Methane and Nitrous Oxide Emissions from Agriculture in the EU: A Spatial Assessment of Sources and Abatement Costs

Agriculture significantly contributes to emissions of greenhouse gases in the EU. By using a farm-type, supply-side oriented, linear-programming model of the European agriculture, the baseline levels of methane and nitrous oxide emissions are assessed at the regional level in the EU-15. For a range of CO₂-equivalent prices, we assess the potential abatement, as well as the resulting optimal mix of emission sources in the total abatement. Furthermore, we show that the spatial variability of the abatement achieved at a given carbon price is large, indicating that abatement cost heterogeneity is a fundamental feature in the design of a mitigation policy. The cost savings permitted by market-based instruments relative to uniform standard are shown to be large.     

Do environmental benefits matter? Evidence from a choice experiment among house owners in Germany

Residential buildings strongly contribute to global CO₂ emissions due to the high energy demand for electricity and heating, particularly in industrialised countries. Within the EU, decentralised heat generation is of particular relevance for future climate policy, as its emissions are not covered by the EU ETS. We conducted a choice experiment concerning energy retrofits for existing houses in Germany. In the experiment, the approximately 400 sampled house owners could either choose a modern heating system or an improved thermal insulation for their home. We used standard and mixed logit specifications to analyse the choice data. We found environmental benefits to have a significant impact on choices of heating systems. However, they played no role in terms of insulation choices. Based on the estimated mixed logit model, we further obtained willingness-to-pay (WTP) measures for CO₂ savings.     

Joint implementation under asymmetric information and strategic behavior

Joint Implementation (JI) under the Framework Convention on Climate Change means that countries could partly offset their national abatement commitments by investing in CO₂ abatement projects abroad. JI is introduced as a mechanism for achieving a certain global abatement target less costly by separating the commitments from the implementation of measures. This paper studies the design of a JI contract when the investor has incomplete information about the foreign firm which carries out the JI project (the host). Asymmetric information leads to a decrease in the potential cost savings from JI. Furthermore, private information held by the potential host firm could give the firm a significant positive utility of participating in JI projects. The possibility of being a host for a JI project in the future can prevent potential host firms from investing in profitable abatement projects today. The paper analyzes the impact on emissions of CO₂ of strategic behavior among potential hosts for JI projects.     

Climate Policy with Multiple Sources and Sinks of Greenhouse Gases

This paper studies how inclusion of many sources, sinks and reservoirs -- a comprehensive approach -- affects climate policy, compared with a control merely of CO₂. Two questions of particular importance arise in such an analysis. One is how to aggregate the emissions of different climate gases, and the other is how to include all relevant measures in the analysis. To aggregate gases properly, an intertemporal analysis should be carried out. To assure that all relevant measures are included, we suggest that certain measures to reduce emissions of greenhouse gases are specified explicitly and evaluated together with indirect measures, such as carbon charges. A numerical analysis based on an optimal control model indicates that direct measures may play an important role in the design of climate policy, especially for the control of the emissions of greenhouse gases other than CO₂. Similar to other studies of the time-path for abatement efforts, the bulk of abatement should be taken by the end of the planning period. This result is significantly strengthened if gases with short life-times in the atmosphere, such as methane, are subject to control.     

The impact of urbanization on CO2 emissions: Evidence from developing countries

This paper analyzes the impact of urbanization on CO₂ emissions in developing countries from 1975 to 2003. It contributes to the existing literature by examining the effect of urbanization, taking into account dynamics and the presence of heterogeneity in the sample of countries. The results show an inverted-U shaped relationship between urbanization and CO₂ emissions. Indeed, the elasticity emission-urbanization is positive for low urbanization levels, which is in accordance with the higher environmental impact observed in less developed regions. Among our contributions is the estimation of a semi-parametric mixture model that allows for unknown distributional shapes and endogenously classifies countries into homogeneous groups. Three groups of countries are identified for which urbanization's impact differs considerably. For two of the groups, a threshold level is identified beyond which the emission-urbanization elasticity is negative and further increases in the urbanization rate do not contribute to higher emissions. However, for the third group only population and affluence, but not urbanization, contribute to explain emissions. The differential impact of urbanization on CO₂ emissions should therefore be taken into account in future discussions of climate change policies.     

