Optimal Timing of Climate Change Policy: Interaction Between Carbon Taxes and Innovation Externalities

This paper addresses the impact of endogenous technology through research and development (R&D) on the timing of climate change policy. We develop a model with a stock pollutant (carbon dioxide) and abatement technological change through R&D, and we use the model to study the interaction between carbon taxes and innovation externalities. Our analysis shows that the timing of optimal emission reduction policy strongly depends on the set of policy instruments available. When climate-specific R&D targeting instruments are available, policy has to use these to step up early innovation. When these instruments are not available, policy has to steer innovation through creating demand for emission saving technologies. That is, carbon taxes should be high compared to the Pigouvian levels when the abatement industry is developing. Finally, we calibrate the model in order to explore the magnitude of the theoretical findings within the context of climate change policy.      

Climate Policy Under Fat-Tailed Risk: An Application of Dice

Uncertainty plays a significant role in evaluating climate policy, and fat-tailed uncertainty may dominate policy advice. Should we make our utmost effort to prevent the arbitrarily large impacts of climate change under deep uncertainty? In order to answer to this question, we propose a new way of investigating the impact of (fat-tailed) uncertainty on optimal climate policy: the curvature of the optimal carbon tax against the uncertainty. We find that the optimal carbon tax increases as the uncertainty about climate sensitivity increases, but it does not accelerate as implied by Weitzman’s Dismal Theorem. We find the same result in a wide variety of sensitivity analyses. These results emphasize the importance of balancing the costs of climate change against its benefits, also under deep uncertainty.     

Oil shale and climate policy in the shift to a low carbon and more resilient economy

Policy makers worldwide are recently debating options to implement an effective climate policy that would put a cap on green house gas emissions. At the same time, investors are carefully evaluating the profitability of unconventional fossil fuels such as shale oil. To enhance the understanding of the impacts of a climate policy such as the American Clean Energy and Security Act of 2009, on oil shale production – and vice versa – we have customized an integrated assessment model, the Climate and Energy Assessment for Resiliency model for Unconventional Fossil Fuels to the U.S. Western Energy Corridor. Our analysis indicates that while the bill would increase the production cost of oil shale, the industry remains highly profitable in the longer-term, generating a potential profit of about $10 to $16 billion per year by 2040 at 2.5 million barrels per day. These results suggest that the oil shale industry may comfortably face the enactment of a carbon policy, albeit with some caveats. Furthermore, while its potential economic impact on non-compliant industries may be severe, it would generate mounting profits for those achieving energy efficiency gains, thereby increasing the profitability of energy efficiency investments.     

Environmental Protection for Sale: Strategic Green Industrial Policy and Climate Finance

Industrial policy has long been criticized as subject to protectionist interests; accordingly, subsidies to domestic producers face disciplines under World Trade Organization agreements, without exceptions for environmental purposes. Now green industrial policy is gaining popularity as governments search for low-carbon solutions that also provide jobs at home. The strategic trade literature has largely ignored the issue of market failures related to green goods. I consider the market for a new environmental good (like low-carbon technology) whose downstream consumption provides external benefits (like reduced emissions). Governments may have some preference for supporting domestic production, such as by interest-group lobbying, introducing a political distortion in their objective function. I examine the national incentives and global rationales for offering production (upstream) and deployment (downstream) subsidies in producer countries, allowing that some of the downstream market may lie in nonregulating third-party countries. Restraints on upstream subsidies erode global welfare when environmental externalities are large enough relative to political distortions. Climate finance is an effective alternative if political distortions are large and governments do not undervalue carbon costs. Numerical simulations of the case of renewable energy indicate that a modest social cost of carbon can imply benefits from allowing upstream subsidies.     

