The Clean Development Mechanism’s Low-hanging Fruit Problem: When Might it Arise,and How Might it be Solved?

It is widely recognized that industrialized countries’ commitments under the Kyoto Protocol to reduce their greenhouse-gas emissions will be far less costly to achieve if they can be met at least in part through investment in cheap abatement options available in developing countries, as is permitted under the Protocol’s Clean Development Mechanism. Developing-country NGOs and others involved in the policy debate on the CDM have frequently raised concerns, however, about the so-called “low-hanging fruit” problem. The standard characterization of this problem is that if developing countries allow their cheap abatement options to be used now, they may find themselves worse off in future when they take on emissions-reduction commitments of their own, because only expensive abatement options will remain. We show that under plausible CDM-market imperfections a low-hanging fruit problem may indeed arise, but that the standard characterization of the problem is incorrect. We also present a potential solution, based on mandating a “virtual” option clause in CDM-investment contracts.     

What is the Best Distribution for Pollution Abatement Efforts? Information for Optimizing the WFD Programs of Measures

The Water Framework Directive (WFD) has mobilized economic theory in order to encourage E.U. Member States to reach desirable environmental water pollution levels by conciliating economic and ecological interests. For this purpose, a stringent standard (“good status”) has been set. Nevertheless, it will be possible to relax this standard if it appears that total abatement costs required for reaching this “good status” exceed expected environmental benefits. This ambitious policy updates the issue of the abatement costs and environmental benefits assessment. Concerning the costs, a full discrimination of the abatement effort minimizes the total cost when the impact of polluters changes spatially, while a uniform effort can reach a pollution target in flexible ways. In this case, the increase of the degree of discrimination of the abatement effort is required only if it generates significant positive economies. Our theoretical and empirical results have shown that the discrimination advantage becomes insignificant for either very demanding or very little demanding ecological standards and varies according to the polluters’ profile. In the case of “intermediate” standards, efficiency gains become negligible with a restricted number of effort “levels”.     

Endogenous structural change and crisis in a multiple time-scales growth model

The slow and endogenous twist of economic macro-structure makes up an important evolutionary feature of capitalist economies, and may be at the root of structural crisis. In this line, a Goodwinian growth model with increasing returns and profit-sharing that tries to picture a simple scenario of the seventies crisis is considered. It is shown that the exhaustion of the Kaldor-Verdoorn “productivity law” can entail, in a nonlinear framework, a “catastrophic” bifurcation from a “high” to a “low” growth path. Slow/fast dynamical systems then allow one to formalize a multiple time-scales dynamics where the growth path is shaped by the structural framework in which it takes place, but has also a long -un feedback. Structural change and crisis appear as long term and endogenous outcomes.     

Pollution Abatement and Productivity Growth: Evidence from Germany,Japan, the Netherlands,and the United States

The passage of environmental legislation was accompanied by concerns about its potential detrimental effect on productivity. We assume inputs can be assigned to either abatement activities or good output production. This allows us to specify regulated and unregulated production frontiers to determine the association between pollution abatement and productivity growth. We then employ our “assigned input” model to determine the association between productivity and abatement activities for manufacturing industries in Germany, Japan, the Netherlands and the United States.     

Optimal intensity targets for greenhouse gas emissions trading under uncertainty

Uncertainty is an obstacle for commitments under cap and trade schemes for emission permits. We assess how well intensity targets, where each country’s permit allocation is indexed to its future realized GDP, can cope with uncertainties in international greenhouse emissions trading. We present some empirical foundations for intensity targets and derive a simple rule for the optimal degree of indexation to GDP. Using an 18-region simulation model of a cooperative, global cap-and-trade treaty in 2020 under multiple uncertainties and endogenous commitments, we show that optimal intensity targets could reduce the cost of uncertainty and achieve significant increases in global abatement. The optimal degree of indexation to GDP would vary greatly between countries, including super-indexation in some advanced countries, and partial indexation for most developing countries. Standard intensity targets (with one-to-one indexation) would also improve the overall outcome, but to a lesser degree and not in all individual cases. Although target indexation is no magic wand for a future global climate treaty, gains from reduced cost uncertainty and the potential for more stringent environmental commitments could justify the increased complexity and other potential downsides of intensity targets.      

Economic Growth and Development: Towards a Catchup Model

We develop a model for economic growth applicable to a group of countries, constituting around half of the gross global production, that have been consistently “catching up” to the US since 1960 or so. This group can be termed “the convergence club.” The model has a theoretical basis developed in other publications (cited), but the present work is essentially empirical. It demonstrates that there is a very strong correlation between “catchup” growth, with respect to the US, and an energy proxy (EP). The energy proxy that works best is a linear combination of domestic electric power consumption petroleum (oil) consumption, per capita, compared to the US levels. The results presented here do not constitute a theory of growth, but they are consistent with theory presented elsewhere. On a practical level, we argue that consistent “catchup” trends over the past 40 years can safely be extrapolated for a few more decades for scenario construction purposes. We also believe that the observed catchup trends can be regarded as “potential” mid-term or long-term growth trajectories for transition economies and others that have recently been adversely affected by conflict or mismanagement.     