Implications of incorporating domestic margins into analyses of energy taxation and climate change policies

In most applied general equilibrium (AGE) analyses, the domestic transportation, wholesaling, and retailing services that facilitate the flow of goods and services from producers to consumers are not identified by commodity or use. Because the margins on energy commodities can be substantial, ignoring these domestic margins has important consequences when analyzing the impacts of policies designed to limit greenhouse gas emissions. This paper incorporates domestic trade and transport margins into the GTAP-E model, which has previously been used to analyze climate change policies. Models that do not explicitly incorporate domestic margins over-estimate the reduction in CO₂ emissions from a given carbon tax or under-estimate the level of a carbon tax needed to achieve a specific abatement target when domestic margins are fixed or when the carbon tax is treated as a consumption tax with variable domestic margins. However, this result can be reversed when the carbon tax is treated as an output tax with variable domestic margins.     

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.     

Taxation of multiple greenhouse gases and the effects on income distribution: A case study of the Netherlands

Current economic instruments aimed at climate change mitigation focus on CO₂ emissions only, but the Kyoto Protocol refers to other greenhouse gases (GHG) as well as CO₂. These are CH₄, N₂O, HFCs, PFCs and SF₆. Taxation of multiple greenhouse gases improves the cost-effectiveness of climate change mitigation. It is not yet clear, however, what the effect is of multigas taxation on the distribution of the tax burden across income groups. This paper examines and compares distributional effects of a CO₂ tax and a comprehensive tax that covers all six GHG of the Kyoto Protocol. The study concentrates on the Netherlands in the year 2000. We established tax rates on the basis of marginal abatement cost curves and the Dutch policy target. The distributional effects have been determined by means of environmentally extended input−output analysis and data on consumer expenditures. Our results show that taxation of multiple GHG improves not only the cost-effectiveness of climate change mitigation, but also distributes the tax burden more equally across income groups as compared to a CO₂ tax. These findings are relevant for the debate on the role of non-CO₂ GHG in climate change mitigation.     

Taxation of multiple greenhouse gases and the effects on income distribution: A case study of the Netherlands

Current economic instruments aimed at climate change mitigation focus on CO₂ emissions only, but the Kyoto Protocol refers to other greenhouse gases (GHG) as well as CO₂. These are CH₄, N₂O, HFCs, PFCs and SF₆. Taxation of multiple greenhouse gases improves the cost-effectiveness of climate change mitigation. It is not yet clear, however, what the effect is of multigas taxation on the distribution of the tax burden across income groups. This paper examines and compares distributional effects of a CO₂ tax and a comprehensive tax that covers all six GHG of the Kyoto Protocol. The study concentrates on the Netherlands in the year 2000. We established tax rates on the basis of marginal abatement cost curves and the Dutch policy target. The distributional effects have been determined by means of environmentally extended input−output analysis and data on consumer expenditures. Our results show that taxation of multiple GHG improves not only the cost-effectiveness of climate change mitigation, but also distributes the tax burden more equally across income groups as compared to a CO₂ tax. These findings are relevant for the debate on the role of non-CO₂ GHG in climate change mitigation.     

The meta-technology cost ratio: An indicator for judging the cost performance of CO2 reduction

This paper constructs an innovative ratio of meta-technology cost (MTCR) by combining the meta-frontier framework and shadow price model. This ratio is not only an indicator to account for country-specific technology heterogeneity or technology heterogeneity across a group of countries to measure improvement toward the meta-frontier. This ratio also computes the absolute value difference between the real and ideal minimum marginal abatement costs for the non-market good CO₂ to achieve specific emission reduction. An equally weighted combination of technological readiness and innovation is used to classify countries into groups. The value of the MTCR via the computation of the meta marginal abatement cost (MAC^meta) and group marginal abatement cost (MAC^group-k) allows us to identify the possible improvement of marginal abatement cost (MAC) in absolute value. That is, observation of the MTCR, along with its components the MAC^meta and MAC^group-k, provides more intuitive and comprehensive information for commanding the cost performance of CO₂ reduction than the traditional meta-technology ratio alone.     

Global resilience to climate change: Examining global economic and environmental performance resulting from a global carbon dioxide market

In this study, we investigated global economic and environmental resilience in the presence of climate change. In particular, we examine the possibility of mitigating carbon dioxide (CO₂) emissions without stressing standards of living. Here, we set up a cross-country CO₂ market constrained by a quota, where CO₂ is optimally re-allocated based on relative shadow prices of the pollutant. The objective is to stabilize global emissions without hindering global incomes and in the process achieve a single CO₂ price. We introduce a re-allocation model that takes into account each country’s underlying polluting technology. The model solutions are then used to investigate whether a single, global price for CO₂ is attainable. Our results suggest that global CO₂ emissions could stabilize without stressing global incomes, with a global CO₂ market achieving equilibrium. With a CO₂ market, countries would then have the incentive to consider adopting, improving, or investing in additional abatement technologies to move beyond current capabilities, while continuing to increase standards of living.     