Optimal climate change mitigation under long-term growth uncertainty: Stochastic integrated assessment and analytic findings

Economic growth over the coming centuries is one of the major determinants of today׳s optimal greenhouse gas mitigation policy. At the same time, long-run economic growth is highly uncertain. This paper is the first to evaluate optimal mitigation policy under long-term growth uncertainty in a stochastic integrated assessment model of climate change. The sign and magnitude of the impact depend on preference characteristics and on how damages scale with production. We explain the different mechanisms driving optimal mitigation under certain growth, under uncertain technological progress in the discounted expected utility model, and under uncertain technological progress in a more comprehensive asset pricing model based on Epstein–Zin–Weil preferences. In the latter framework, the dominating uncertainty impact has the opposite sign of a deterministic growth impact; the sign switch results from an endogenous pessimism weighting. All of our numeric scenarios use a DICE based assessment model and find a higher optimal carbon tax than the deterministic DICE base case calibration.     

Environmental Policy and the International Diffusion of Cleaner Energy Technologies

Technology transfer is an important channel of technological change and sustainable development for countries with less innovative ability than technological leaders. This paper studies whether domestic environmental policies affect the inward technology transfer of cleaner innovation from abroad. We focus specifically on the power sector, for its important role in the decarbonization process, by looking at zero-carbon (renewable) and carbon-saving (efficient fossil) technologies for energy production. Using data on cross-country patent applications, we provide evidence that environmental policy contributes to attracting foreign cleaner technology options to OECD markets but not to non-OECD markets. We show that this is due to the nature of the implemented policy instruments. Market-based approaches positively impact technology transfer to both OECD and non-OECD economies, while non-market based approaches have at best only a weak effect in OECD countries. Domestic environmental policies may provide too weak a signal for foreign innovators in countries off the technological frontier. This calls for a strengthening of policy incentives for technology transfer in light of pressing climate change objectives.     

去产能背景下跨部门产业政策与技术创新

基于政策效果的部际传导视角，建立包含上游能源部门、中游电力部门和下游生产部门的多部门一般均衡模型，对高耗能产业生产函数以施加外生冲击方式刻画中国2015年实施的去产能政策，通过校准模型分析核心内生变量在政策冲击时期相较于平衡增长路径时期的变化。结果显示：①以“短期阵痛”为代价的去产能政策能够实现提振过剩产业产品价格的基础政策目标；②在能源部门技术创新的内生设定下，去产能政策能够提高绿色能源占能源使用总量的比重，实现绿色结构效应；③去产能政策能够降低绿色能源相对价格，实现绿色成本效应。进一步地，引入价格政策进行政策情景模拟，比较实现同一减排目标时内生技术模型和外生技术模型的政策成本，发现内生技术设定能够以更低税率和更小福利损失实现减排目标。研究结论表明，内生的技术创新是完善去产能政策传导、降低政策成本的关键环节，推动了下游过剩产业的市场提振和上游能源部门的绿色转型，为供给侧改革研究提供了产业政策与技术创新互动的新视角。     

去产能背景下跨部门产业政策与技术创新

基于政策效果的部际传导视角，建立包含上游能源部门、中游电力部门和下游生产部门的多部门一般均衡模型，对高耗能产业生产函数以施加外生冲击方式刻画中国2015年实施的去产能政策，通过校准模型分析核心内生变量在政策冲击时期相较于平衡增长路径时期的变化。结果显示：①以“短期阵痛”为代价的去产能政策能够实现提振过剩产业产品价格的基础政策目标；②在能源部门技术创新的内生设定下，去产能政策能够提高绿色能源占能源使用总量的比重，实现绿色结构效应；③去产能政策能够降低绿色能源相对价格，实现绿色成本效应。进一步地，引入价格政策进行政策情景模拟，比较实现同一减排目标时内生技术模型和外生技术模型的政策成本，发现内生技术设定能够以更低税率和更小福利损失实现减排目标。研究结论表明，内生的技术创新是完善去产能政策传导、降低政策成本的关键环节，推动了下游过剩产业的市场提振和上游能源部门的绿色转型，为供给侧改革研究提供了产业政策与技术创新互动的新视角。     

