fairly mild Mediterranean climate, our analysis focused on temperature extremes at key times of the tourist season, i.e., on maximum summer temperature and minimum winter temperature. Separate analyses are conducted for domestic and international tourists, so as to test the differences in the preferences among these distinct groups (or types of demand).

Mattia Cai, Roberto Ferrise, Marco Moriondo, Paulo A.L.D. Nunes and Marco Bindi (2011). "Climate Change and Tourism in Tuscany, Italy. What if heat becomes unbearable?" FEEM Note di Lavoro No. 67.2011, Sept 2011.

Output-Based Allocation of Emissions Permits for Mitigating the Leakage and Competitiveness Issues for the Japanese Economy

by Shiro Takeda, Toshi Arimura, Hanae Tamechika, Carolyn Fischer and Alan Fox

- This paper examines the effects of various allocation methods for granting emissions permits in the Japanese ETS on the economy and CO2 emissions using a multiregional and multisector computable general equilibrium model. Specifically, we apply the Fischer and Fox (2007) model to the Japanese economy to address carbon leakage and competitiveness issues. We compare auction schemes, grandfathering schemes, and output-based allocation (OBA) schemes. We further extend the model by examining a combination of auctions and OBA. Though the auction scheme is found to be the best in terms of macroeconomic impacts (welfare and GDP effects), the leakage rate is high and the harm to energy-intensive sectors can be significant.

Shiro Takeda, Toshi Arimura, Hanae Tamechika, Carolyn Fischer and Alan Fox (2011). "Output-Based Allocation of Emissions Permits for Mitigating the Leakage and Competitiveness Issues for the Japanese Economy." RFF Discussion Paper 11-40, Sept 2011.

Cleaning the Bathwater with the Baby: The Health Co-Benefits of Carbon Pricing in Transportation

by Christopher R. Knittel and Ryan Sandle

- Efforts to reduce greenhouse gas emissions in the US have relied on Corporate Average Fuel Economy (CAFE) Standards and Renewable Fuel Standards (RFS). Economists often argue that these policies are inefficient relative to carbon pricing because they ignore existing vehicles and do not adequately reduce the incentive to drive. This paper presents evidence that the net social costs of carbon pricing are significantly less than previous thought. While our empirical setting is California, we present evidence that the effects may be larger for the rest of the US.

Knittel, C.R. and R. Sandle (2011). "Cleaning the Bathwater with the Baby: The Health Co-Benefits of Carbon Pricing in Transportation." MIT CEEPR Working Paper No. WP-2011-015, Aug 2011.

Some Inconvenient Truths About Climate Change Policy: The Distributional Impacts of Transportation Policies

by Stephen P. Holland, Jonathan E. Hughes Christopher R. Knittel and Nathan C. Parker

- Instead of efficiently pricing greenhouse gases, policy makers have favored measures that implicitly or explicitly subsidize low carbon fuels. We simulate a transportation-sector cap & trade program (CAT) and three policies currently in use: ethanol subsidies, a renewable fuel standard (RFS), and a low carbon fuel standard (LCFS). Our simulations confirm that the alternatives to CAT are quite costly - 2.5 to 4 times more expensive. We provide evidence that the persistence of these alternatives in spite of their higher costs lies in the political economy of carbon policy.

Holland, S.P., J.E. Hughes, C.R. Knittel and N.C. Parker (2011). "Some Inconvenient Truths About Climate Change Policy: The Distributional Impacts of Transportation Policies." MIT CEEPR Working Paper No. WP-2011-016, Aug 2011.

Embodied Carbon Tariffs

by Christoph Böhringer, Jared C. Carbone and Thomas F. Rutherford

- In a world where the prospects of a global agreement to control greenhouse gas emissions are bleak, the idea of using trade policy as an implicit regulation of foreign emission sources has gained many supporters in countries contemplating unilateral climate policies. Embodied carbon tariffs tax the direct and indirect carbon emissions embodied in imported goods. The appeal seems obvious: as OECD countries are, on average, large net importers of embodied emissions from non-OECD countries, carbon tariffs could substantially extend the reach of OECD climate policies. We investigate this claim by simulating the effects of embodied carbon tariffs with a computable general equilibrium model of global trade and energy use. We find that embodied carbon tariffs do effectively reduce carbon leakage. However, the scope for improvements in the global cost-effectiveness of unilateral climate policy is limited. The main welfare effect of the tariffs is to shift the burden of OECD climate policy to the developing world.

