Climate Policy

Growth and welfare losses from carbon emissions restrictions: A general equilibrium analysis for Egypt

The authors assess the economic effects in Egypt, under various conditions, of restricting carbon dioxide emissions. They use their model to assess the sensitivity of these effects to alternative specifications: changes in the level or timing of restrictions, changes in the rate of discount of future welfare, and the presence or absence of alternative technologies for generating power. They also analyze a constraint on accumulated emissions of carbon dioxide. Their time model has a time horizon of 100 years, with detailed accounting for every five years, so they can be specific about differences between short- and long-run effects and their implications. However, the results reported here cover only a 60-year period - and are intended only to compare the results of generic,"what if?"questions, not as forecasts. In that 60-year period, the model economy substantially depletes its hydrocarbon reserves, which are the only non produced resource. The authors find that welfare losses due to the imposition of annual restrictions on the rate of carbon dioxide emissions are substantial - ranging from 4.5 percent for a 20 percent reduction in annual carbon dioxide emissions to 22 percent for a 40 percent reduction. The effects of the annual emissions restrictions are relatively nonlinear. The timing of the restrictions is significant. Postponing them provides a longer period for adjustment and makes it possible to continue delivering consumption goods in a relatively unconstrained manner. The form of emissions restrictions is also important. Welfare losses are much higher when constraints are imposed on annual emissions rates rather than on total additions to the accumulation of greenhouse gases. Conventional backstop technologies for maintaining output and consumption - cogeneration, nuclear power, and gas-powered transport - are more significant than unconventional"renewable"technologies,which cannot compete for cost.

Beyond Emissions Paths: Rethinking the Climate Impacts of Emissions Protocols in an Uncertain World

As nations engage in the long-term process of negotiating a protocol on controlling greenhouse gas emissions, the danger of costly mistakes looms large, both from doing too little or too much. Researchers try to provide insight and guidance on this difficult problem, many relying on the tools of mathematical simulation models, but two important shortcomings remain in much of the current analysis. One is the treatment of the uncertainty inherent in projections of economic activity over the next century or more; and the other is the way economic activity is modeled to impact the poorly understood physical and biological systems of the earth.
    This paper presents several simple illustrations of the performance of current policy proposals in the face of a long-term climate-based goal when uncertainties in economic growth and technology development are made explicit. Several conclusions emerge. Analyses that rely on deterministic emissions paths through time obscure the underlying uncertainties, and explicitly incorporating these uncertainties can produce qualitatively different conclusions. Moreover, apparent differences in the climate impacts of proposals now being debated within the Framework Convention on Climate Change may be negligible when viewed in the light of likely uncertainties. Seeking a less stringent protocol with a higher probability of compliance may thus produce preferable outcomes. Most importantly, the analyses presented are meant to highlight the need for flexibility in any response to climate change, because uncertainty is an unavoidable aspect of the problem.

Cap and Trade Policies in the Presence of Monopoly and Distortionary Taxation

We extend an analytical general equilibrium model of environmental policy with pre-existing labor tax distortions to include pre-existing monopoly power as well. We show that the existence of monopoly power has two offsetting effects on welfare. First, the environmental policy reduces monopoly profits, and the negative effect on income increases labor supply in a way that partially offsets the pre-existing labor supply distortion. Second, environmental policy raises prices, so interaction with the pre-existing monopoly distortion further exacerbates the labor supply distortion. This second effect is larger, for reasonable parameter values, so the existence of monopoly reduces the welfare gain (or increases the loss) from environmental restrictions.

Carbon Emissions and The Kyoto Commitment in the European Union

We estimate reference CO2 emission projections in the European Union, and quantify the economic impacts of the Kyoto commitment on Member States. We consider the case where each EU member individually meets a CO2 emissions target, applying a country-wide cap and trade system to meet the target but without trade among countries. We use a version of the MIT Emissions Prediction and Policy Analysis (EPPA) model, here disaggregated to separately include 9 European Community countries and commercial and household transportation sectors. We compare our results with that of four energy-economic models that have provided detailed analyses of European climate change policy. In the absence of specific additional climate policy measures, the EPPA reference projections of carbon emissions increase by 14% from 1990 levels. The EU-wide target under the Kyoto Protocol to the Framework Convention on Climate Change is a reduction in emissions to 8% below 1990 levels. EPPA emissions projections are similar to other recent modeling results but there are underlying differences in energy and carbon intensities among the projections. If EU countries were to individually meet the EU allocation of the Community-wide carbon cap specified in the Kyoto Protocol, we find using EPPA that carbon prices vary from $91 in the United Kingdom to $385 in Denmark; welfare costs range from 0.6 to 5%.