International differences in emissions intensity and emissions content of global trade

Understanding international differences in the emissions intensity of trade and production is essential to understanding the effects of greenhouse gas limitation policies. We develop data on emissions from 41 industrial sectors in 39 countries and estimate the CO₂ emissions intensity of production and trade. We find no evidence that developing countries specialize in emissions-intensive sectors; instead, our evidence suggests that emissions intensities differ systematically across countries because of differences in production techniques. Our results confirm that international differences in emissions intensity are substantial, but suggest that they do not play a significant factor in determining patterns of trade.     

The greenhouse effect: Damages,costs and abatement

The buildup of so-called greenhouse gases in the atmosphere — CO₂ in particular-appears to be having an adverse impact on the global climate. This paper briefly reviews current expectations with regard to physical and biological effects, their potential costs to society, and likely costs of abatement. For a worst case scenario it is impossible to assess, in economic terms, the full range of possible non-linear synergistic effects. In the most favorable (although not necessarily likely) case (of slow-paced climate change), however, it seems likely that the impacts are within the affordable range, at least in the industrialized countries of the world. In the third world the notion of affordability is of doubtful relevance, making the problem of quantitative evaluation almost impossible. We tentatively assess the lower limit of quantifiable climate-induced damages at $30 to $35 per ton of CO₂ equivalent, worldwide, with the major damages being concentrated in regions most adversely affected by sea-level rise. The non-quantifiable environmental damages are also significant and should by no means be disregarded.The costs and benefits of (1) reducing CFC use and (2) reducing fossil fuel consumption, as a means of abatement, are considered in some detail. This strategy has remarkably high indirect benefits in terms of reduced air pollution damage and even direct cost savings to consumers. The indirect benefits of reduced air pollution and its associated health and environmental effects from fossil-fuel combustion in the industrialized countries range from $20 to $60 per ton of CO₂ eliminated. In addition, there is good evidence that modest (e.g. 25%) reductions in CO₂ emissions may be achievable by the U.S. (and, by implication, for other countries) by a combination of increased energy efficiency and restructuring that would permit simultaneous direct economic benefits (savings) to energy consumers of the order of $50 per ton of CO₂ saved. A higher level of overall emissions reduction — possibly approaching 50% — could probably be achieved, at little or not net cost, by taking advantage of these savings.We suggest the use of taxes on fossil fuel extraction (or a carbon tax) as a reasonable way of inducing the structural changes that would be required to achieve significant reduction in energy use and CO₂ emissions. To minimize the economic burden (and create a political constituency in support of the approach) we suggest the substitution of resource-based taxes in general for other types of taxes (on labor, income, real estate, or trade) that are now the main sources of government revenue. While it is conceded that it would be difficult to calculate the optimal tax on extractive resources, we do not think this is a necessary prerequisite to policy-making. In fact, we note that the existing tax system has never been optimized according to theoretical principles, and is far from optimal by any reasonable criteria.During the academic year 1989–90 Dr. Ayres was at the International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria.During the summer of 1989 Mr. Walter was a member of the Young Scientists' Summer Program at IIASA.     

Rethinking the optimal level of environmental quality: justifications for strict environmental policy

Traditional environmental theory suggests that the optimal level of a pollution emission occurs when the marginal damage created by the emissions is equal to the marginal cost of reducing the emissions. We argue that the benefits from reducing pollution should be much more broadly defined to include at least three other sources of benefits. First, we develop a game-theoretic model in which firms may under-invest in cost-saving ‘green technologies’. Second, we demonstrate that consideration of future damages and abatement costs leads to a lower current optimal pollution level than that obtained in traditional models. Finally, we show that ecological complexity creates indirect pathways by which greater pollution increases the likelihood of generating irreversible environmental damage. This broader definition of the benefits of pollution abatement yields an optimal level of pollution that may actually be less than the level at which conventionally-measured marginal damages are equal to marginal abatement costs. Thus, environmental policy should be stricter.     

Frictions in Project-Based Supply of Permits

Emissions trading in climate change can entail large overall cost savings and transfers between developed and developing countries. However, the search for acceptable JI or CDM projects implies a deviation from the perfect market framework used in previous estimations. Our model combines the search market for projects with a frictionless permit market to quantify the supply-side frictions in the CO₂ market. We also decompose the effects of frictions into the effects of search friction, bargaining, and bilateralism. A calibration using previous cost estimates of CO₂ reductions illustrate changes in cost savings and allocative implications.     

