Policy instruments for evolution of bounded rationality: Application to climate-energy problems

We demonstrate how an evolutionary agent-based model can be used to evaluate climate policies that take the heterogeneity of strategies of individual agents into account. An essential feature of the model is that the fitness of an economic strategy is determined by the relative welfare of the associated agent as compared to its immediate neighbors in a social network. This enables the study of policies that affect relative positions of individuals. We formulate two innovative climate policies, namely a prize, altering directly relative welfare, and advertisement, which influences the social network of interactions. The policies are illustrated using a simple model of global warming where a resource with a negative environmental impact—fossil energy—can be replaced by an environmentally neutral yet less cost-effective alternative, namely renewable energy. It is shown that the general approach enlarges the scope of economic policy analysis.     

Mathematical modelling as a tool to aid R&D investment decisions in a sustainable development policy climate

By its very nature, investment in R&D is a challenging proposition. It is a decision made today for an uncertain return in the future. Moreover, it has become more complex with the introduction of sustainable development considerations into the decision-making process. In this paper, the effect of environmental policy on the economic framework within which new technologies must compete is discussed, and analytical techniques which help assess these complexities are described. The return on an R&D investment is determined by the competitiveness of the resultant innovation at the time of its eventual application. A new technology is competitive relative to a given economic framework (which includes such factors as alternative technologies, availability of investment capital, trained human resources, etc).Government involvement in establishing goals and timetables for environmental protection signficantly affects the evolution of the economic framework in which new technologies must perform. To be successful in the 'sustainable development' age, the R&D investor must be able to anticipate the effect and development of government environmental and economic policy. Mathematical modelling is a valuable tool to help the investor and policy-maker appreciate the key risk factors and to understand the effect of environmental and economic policy on desired outcomes. For R&D, most model development has focused on policy development and is not very useful supporting the business decisions msociated with effective R&D investment. In this paper, the interaction bebeen government policy and business decision-making is discussed, and a methodology, supported by a model, is presented to aid R&D investors to take environmental and sustainabilip issues into account when assessing the future competitiveness of technology.     

Climate change—environmental and technology policies in a strategic context

There are a number of features of climate change which make it one of the most challenging problems confronting policy makers and policy analysts. In this paper we consider three such features: (i) climate change is a global pollutant so there are strategic interactions between governments over climate policy; (ii) cutting greenhouse gas emissions can have significant cost effects across a number of sectors of the economy, raising concerns about the implications of climate change policy on competitive advantage; (iii) the long-time scales on which climate change operates means that an important dimension of climate change policy is policy towards R&D to cut the costs of dealing with climate change. In Ulph and Ulph (1996) [Ulph A, Ulph D (1996) In: Carraro C, Katsoulacos Y, Xepapadeas A (eds) Environmental policy and market structure. Kluwer, Dordrecht, pp 181–208] we presented a model to analyse these issues, but considered only environmental policies. In this paper we extend that analysis to allow for both a richer set of policy instruments (environmental and technology policies) and a richer strategic context.     

Embodied Carbon Tariffs

In this paper, we investigate the economic and environmental impacts of tariffs on carbon embodied in trade. We find that carbon tariffs do reduce foreign emissions, but their ability to improve global cost‐effectiveness of unilateral climate policy is quite limited – even if tariff rates are based on more sophisticated second‐best considerations. If carbon tariffs are levied on the full carbon content of traded goods, they can even increase rather than decrease the global cost of emission reduction. The main effect of carbon tariffs is to shift the economic burden of developed‐world climate policies to the developing world.     

Climate policy targets in emerging and industrialized economies: the influence of technological differences, environmental preferences and propensity to save

Although emerging economies claim that industrialized countries need to reduce their carbon emissions first, stabilization of the future global climate system requires immediate action by all countries. In a stylized two-country intertemporal general equilibrium model, we derive welfare maximizing emission caps in emerging and industrialized countries, taking account of country differences in technology, environmental preferences and propensity to save. Simultaneous target setting is compared to a sequential one in which the industrialized country commits itself to binding targets first. In the latter case, when the industrialized economy has stronger environmental preferences and a lower relative pollution production share, the industrialized economy can increase its joint economic and environmental welfare by setting a laxer target. On the other hand, when the emerging economy has considerably higher environmental preferences, our results suggest that the industrialized economy will choose a more restrictive target in a sequential setting than in a simultaneous one, contrary to first thought that a first mover is always pursuing a ‘symbolic’ policy with a lax target.     

