Consequences of irreversibilities on optimal intertemporal CO2 emission policies under uncertainty

This paper investigates how irreversibilities affect the optimal intertemporal accumulation of greenhouse gases in the atmosphere under uncertainty. More precisely, the evolution of the future temperature is assumed to follow an Itô-process with the drift provided by greenhouse gas emissions. This paper considers two different kinds of irreversibilities: of emissions (i.e., CO₂ once dissolved into the air cannot be collected later) and of stopping. These issues are investigated first (in the tradition of the real option literature) as pure stopping problems and then allowing for a continuous choice of emissions. Implications for global warming are: an irreversible stopping of greenhouse gas emissions is never optimal in a continuous framework and yields in the real option framework a less conservationist stopping rule in which uncertainty increases the stopping threshold (i.e. works against conservation).     

Inertia Risk: Improving Economic Models of Catastrophes*

We model endogenous catastrophic risk in a new way. We call it “inertia risk”, which accounts for delays between physical variables and the hazard rate – a characteristic often observed in reality. The added realism significantly affects optimal policies relative to the standard model of catastrophic risk. The probability of a catastrophe occurring at some point in time can span the entire interval [0,1], and is not 0 or 1 as is typical in standard models. Inertia risk can also generate path dependences. We illustrate the implications for policy in a simple model of climate change.     

Coping with Multiple Catastrophic Threats

We study intertemporal policies for dealing with multiple catastrophic threats with endogenous hazards, allowing, inter alia, for gradual mitigation efforts that accumulate to reduce occurrence risks. The long-run properties of the optimal policies are characterized in terms of the key parameters (damage, hazard sensitivity and natural degradation rate) associated with each type of catastrophic threat. Effects of background threats on the optimal response to a potential catastrophe are illustrated numerically.     

Are Optimal CO2 Emissions Really Optimal?

Although the greenhouse effect is by many considered as one of the most serious environmental problems, several economic studies of the greenhouse effect, most notably Nordhaus's DICE model, suggest that it is optimal to allow the emissions of greenhouse gases (GHG) to increase by a factor of three over the next century. Other studies have found that substantial reductions can be justified on economic grounds. This paper explores into the reasons for these differences and identifies four (partly overlapping) crucial issues that have to be dealt with when analysing the economics of the greenhouse effect: low-probability but catastrophic events; cost evaluation methods; the choice of discount rate; the choice of decision criterion. The paper shows that (i) these aspects are crucial for the policy conclusions drawn from models of the economics of climate change, and that (ii) ethical choices have to be made for each of these issues. This fact needs wider recognition since economics is very often perceived as a value neutral tool that can be used to provide policy makers with “optimal” policies.     

Another strategy to assess sustainable development

The goal of sustainoble development is to preserve sustainabitity trod simultaneously prevent catastrophe in a man-land .system. However, almost all the existing approaches to assessing sustainable development are to measure the sustainability. namely appraise from the obverse side of the sustainable development. So it seems necessary to attack the same task on the reverse, namely to measure the passibility of eatostrophe. In this paper, with a case study of Tianjin, China. we employ catastrophe theory and models to integrate Tianjin＇s sustainable development indicators, and then deduce the catastrophe risk index （ CRI） to present the level of catastrophic possibility in the city. Applying catastrophe theory, is a new strategy to assess sustainable development and shows great practical significance, especially for those developing regions or countries, who always give more priority to their economy and therefore have more obligation to make sure whether their social economic activities might bring forth any ecological environment catastrophe. Besides, being both qualitative and quantitative, the approach could be employed to explore not only static characteristics bat also dynamic mechanism of man-land system. Although our work is only a maiden attempt and still calls for further effort to improve it, the case study of Tianjin in this paper would assure as the great promising future to apply, catastrophe theory to sustoinable devetopment modeling,     

Endogenous Discounting and Climate Policy

Under risk of abrupt climate change, the occurrence hazard is added to the social discount rate. As a result, the social discount rate (1) increases and (2) turns endogenous to the global warming policy. The second effect bears profound policy implications that are magnified by economic growth. In particular, we find that greenhouse gases (GHG) emission should be terminated at a finite time so that the ensuing occurrence risk will vanish in the long run. Due to the public bad nature of the catastrophic risk, the second effect is ignored in a competitive allocation and unregulated economic growth will give rise to excessive emissions. In the long term, the GHG emission paths under the optimal and competitive growth regimes lie at the extreme ends of the range of feasible emissions.     