Managing Permit Markets to Stabilize Prices

The political economy of environmental policy favors the use of quantity-based instruments over price-based instruments (e.g., tradable permits over green taxes), at least in the United States. With cost uncertainty, however, there are clear efficiency advantages to prices in cases where the marginal damages of emissions are relatively flat, such as with greenhouse gases. The question arises, therefore, of whether one can design flexible quantity policies that mimic the behavior of price policies, namely stable permit prices and abatement costs. We explore a number of “quantity-plus” policies that replicate the behavior of a price policy through rules that adjust the effective permit cap for unexpectedly low or high costs. They do so without necessitating any monetary exchanges between the government and the regulated firms, which can be a significant political barrier to the use of price instruments.     

Capital growth in a global warming model: will China and India sign a climate treaty?

Global warming is now recognized as a significant threat to sustainable development on an international scale. One of the key challenges in mounting a global response to it is the seeming unwillingness of the fastest growing economies such as China and India to sign a treaty that limits their emissions. The aim of this paper is to examine the differential incentives of countries on different trajectories of capital growth. A benchmark dynamic game to study global warming, introduced in Dutta and Radner (J Econ Behav Organ, 2009), is generalized to allow for exogenous capital accumulation. It is shown that the presence of capital exacerbates the “tragedy of the common”. Furthermore, even with high discount factors, the threat of reverting to the inefficient “tragedy” equilibrium is not sufficient to deter the emissions growth of the fastest growing economies—in contrast to standard folk theorem like results. However, foreign aid can help. If the slower growth economies—like the United States and Western Europe—are willing to make transfers to China and India, then the latter can be incentivized to cut emissions. Such an outcome is Pareto improving for both slower and faster growth economies.     

Experts with a conflict of interest: a source of ambiguity?

We present an experimental design where uncertainty is generated from the advice of experts with conflicts of interest. In this experiment clients are faced with a variant of a multi-armed bandit problem with a random end-time. On the known arm (the “task screen”), clients can earn a certain payment per completion of a decoding task. However, clients may also opt for the unknown arm where they earn an uncertain amount if they end the experiment on this “expert screen”. The amount is uncertain to the clients because the value is being communicated through an “expert” with conflicted incentives. A control session provides for direct transmission of the value to the clients. Our results show that ambiguity aversion is alive-and-well in this environment. Also, when we vary the wage rate on the known arm we find that higher opportunity cost clients are less likely to heed the advice of conflicted experts.     

From contract to mental model: Constitutional culture as a fact of the social sciences

This paper develops the concept of constitutional culture—the attitude, thoughts, and feelings about constitutional constraints and the nature, scope, and function of constitutionalism. Constitutional culture is approached as a complex emergent phenomenon bridging Hayekian cognitive and institutional insights. It can be studied as a mental model, a series of expectations and understandings about the constitutional order, how it is, and how it ought to be. The “map” and “model” approach from Hayek’s Sensory Order (1952) is employed to understand how individuals and (cautiously) groups of individuals at the national level approach constitutionalism. This paper goes beyond the more traditional one-size-fits-all approach where all individuals respond uniformly to incentives, as provided by the constitution qua contract. Instead, constitutionalism is tied up in the individual’s vision of the world, that is, what Hayek (1948) labels “the facts of the social sciences.” The paper concludes with four areas where constitutional culture can further the insights of constitutional political economy: comparative political economy, constitutional stickiness, constitutional maintenance, and the new development economics.     

The economic spin

In business today “spinning” typically has a negative connotation. But it's more basic meaning, as a counter-twisting action producing multipurpose threads, actually better describes economic acts and relations. It especially illustrates Adam Smith's basic insight into the economic act as blending the mutual self-interests of buyers and sellers, of workers and employers, of borrowers and lenders. This meaning is obviously evident in private economic actions but it is also implicit in public undertakings. Indeed, just a few “look-sees” into the histories of national economies demonstrate the conclusion that where economic “weaving and spinning” interests are most effective, their economies evolve most productively and where not, they don’t.     

In or out: efficient inclusion of installations in an emissions trading scheme?

Regulators around the world are currently considering national emissions trading schemes (ETS) as cost-effective instruments to reduce greenhouse gas emissions. In the process, they are confronted with numerous design issues. The coverage of installations in an ETS is one such issue. While “blanket coverage” that includes all industrial emitters of greenhouse gases in an economy has some intuitive appeal, and seems equitable, it does not take into full account all the costs related to the extent of coverage. This paper shows that an alternative approach of “partial coverage” based on benefit–cost analysis can achieve the same emission reduction outcome at lower social cost. The approach is based on maximizing the benefits from inclusion of installations in an ETS at the same time as taking all relevant transaction costs into account. A broad definition of transaction costs is used, which covers the regulatory costs to the government as well as regulatory costs imposed on covered installations. We find that particularly for relatively modest emissions reduction targets the cost savings of a “partial coverage” compared to “blanket coverage” are significant.     