Will Trade Liberalization Harm the Environment? The Case of Indonesia to 2020

Most-favoured-nation (MFN) trade liberalizations willalways improve global economic welfare providedglobally optimal environmental and other policies arein place. But since the latter proviso is not met inpractice, empirical studies of the environmental andresource depletion effects of such reforms are neededto determine whether trade reform is still worthwhile.This paper provides a methodology for doing that. Itis illustrated with a case study of Indonesia, a largenewly industrializing country that is rich in naturalresources and committed to taking part in majormultilateral and regional trade liberalizations overthe next two decades. A modified version of theglobal CGE model known as GTAP is used to project theworld economy to 2010 and 2020 without and with thosereforms. An environmental module is attached to theIndonesian part of that global CGE model so as tomeasure the effects of changes in economic activity onair and water pollution. The proportionalcontributions to environmental indicators of changesin the level and composition of output, and changes inproduction techniques, are identified. A base caseprojection without trade reform is compared withalternative scenarios involving full globalimplementation of Uruguay Round commitments by 2010,and the additional move to MFN free trade by APECcountries by 2020. The study suggests that, at leastwith respect to air and water, trade policy reformsslated for the next two decades would in many casesimprove the environment and reduce the depletion ofnatural resources and in the worst cases would addonly slightly to environmental degradation – evenwithout toughening the enforcement of existingenvironmental regulations or adding new ones, and evenif the reforms stimulate a faster rate of economicgrowth.     

Local air pollution and global climate change: A combined cost-benefit analysis

This article presents the findings of a combined cost-benefit analysis of local air pollution and global climate change, two subjects that are usually studied separately. Yet these distinct environmental problems are closely related, since they are both driven by the nature of present energy production and consumption patterns. Our study demonstrates the mutual relevance of, and interaction between, policies designed to address these two environmental challenges individually. Given the many dimensions air pollution control and climate change management have in common, it is surprising that they have only little been analyzed in combination so far. We attempt to cover at least part of the existing gap in the literature by assessing how costs and benefits of technologies and strategies that jointly tackle these two environmental problems can best be balanced. By using specific technological options that cut down local air pollution, e.g. related to particulate emissions, one may concurrently reduce CO₂ emissions and thus contribute to diminishing global climate change. Inversely, some of the long-term climate change strategies simultaneously improve the quality of air in the short run. We have extended the well-established MERGE model by including emissions of particulate matter, and show that integrated environmental policies generate net global welfare benefits. We also demonstrate that the discounted benefits of local air pollution reduction significantly outweigh those of global climate change mitigation, at least by a factor of 2, but in most cases of our sensitivity analysis much more. Still, we do not argue to only restrict energy policy today to what should be our first priority, local air pollution control, and wait with the reduction of greenhouse gas emissions. Instead, we propose to design policies that simultaneously address these issues, as their combination creates an additional climate change bonus. As such, climate change mitigation proves an ancillary benefit of air pollution reduction, rather than the other way around.     

Bio-economic modeling of water quality improvements using a dynamic applied general equilibrium approach

An integrated bio-economic model is developed to assess the impacts of pollution reduction policies on water quality and the economy. Emission levels of economic activities to water are determined based on existing environmental accounts. These emission levels are built into a dynamic economic model for the Dutch economy and subsequently coupled to a national water quality model. The modular approach has the advantage that the impacts on the economy and water quality are evaluated simultaneously, but each within their own domain based on the appropriate scale and level of detail. The dynamic nature of the economic model allows us to also evaluate a derogated water policy as foreseen in the European Water Framework Directive. The indirect costs of different water quality improvement policy scenarios are at least as high as the direct costs related to investments in pollution abatement technology. The stricter the policy scenario, the more important the role of economic adjustment and restructuring mechanisms at the macro-economic level. Significant water quality improvements can be achieved through stringent domestic emission reductions. However, reaching water quality standards is highly dependent on water quality improvement policy in surrounding river basin countries and climate change.     

Economic Impacts of Multiple Agro-Environmental Policies on New Zealand Land Use

This paper investigates the implications of policy on farm income, land use, and the environment when New Zealand landowners face multiple environmental constraints. It also looks at the interaction between climate and nutrient reduction policy and the extent to which one policy can be used to meet the other’s objectives. We use a non-linear, partial equilibrium mathematical programming model of New Zealand land use to assess the economic impacts of climate and water policies at the New Zealand territorial authority level. The spatially explicit agro-environmental economic model estimates changes in land use, agricultural output, land management, and environmental impacts. The policies investigated include a range of carbon prices on land-based emissions ($0–30/tCO\(_{2\mathrm{e}}\)) as well a range of prices on nitrogen leaching from diffuse sources ($0–30/kgN). We estimate that implementing stand-alone greenhouse gas and nutrient emissions reduction policies for the agricultural and forestry sectors will create environmental benefits outside the scope of the policy. However, not all environmental outputs improve, and net farm revenue declines by between 0 and 11%. Simultaneously implementing the two policies results in the desired goals of reductions in nitrogen and greenhouse gas emissions with a marginal economic burden on landowners (i.e. 1–2% additional loss in farm profit relative to a stand-alone policy).     