Regulating environmental threats

Environmental consequences of natural resource exploitation often entail threats of future occurrences of detrimental abrupt events rather than (or in addition to) inflicting a damage gradually. The possibility of abrupt occurrence of climate-change related calamities is a case in mind. The uncertainty associated with the realization of these threats and their public-bad nature complicate the design of optimal economic response. We derive a Pigouvian hazard tax schedule that implements the socially optimal outcome. The tax is based on the expected cost of the hazard-generating activities and serves to reduce hazardous emissions well in advance of the catastrophic occurrence. A numerical example illustrates possible effects of the proposed regulation scheme. Implications for climate policy are discussed.      

论中国巨灾风险保障体系的建立与完善

当前中国巨灾事故不断发生，造成重大损失，这种状况呼唤着完善的巨灾风险保障体系的建立与健全。本文在分析中国巨灾保障体系缺失原因的基础上，通过总结与中国一样面临巨灾威胁的一些国家管理巨灾风险的模式，井结合中国实际，提出若干建立以巨灾保险为基础的巨灾风险保障体系的初步设想，以期使保险这种社会化风险管理手段在和谐社会构建中，更好地发挥其社会管理功能和“社会稳定器”作用。     

我国经济增长过程中的防灾减灾问题

作为一个灾害广泛而又频繁发生的发展中国家,我们在经济增长模式的选择中,必须将灾害因素纳入其中,改变我们传统的经济增长模式、行为方式与生活方式。因为,尽管各种灾害的发生具有客观性,但几乎任何灾害的发生都与人类自身的不良影响和不当行为有关,其实质乃天灾人祸。     

巨灾风险下的投保行为 ——基于实验理论的研究

中国尚无巨灾保险市场,研究人们在巨灾风险下的投保行为对巨灾保险市场的建立与发展都具有重要的意义。本文以地震风险为例,运用实验经济学的方法,探讨了个体面对巨灾风险时的投保行为与相关理论问题。研究结果表明,人们的投保决策受其对风险概率认知的影响较小,知道清晰的风险概率甚至会降低投保率;在实验中引入仿真信息,将诱导被试投保;而过往受灾经历影响较大,且这种影响并不一定需要亲身经历才能形成,知晓他人遭受灾难也能唤起人们的投保意识。通过扩展传统的实验理论,实验室实验被应用到了这种因难以控制变量而研究较少的领域,并发现了投保行为的某些特征。     

GHG Targets as Insurance Against Catastrophic Climate Damages

The climate system is an angry beast and we are poking it with sticks 1 . A critical issue in climate change economics is the specification of the so‐called “damages function” and its interaction with the unknown uncertainty of catastrophic outcomes. This paper asks how much we might be misled by our economic assessment of climate change when we employ a conventional quadratic damages function and/or a thin‐tailed probability distribution for extreme temperatures. The paper gives some numerical examples of the indirect value of various greenhouse gas (GHG) concentration targets as insurance against catastrophic climate change temperatures and damages. These numerical exercises suggest that we might be underestimating considerably the welfare losses from uncertainty by using a quadratic damages function and/or a thin‐tailed temperature distribution. In these examples, the primary reason for keeping GHG levels down is to insure against high‐temperature catastrophic climate risks.     

论温室气体排放管制的政治学根据

温室气体排放管制的政治学根据包括绿色政治和政治合法性两个方面。在绿色政治的大背景下,国际政治和国内政治都将温室气体排放管制问题放到了一个非常重要的位置。政府对温室气体排放行为进行管制是实现和维护其政治合法性的重要途径。温室气体排放管制本身是政府作为公共权力主体应当提供的一种特殊公共产品。温室气体排放管制是政府履行其社会职能的重要方面。温室气体排放管制的目的是为社会提供环境公共产品——安全的气候。作为地球村的一员,每个国家应当积极采取相关法律政策措施促进温室气体减排。     

巨灾保险:内涵、市场失灵、政府救济与现实选择

巨灾保险问题是一个全球性的问题,是保险业正在拓展的一个新领域,也是保险理论研究的一个新课题。深刻剖析巨灾风险的特殊内涵,明确指出目前巨灾保险存在的“市场失灵”问题,并提出政府干预是解决该问题的根本方法,从而为我国巨灾保险制度建立和完善提供现实选择。     