Abatement and Allocation in the Pilot Phase of the EU ETS

We use historical industrial emissions data to assess the level of abatement and over-allocation that took place across European countries during the pilot phase (2005–2007) of the European Union Emission Trading Scheme. Using a dynamic panel data model, we estimate the counter factual (business-as-usual) emissions scenario for EU member states. Comparing this baseline to allocated and verified emissions, we find that both over-allocation and abatement occurred, along with under-allocation and emissions inflation. Over the three trading years of the pilot phase we find over-allocation of approximately 280 million EUAs and total abatement of 247 Mt CO₂. However, we calculate that emissions inflation of approximately 73 Mt CO₂ also occurred, possibly due to uncertainty about future policy design features.     

Policy choice for end-of-pipe abatement technology adoption under technological uncertainty

Regulators have increasingly become concerned about end-of-pipe abatement technologies because they not only play a crucial role in air pollution control but also ensure the achievement of the deep carbon emissions reduction target. This paper investigates the effect of emission taxes and standards on the adoption of end-of-pipe abatement technology when the arrival time and degree of improvement of the new emissions abatement technology are uncertain. We find that the ranking of emission taxes and standards in terms of motivating early adoption depends on the policy stringency. More specifically, for high levels of environmental stringency, standards induce an earlier technology adoption than taxes, while the opposite conclusion holds for low levels of environmental stringency. The sensitivity analysis shows that these findings are robust to various relevant crucial parameters. Finally, the implications for the choice of environmental policy have been provided.     

The control of CO2 emissions and its economic impact: An AGE model for a german state

Since it is believed that CO₂ is responsible for 55% of the greenhouse effect, a CO₂ levy is now under consideration in several countries. For an assessment of the macroeconomic implications of an integrated energy and environmental policy we employ an applied general equilibrium model (AGE) since all sectors of an economy and all private households contribute to CO₂ emission. Our model is a temporary equilibrium model with capacity extension under adjustment costs and with abatement activities for SO₂ and NO_x emissions.The model of consumer behavior will result in a system of consumer demand functions for non-durables as well as for durable goods. The simulations show the cost of inefficiency in resource allocation if CO₂ taxes differ between industries and households. We finally present the marginal cost curve of CO₂ emission reduction.     

Measuring environmental efficiency of industry: a case study of thermal power generation in India

Technical and environmental efficiency of some coal-fired thermal power plants in India is estimated using a methodology that accounts for firm’s efforts to increase the production of good output and reduce pollution with the given resources and technology. The methodology used is directional output distance function. Estimates of firm-specific shadow prices of pollutants (bad outputs), and elasticity of substitution between good and bad outputs are also obtained. The technical and environmental inefficiency of a representative firm is estimated as 0.06 implying that the thermal power generating industry in Andhra Pradesh state of India could increase production of electricity by 6/ while decreasing generation of pollution by 6%. This result shows that there are incentives or win–win opportunities for the firms to voluntarily comply with the environmental regulation. It is found that there is a significant variation in marginal cost of pollution abatement or shadow prices of bad outputs across the firms and an increasing marginal cost of pollution abatement with respect to pollution reduction by the firms. This result calls for the use of economic instruments like pollution taxes instead of command and control regulation used currently in India to reduce air pollution.

An analysis of China's climate policy using the China-in-Global Energy Model

The primary approach to address climate change in China has been the use of CO₂ intensity targets coupled with targets for low carbon energy deployment. We evaluate the impact of extending similar targets through 2050 on China's energy use profile and CO₂ emissions trajectory using the China-in-Global Energy Model (C-GEM). The C-GEM is a global computable equilibrium model that includes energy and economic data provided by China's statistical agencies, calibration of savings, labor productivity, and capital productivity dynamics specific to China's stage of development, and regional aggregation that resolves China's major trading partners. We analyze the combined impact of extending CO₂ intensity targets, implemented via a cap-and-trade program, and low carbon energy policies (directives for nuclear power expansion and feed-in tariffs for wind, solar, and biomass energy) through 2050. Although with the policy, simulated CO₂ emissions are around 43% lower in 2050 relative to a reference (No Policy) counterfactual, China's CO₂ emissions still increase by over 60% between 2010 and 2050. Curbing the rise in China's CO₂ emissions will require fully implementing a CO₂ price, which will need to rise to levels higher than $25/ton in order to achieve China's stated goal of peaking CO₂ emissions by 2030.