Böhringer, C., J.C. Carbone and T.F. Rutherford (2011). "Embodied Carbon Tariffs." NBER Working Paper No. 17376, Aug 2011.

Fuel Prices and New Vehicle Fuel Economy in Europe

by Thomas Klier and Joshua Linn

- This paper evaluates the effect of fuel prices on new vehicle fuel economy in the eight largest European markets. The analysis spans the years 2002-2007 and uses detailed vehicle registration and specification data to control for policies, consumer preferences, and other potentially confounding factors. Fuel prices have a statistically significant effect on new vehicle fuel economy in Europe, but this estimated effect is much smaller than that for the United States. Within Europe, fuel economy responds more in the United Kingdom and France than in the other large markets. Overall, substantial changes in fuel prices would have relatively small effects on the average fuel economy of new vehicles sold in Europe. We find no evidence that diesel fuel prices have a large effect on the market share of diesel vehicles.

Klier T., and J. Linn (2011). "Fuel Prices and New Vehicle Fuel Economy in Europe." MIT CEEPR Working Paper No. WP-2011-017, Aug 2011.

Understanding the Solar Home Price Premium: Electricity Generation and 'Green' Social Status

by Samuel Dastrup, Joshua S. Graff Zivin, Dora L. Costa and Matthew E. Kahn

- This study uses a large sample of homes in the San Diego area and Sacramento, California area to provide some of the first capitalization estimates of the sales value of homes with solar panels relative to comparable homes without solar panels. Although the residential solar home market continues to grow, there is little direct evidence on the market capitalization effect. Using both hedonics and a repeat sales index approach we find that solar panels are capitalized at roughly a 3.5% premium. This premium is larger in communities with a greater share of college graduates and of registered Prius hybrid vehicles.

Dastrup, S., J.S. Graff Zivin, D.L. Costa and M.E. Kahn (2011). "Understanding the Solar Home Price Premium: Electricity Generation and 'Green' Social Status." NBER Working Paper No. 17200, Jul 2011.

Distributional Impacts of Carbon Pricing: A General Equilibrium Approach with Micro-Data for Households

by Sebastian Rausch, Gilbert E. Metcalf and John M. Reilly

- The impact of carbon pricing is determined by heterogeneity in household spending patterns across income groups as well as heterogeneity in factor income patterns across income groups. It is also affected by precise formulation of the policy as well as the treatment of other government policies . What is often neglected in analyses of policy is the heterogeneity of impacts across households even within income or regional groups. In this paper, we incorporate 15,588 households from the U.S. Consumer and Expenditure Survey data as individual agents in a comparative-static general equilibrium framework. These households are represented within the MIT USREP model, a detailed general equilibrium model of the U.S. economy.

Rausch, S., G. Metcalf and J.M. Reilly (2011). "Distributional Impacts of Carbon Pricing: A General Equilibrium Approach with Micro-Data for Households." MIT Joint Program Report Series No. 202, Jul 2011.

Too Little Oil, Too Much Coal: Optimal Carbon Tax and when to Phase in Oil, Coal and Renewables

by Frederick van der Ploeg and Cees Withagen

- Our main message is that it is optimal to use less coal and more oil once one takes account of coal being a backstop which emits much more CO2 than oil. The way of achieving this is to have a steeply rising carbon tax during the initial oil-only phase, a less-steeply rising carbon tax during the intermediate phase where oil and coal are used alongside each other and the following coal-only phase, and a flat carbon tax during the final renewables-only phase.

van der Ploeg, F. and C. Withagen (2011). "Too Little Oil, Too Much Coal: Optimal Carbon Tax and when to Phase in Oil, Coal and Renewables." CESifo Working Paper No. 3526, Jul 2011.

Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility

by Fabien Prieur, Mabel Tidball and Cees Withagen

- This paper extends the classical exhaustible-resource/stock-pollution model with the irreversibility of pollution decay. Within this framework, we answer the question how the potential irreversibility of pollution affects the extraction path. We investigate the conditions under which the economy will optimally adopt a reversible policy, and when it is optimal to enter the irreversible region. In the case of irreversibility it may be optimal to leave a positive amount of resource in the ground forever. As far the optimal extraction/emission policy is concerned, several types of solutions may arise, including solutions where the economy stays at the threshold for a while.

Prieur, F., M. Tidball and C. Withagen (2011). "Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility." CESifo Working Paper No. 3512, Jul 2011.