The dynamics of optimal abatement strategies for multiple pollutants—An illustration in the Greenhouse

We investigate optimal abatement strategies for cumulative and interacting pollutants. We show that different decay rates can cause non-monotonic behavior in the optimal paths of emissions, the aggregate level of pollution, and even the relative optimal price for emissions. This contrasts strikingly with the case of a single pollutant. The results are illustrated by numerical simulations, first for instructive fictitious and second for more realistic parameters mimicking the greenhouse problem. The results add to the skepticism existing about whether the concept of global warming potential is a useful indicator for the optimal relative abatement of different GHGs over time. In fact, we show that a constant index suitable for comparing dynamically different pollutants with respect to their economic harmfulness does not exist.     

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.     

Emission Taxes and Product Differentiation in the Presence of Foreign Firms

Industries characterized by differentiated products are important contributors of greenhouse gases and currently subject to market‐based policies such as emission taxes. In the context of developing countries, fears about foreign investment leaving the country are often used as an argument not to address industry emissions through emission taxes. This paper develops a Cournot model with product differentiation in the presence of abatement efforts where host and foreign firms are subject to an emission tax. The analysis indicates that abatement efforts and differences in pollution intensity coefficients across firms may play a significant role in the characterization of optimal policy. The analysis also suggests that the government may opt to encourage foreign, less pollution‐intensive firms via higher taxation. Additionally, this paper examines how an optimal emission tax may be adjusted as products become more differentiated; industry emissions may fall/rise as a result of more differentiated products. One important contribution of this paper is that it emphasizes the role of abatement efforts, product differentiation, and differences in pollution intensity coefficients across firms in the characterization of the optimal emission tax.     

The political economy of global carbon emissions reductions

The discussion about what reductions in greenhouse gas emissions are required and how the emissions rights might be distributed globally has fostered the belief that there is a fundamental conflict between the rich nations of the “North” and the poor but populous nations of the “South.” The argument is that grandfathering the rights will only reinforce existing global inequalities, while per capita distribution of the rights would lead to such huge transfers of wealth to the South as to be unacceptable to the North. However, a very simple general equilibrium model highlighting key elements of the global economy shows that this perception is incorrect under a plausible interpretation of the goal of the United Nations Framework Convention on Climate Change to “avoid dangerous anthropogenic interference with the climate system.” Instead of using an economic damage function to determine the optimal level of emissions reductions, the model's utility functions are calibrated to reflect scientific understanding of what would be required to stabilize the atmosphere at safe concentrations of greenhouse gases. Among policy options that would accomplish this, the United States has a preference for grandfathering the allocation of emissions rights over a per capita allocation, but this preference is not strong and could be offset by other geopolitical considerations.     

The optimal control of emissions and renewable resource harvesting under uncertainty

A model of a renewable resource is developed where the growth and quality of the resource are reduced by pollution. Ambient pollution concentrations and the renewable resource stock are modeled as stochastic processes. Conditions for the optimal harvest plan and the optimal emissions rate are derived. The effect of stochastic variations on the optimal management of the resource is analyzed. The steady-state joint probability distribution of the resource and pollution stocks is shown to exist under certain conditions.     

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.     

Economic growth and greenhouse gas emissions

Recent empirical research has examined the relationship between certain indicators of environmental degradation and income, concluding that in some cases an inverted U-shaped relationship, which has been called an environmental Kuznets curve (EKC), exists between these variables. Unfortunately, this inverted U-shaped relationship does not hold for greenhouse gas emissions. One explanation of the absence of EKC-like behavior in greenhouse gas emissions is that greenhouse gases are special pollutants that create global, not local, disutility. But the international nature of global warming is not the only reason that prevents de-linking greenhouse gas emissions from economic growth. The intergenerational nature of the negative impact of greenhouse gas emissions may have also been an important factor preventing the implementation of greenhouse gas abatement measures in the past. In this paper we explore the effect that the presence of intergenerational spillovers has on the emissions–income relationship. We use a numerically calibrated overlapping generations model of climate–economy interactions. We conclude that: (1) the intertemporal responsibility of the regulatory agency, (2) the institutional capacity to make intergenerational transfers and (3) the presence of intergenerationally lagged impact of emissions constitute important determinants of the relationship between economic growth and greenhouse gas emissions.