Economic Growth and (Re-)Distributive Policies in a Non-cooperative World

Many models show that redistribution is bad for growth. This paper argues that in a non-cooperative world optimizing, redistributing (“left-wing”) governments mimic non-redistributing (“right-wing”) policies for fear of capital loss if capital markets become highly integrated and the countries are technologically similar. “Left-right” competition leads to more redistribution and lower GDP growth than “left-left” competition. Efficiency differences allow for higher GDP growth and more redistribution than one's opponent. Irrespective of efficiency differences, however, “left-wing” governments have higher GDP growth when competing with other “left-wing” governments. The results may explain why one observes a positive correlation between redistribution and growth across countries, and why capital inflows and current account deficits may be good for relatively high growth.     

Assessing the performance of the UK Emissions Trading Scheme

The UK’s Climate Change Programme introduced an Emissions Trading Scheme (ETS) for greenhouse gases. Firms in over 40 industrial sectors which have negotiated “Climate Change Agreements” setting quantitative energy efficiency targets can use the ETS to trade over-and under-compliance with these targets. In parallel, a limited number of firms have become major participants in the ETS as a result of an auction of subsidies for additional abatement commitments. The paper describes the UK arrangements and assesses the economic efficiency and environmental effectiveness of the ETS, drawing on evidence of participants’ behaviour both in the incentive auction, and in subsequent trading.     

Local Transportation Policy and the Environment

The paper introduces a simple framework for analyzing the environmental effects of local transportation policies, and it reviews some evidence. In several cases, subsidies for local public transportation have led to substantial reductions in road transportation and have thereby reduced externalities. Some but not all estimates suggest positive overall welfare effects of such policies. In the rare cases where road pricing has been applied, it has helped to reduce automobile transportation, and it has led to environmental improvements. The experience with specific driving restrictions like “days without cars” and “low emission zones” has been mixed. Local transportation policy can have a useful role to play as a complement to national policy instruments, but neither efficiency nor effectiveness can be taken for granted.     

Agreeing on generalized Darwinism: a response to Geoffrey Hodgson and Thorbj?rn Knudsen

I thank Geoffrey Hodgson and Thorbj?rn Knudsen for their thought-provoking response to my latest generalization of Darwinism, and welcome their proposal to cooperate, after many years of our independent searches. I agree with them that our searches contain more similarities than both they and I had previously seen, but consider our remaining differences—especially in the terms employed and in the definitions of the terms we both employ, including “information,” “instructions,” “programs,” and “Lamarckism”—more important than they do. Their response also exaggerates or distorts some of my arguments. All this needs to be clarified before our cooperation can start.     

The “hidden catch” in <Emphasis Type="Italic">The Invisible Hook</Emphasis>

In The Invisible Hook, Leeson argues that by devising a complex system of rules (called the “pirate code”) and procedures for electing their leaders, pirate societies created governance structures where the leaders were strong enough to “control the governed” but were not strong enough to break the constraints that bound them. There is, however, a “hidden catch” within The Invisible Hook. There are important differences between pirate crews and societies, between pirate captains and political leaders, and between the pirate code and constitutions. Moreover, understanding these differences is critical for understanding how criminal bands were able to accomplish a feat that still proves problematic for many societies.     

Fair welfare maximization

We consider the general problem of finding fair constrained resource allocations. As a criterion for fairness we propose an inequality index, termed “fairness ratio,” the maximization of which produces Lorenz-undominated, Pareto-optimal allocations. The fairness ratio does not depend on the choice of any particular social welfare function, and hence it can be used for an a priori evaluation of any given feasible resource allocation. The fairness ratio for an allocation provides a bound on the discrepancy between this allocation and any other feasible allocation with respect to a large class of social welfare functions. We provide a simple representation of the fairness ratio as well as a general method that can be used to directly determine optimal fair allocations. For general convex environments, we provide a fundamental lower bound for the optimal fairness ratio and show that as the population size increases, the optimal fairness ratio decreases at most logarithmically in what we call the “inhomogeneity” of the problem. Our method yields a unique and “balanced” fair optimum for an important class of problems with linear budget constraints.     

The political economy of constitutional restraints

Constitutions are multidimensional objects with non-trivial implications on the structure of the political environment and, therefore, on the policy outcomes. This paper models constitutions as sets of “restraints” on the authority’s choice freedom (absolute and democracy restraints). We argue that even if both kinds of restraints seem to be serving the same purpose (increase social welfare), “democracy restraints” prolong the “life” of a constitution while “absolute restraints” not. We moreover use the proposed way of modelling constitutions in order to explain the dominance of intermediate (in terms of tightness of “democracy restraints”) constitutions in the real world.