How Feasible is Carbon Sequestration in Korea? A Study on the Costs of Sequestering Carbon in Forest

In recent years, carbon sequestration has become a more attractive policy in Korea due to the increasing trend of marginal cropland and enhanced public awareness on adverse climate change phenomena. This study aims to calculate the unit costs of carbon sequestration programs through afforestation in Korea and examine the cost-effectiveness of programs. The basis of our simulation is an econometric land use share model, and province level of aggregated panel data are used for model estimation. Four scenarios are considered depending on whether the program includes the harvest and which tree species are planted. The approach of sequestration program is to pay the landowners to convert their lands to forest for a period of time in exchange of fixed annual payment in addition to tree establishment cost. Our results show that the unit cost varies from $122 to $486 per ton of carbon stored depending on the scenarios and payment levels. We found that the carbon sequestration can be a cost-effective mitigation policy in Korea although it is not the least cost option.     

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.     

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.     

Pricing Monitoring Uncertainty in Climate Policy

This article assesses the environmental and economic efficiency of three different approaches to treat monitoring uncertainty in climate policy, namely prescribing uncertainty, setting minimum certainty thresholds and pricing uncertainty through a discount. Our model of the behavior of profit-maximizing agents demonstrates that under the simplest set of assumptions the regulator has no interest in reducing monitoring uncertainty. However, in the presence of information asymmetry, monitoring uncertainty may hamper the economic and environmental performance of climate policy due to adverse selection. In a mandatory policy, prescribing a reasonable level of uncertainty is preferable if the regulator has enough information to determine this level. For voluntary mechanisms, such as carbon offsets, allowing agents to set their own monitoring uncertainty below a maximum threshold or discounting carbon revenues in proportion to monitoring uncertainty are the best approaches for the regulator to mitigate the negative effects of information asymmetry. These conclusions are much more pronounced when agents do not accrue revenues from their mitigation action, other than carbon. Our analysis of monitoring uncertainty under information asymmetry, which results in heterogeneity in the agents’ benefits from abatement, generalizes the classical trade-off between production efficiency and information rents.     

碳定价的政策工具选择争论:一个文献综述

二氧化碳等温室气体减排的政策工具选择问题是气候变化经济学中的一个重要研究领域。本文对该领域的最新研究进展作了全面的综述,试图梳理出在应对气候变化政策工具选择问题上各种不同主张的分歧所在,为中国碳减排的政策框架制定提供启示。通过对比分析关于传统的命令-控制工具和新型的基于市场的工具效率的几种不同观点,对处于政策工具选择争论核心的两种市场型工具——碳税和总量控制与交易制度在经济效率、政治可行性、执行成本、国际合作等方面各自的优劣性进行了重点评论,并讨论了更复杂的复合工具和双轨规制方法的特征。最后探讨了中国碳减排的政策工具选择问题,并指出了气候变化政策工具选择领域未来的研究重点。     

Cutting costs of catching carbon—Intertemporal effects under imperfect climate policy

We use a two-period model to investigate intertemporal effects of cost reductions in climate change mitigation technologies for the power sector. The effect of cost reductions for CCS depends on how carbon taxes are set. If there is no carbon tax in period 1, but an optimally set carbon tax in period 2, a CCS cost reduction may reduce early emissions. Such an innovation may therefore be more desirable than comparable cost cuts related to renewable energy. The finding rests on the incentives fossil fuel owners face. If future profitability is reduced, they speed up extraction (the ‘green paradox’), and vice versa.     

Policy Forum: Designing a Carbon Price Policy: Empirical Uncertainties in Climate Policy Implementation

Despite the passing of the carbon price legislation, implementation of climate policy must confront a number of challenges. These include the uncertain nature of benefits from the policy, uncertainty surrounding the cost of abatement within Australia, uncertainties about international action and challenges in the interaction between policy instruments (for example, between the carbon price and large subsidies to renewable energy). Each of these issues implies a substantial empirical challenge for the Australian Government and the independent agencies charged with implementation. Effort should be focused on increasing the knowledge base, rather than relying on simplified scenarios from a narrow range of economic models.     