Geographically explicit global modeling of land-use change, carbon sequestration, and biomass supply

This study aims to determine whether carbon sequestration policies could present a significant contribution to the global portfolio of climate change mitigation options. The objective is to model the effects of policies designed to induce landowners to change land use and management patterns with a view to sequester carbon or to reduce deforestation. The approach uses the spatially explicit Dynamic Integrated Model of Forestry and Alternative Land Use (DIMA) to quantify the economic potential of global forests. The model chooses which of the land-use processes (afforestation, reforestation, deforestation, or conservation and management options) would be applied in a specific location, based on land prices, cost of forest production and harvesting, site productivity, population density, and estimates of economic growth. The approach is relevant in that it (1) couples a revised and updated version of the Special Report on Emissions Scenarios with the dynamic development of climate policy implications through integration with the Model for Energy Supply Strategy Alternatives and their General Environmental Impact (MESSAGE); (2) is spatially explicit on a 0.5° grid; and (3) is constrained by guaranteeing food security and land for urban development. As outputs, DIMA produces 100-year forecasts of land-use change, carbon sequestration, impacts of carbon incentives (e.g., avoided deforestation), biomass for bioenergy, and climate policy impacts. The modeling results indicate that carbon sequestration policies could contribute to a significant part of the global portfolio of efficient climate mitigation policies, dependent upon carbon prices.     

Getting into the energy efficiency scene: does corporate social responsibility matter for energy efficiency in SMEs?

A growing body of literature argues that improving energy efficiency is an essential step that firms must take to mitigate climate change issues. It is assumed that corporate social responsibility (CSR) in general plays a prominent role in firms’ policies, and this paper specifically investigates the effects of the individual CSR dimensions on SMEs’ energy efficiency improvement. Based on data from a sample of 146 thousand SMEs, and using logit model, and fuzzy set qualitative comparative analysis, the study reveals that high activities in social, environmental and economic CSR dimensions are associated with high energy efficiency. Specifically, the environmental CSR dimension has the highest contribution to improving energy efficiency. Furthermore, this study indicates that energy efficiency improvement can be achieved by large SMEs provided they have developed simultaneously the environmental, social, and economic CSR dimensions. In doing so, this study answers to recent calls for more research on CSR-energy efficiency relationship and addresses with greater precision why it matters to relate the role of the CSR dimensions and energy efficiency. Furthermore, this study can be of value to policymakers who are called to promote CSR practices of SMEs in order to foster their energy efficiency.     

Forecasting material and economic flows in the global production chain for silicon

Material and economic flows in a global production chain are analyzed in order to identify shifts in economic structure relevant to environmental issues. Results suggest that the economic and environmental weight of high-tech manufacturing and specialized material sectors will increase significantly relative to extractive and primary commodity sectors, perhaps reaching a similar environmental scale within a few decades. Though further study is needed, the forecasts suggest that a reprioritization of analysis and policy to address these new industries is in order. These results are based on a case study of the global production chain for high-purity silicon and its use in semiconductors, solar cells and optical fiber from primary materials. Forecasts for future material/economic flows are carried out based on the identification of time scales that reveal stable long-term trends. Assuming constant growth over 7–10 year averages reproduces thirty years of historical growth of three global sectors to around 1–2% accuracy. This suggests the constant growth model can be used to forecast with a relatively high degree of confidence.     

International climate regimes: Effects of delayed participation

This paper analyses how delayed participation by regions can affect international climate regimes in terms of the feasibility, costs, timing, magnitude and nature of the long-term mitigation response. We use the energy-systems optimization model MESSAGE to construct several climate change mitigation scenarios with various levels of regional participation in short-to-mid term. By comparing these with a global scenario that assumes full spatial and temporal flexibility throughout the century, we are able to evaluate how participatory decisions affect the mitigation response as well as the costs and technology choices. We find that short-term postponement of participation from some regions can often lead to a delay of mitigation measures on the global level. However, if the regional delay lasts until mid-century, participants of the regime are likely to increase their efforts in the short term. Mitigation costs are found to substantially increase as a result of delayed participation—the extent of the increase depends on the relative importance of the region that postpones its participation, the stringency of the climate target and the ability to reorganize mitigation measures. Our analysis also shows that a region's decision to delay its participation in an international climate regime can lead to accumulated inertia in its energy system and thus to a delayed ‘technological transition’ toward a low-carbon future.     

Between a rock and a soft place: Ecological and feminist economics in policy debates

The field of ecological economics includes both economic analysis on the one hand, and discussions of normative values and visions for society, on the other. Using feminist insights into cultural beliefs about the relative “hardness” and “softness” of these two sides, this essay discusses how ecological economists can use this unique “between” space in order to better inform policy. The current crisis of global climate change, it is argued, requires that economists move beyond modeling and measurement, while ecological thinkers need to re-examine beliefs about markets and profit.     

Climate Policy,Learning, and Technology Adoption in Small Countries

A significant reduction in global greenhouse gas emissions requires international cooperation in emission abatement as well as individual countries’ investment in the adoption of abatement technology. The existing literature on climate policy pays insufficient attention to small countries, which account for a substantial proportion of global emission. In this study, we investigate how climate policy and learning about climate damage affect investment in abatement technology in small countries. We consider three alternative climate policy instruments: emission standards, harmonized taxes and auctioned permits. We say that learning is feasible if an international environmental agreement (IEA) is formed after the resolution of uncertainty about climate damage. We find that, either with learning and quadratic abatement costs or without learning, harmonized taxes outperform emission standards and auctioned permits in terms of investment efficiency. Without learning, a large cost of nonparticipation (that a country incurs) in the IEA can be beneficial to the country. Whether learning improves investment efficiency depends on the size of this nonparticipation cost.     

ICTs: Do they contribute to increased carbon emissions?

There is much evidence that the deployment of information and communications technologies (ICTs) can improve economic productivity, reduce energy intensity and exert downward pressure on renewable energy costs. While significant insights have been revealed about each of these effects in isolation, literature has not established their combined implications for carbon emissions. This article uses the International Futures (IFs) integrated assessment system (www.ifs.du.edu) to explore the dynamic impacts of ICT on interacting global systems, including economic and energy systems, and resultant carbon emissions. First, it reviews the literature on the various impacts of ICT; next, it extracts relationships from previously existing quantitative studies on the subject; third, it explains the addition of these relationships to the IFs structure; fourth, it explores the implications of the acceleration of ICT penetration; finally, it frames a range of uncertainty around the analysis through scenarios. The authors argue that ICT can have a downward impact on overall carbon emissions across a 50-year time horizon. However, the net impact of ICT is limited, and if policy makers are concerned with substantial reductions in overall stocks of carbon in the atmosphere, our model shows that ICT promotion must be coupled a global price on carbon.     

Distributional Preferences and the Incidence of Costs and Benefits in Climate Change Policy

We explore the relationship between willingness to pay (WTP) for climate change mitigation and distributional preferences, by which we mean individuals’ opinions about who should be responsible for climate change prevention and whether the share of climate change impacts borne by the poor is a cause for concern. We use 1,770 responses to an online stated preference survey. The domestic costs in our survey’s policy choice scenarios are expressed as a set of randomized shares across four different payment vehicles, and the international cost shares are randomized across four groups of countries. We also elicit respondents’ perceptions of the likely regressivity of climate change impacts under a policy of business-as-usual. WTP is higher when larger cost shares are borne by parties deemed to bear a greater responsibility for mitigation, and when respondents believe (and care) that the impacts of climate change may be borne disproportionately by the world’s poor. That WTP for an environmental policy depends on the distributional consequences of the policy is an unsettling result: efficiency assessments are typically assumed to be separate from equity considerations in most benefit-cost analyses.     

Believers vs. deniers: Climate change and environmental policy polarization

This paper theoretically studies the consequences of partisanship with an application to environmental policy. We model an election between a right-wing and a left-wing candidate who strategically propose environmental policies to gain the support of an electorate divided based on their climate change beliefs and productive assets. While environmental regulations imply a trade-off between a more sustainable environment and higher incomes for all voters, climate change believers have a higher belief in human activity-induced climate change, which translates into greater expected environmental benefits from policy, and high-asset voters care relatively more about mitigating economic costs. Voters view the left-wing candidate as more effective in addressing environmental challenges, whereas her right-wing opponent is the better candidate to deliver relief from the economic burden of regulations. In equilibrium, there exists policy divergence and the right-wing candidate always proposes the more pro-industry policy. We find that higher asset inequality moves equilibrium policies in a pro-industry direction as long as high-asset voters are ideologically more homogeneous than low-asset ones. Equilibrium policies become further polarized with greater partisanship as those voters with the same climate change belief hold similar ideologies.     

Generational Accounting in Portugal

The social and economic developments in European countries have put pressure on their national budgets and threaten the sustainability of public policies. The traditional fiscal indicators, specifically, the deficit and the debt, which are still used today as guiding tools, have proved to be insufficient, due to their arbitrary nature and short-term focus. In this paper, we resort to an alternative fiscal indicator, known as ‘generational accounting’, which is able to incorporate the future changes in the demographic structure of the population, and their corresponding impact on public accounts. It is also able to evaluate how current fiscal policy affects, not only, current generations, but also future generations. We apply this methodology to assess the long-term fiscal situation of Portugal, and compare the results with those obtained in 1999. In this context, we also explore additional scenarios, as well as additional indicators, in order to provide some robustness to our findings. Our results show that, if the current fiscal policy is not significantly changed, future generations will face a much heavier fiscal burden than current generations.