Climate Policy under Technology Spillovers

We study climate policy when there are technology spillovers between countries, as there is no instrument that (directly) corrects for these externalities. Without an international climate agreement, the (non-cooperative) equilibrium depends on whether countries use tradable quotas or carbon taxes as their environmental policy instruments. All countries are better-off in the tax case than in the quota case. Two types of international climate agreements are then studied: One is a Kyoto type of agreement where each country is assigned a specific number of internationally tradable quotas. In the second type of agreement, a common carbon tax is used domestically in all countries. None of the cases satisfy the conditions for the social optimum. Even if the quota price is equal to the Pigovian level, R&D investments will be lower than what is socially optimal in the quota case. It is also argued that the quota agreement gives higher R&D expenditures and more abatement than the tax agreement.     

气候政策的经济环境效应及其缓解措施的研究综述——兼谈对我国的启示

气候政策对一国经济和环境产生一定的效应,开放经济条件下还将对一国产业的国际竞争力产生影响。碳泄漏等问题使得气候政策的实际减排效果受到了质疑。气候政策实施过程中产生的这些问题都将严重影响气候政策的有效性。为使气候政策的有效性达到最优,很多学者研究了缓解气候政策负面效应的措施。本文对一些重要的气候政策的经济环境效应进行了理论总结,从竞争力效应、经济效应、环境效应和研究方法这四个方面综述了相关实证研究成果,分析了气候政策负面效应的缓解措施,以期为制定适合我国的气候政策提供借鉴。     

Scientific Ambiguity and Climate Policy

Economic evaluation of climate policy traditionally treats uncertainty by appealing to expected utility theory. Yet our knowledge of the impacts of climate policy may not be of sufficient quality to be described by unique probabilistic beliefs. In such circumstances, it has been argued that the axioms of expected utility theory may not be the correct standard of rationality. By contrast, several axiomatic frameworks have recently been proposed that account for ambiguous knowledge. In this paper, we apply static and dynamic versions of a smooth ambiguity model to climate mitigation policy. We obtain a general result on the comparative statics of optimal abatement and ambiguity aversion, and then extend our analysis to a more realistic, dynamic setting, where we introduce scientific ambiguity into the well-known DICE model of the climate-economy system. For policy-relevant exogenous mitigation policies, we show that the value of emissions abatement increases as ambiguity aversion increases, and that this ‘ambiguity premium’ can in some plausible cases be very large. In these cases the effect of ambiguity aversion on welfare is comparable to that of other much studied welfare parameters. Thus ambiguity aversion may be an important neglected aspect of climate change economics, and seems likely to provide another argument for strong abatement policy.     

Greenhouse gas abatement policies and the value of carbon sinks: Do grazing and cropping systems have different destinies?

This paper presents a case study in which the effects of agri-environmental policy on two Mediterranean-type farming systems, grazing dominant and cropping dominant, are contrasted. Two greenhouse gas abatement policies are examined; an emissions taxation policy and an emissions restrictions policy. The study seeks to determine firstly, how the policy impacts on the farming systems, and from that, how the nature of the farming systems impact on the effectiveness of the policy. It is shown that relative costs of abatement are higher for the grazing-dominant farming system. However, in the absence of technological change to aid abatement, the cost of substitution from high emitting enterprises, such as livestock, to low emitting enterprises, such as crop production, will determine the cost of abatement. For both farming systems the restriction policy is found to be more effective and economically efficient than the taxation policy. The analysis found that crediting trees as carbon sinks can significantly reduce the costs of abatement. At predicted emissions permit prices, trees would be adopted by both farming systems to offset farm greenhouse gas emissions.     

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.