Carbon Permit Prices in the European Emissions Trading System: A Stochastic Analysis

The Emission Trading Scheme (ETS) is a cornerstone for European efforts to reduce greenhouse gas emissions, and in its test phase will operate from 2005-2007. It is a cap-and-trade system where an aggregate cap on emissions is set by the respective government agencies to define the total number of emissions allowances. Each allowance gives the owner the right to emit one unit (usually one ton) of emissions. Covered establishments that exceeded the limits may buy emissions credits from entities with allowances they do not need to use themselves. One key feature of this system is that the amount of emissions is capped whereas the permit prices are uncertain. These permit prices are determined by economic conditions, generally, stronger economic growth means a higher permit price.
The objective of this thesis is to understand uncertainty in permit prices under the system, by determining the likelihood that permit prices will fall within a given range. This is accomplished through stochastic analysis simulation of a computable general equilibrium model of the world economy with country-level detail most of the key members of the original 15 member EU plus the 10 accession countries. Economic parameters treated as stochastic in the simulations were labor productivity growth, share of new capital vintaged, the rate of autonomous energy efficiency improvement, the elasticity of substitution between energy and non-energy composites, and oil/gas prices. Information on the likely range of future permit prices will allow operators of covered establishments to decide on the extent to which they should buy permits or invest in emissions reduction technologies possible reducing emissions below their cap, allowing them to sell allowances. While some abatement activities may involve only changes in operation and management of facilities, other may involve longer-term investment. These abatement decisions boil down to basic investment problems. How should entities affected by the ETS plan their investment policies, such that they can minimize costs? To answer this question firms need an estimate of likely future permit prices.
Results were that a zero carbon price occurred with a probability of 28-48% across variants of the Monte Carlo simulations. The mean value for the carbon prices was about $0.40 per ton of carbon, and the maximum price across the variants ranged from about $3.50 to somewhat over $6.00 per ton carbon. The implication for firms is that costly abatement investments appear difficult to justify, except to the extent that firm’s are looking beyond the ETS period when carbon permit prices would rise further.

Causal Reasoning and Goal Setting: A Comparative Study of Air Pollution, Antitrust and Climate Change Policies

Apart from conventional interest-based studies of regulatory policy, the structure of policy design itself is vital to explaining the long-run robustness of policy choices. Causal reasoning and goal setting act as a framework for assessing these choices. Linking policy instruments to the goals they seek to accomplish will be problematic, particularly if linkages are obscured by uncertainties, and inferences are complicated by non-linearities, feedbacks, and differences in the causal inferences drawn by experts and the public. Somewhere in the middle of this causal chain, policy-makers must choose the stages at which to insert both operational goals and policy instruments. Policy choice is rarely a stark one between one causal stage and the next, but instead involves constructing a portfolio of strategies and deciding how to assign relative weights to alternative causal stages without creating too many contradictions or overlaps. In following policy solutions over time, the sequencing of policy design is found to be important in establishing robust policies. Conflicting demands emerge to relate policies to both outcomes and causes, subject to a host of intervening considerations regarding the efficiency of policy choice. These tradeoffs are not static. Causal knowledge that had previously resided only in isolated expert communities will be diffused, albeit slowly and imperfectly, to policy-makers, the judiciary, and the public, leading to changes in perceptions of problems and hence solutions. Policy design that ignores more complicated expert causal

 

(cont.) Moving towards greater reliance on expert knowledge is clearly desirable, the key question this dissertation seeks to explore is the rate at which such a move can be made without threatening the legitimacy of a program. The three cases explored here, air pollution, antitrust, and climate change each presents a different set of actors, forum for regulation, and historical legacy. Each poses a dilemma for policy-makers over how to intervene credibly and effectively. The air pollution case and antitrust cases both offer over a century of experience with policy design over multiple jurisdictions. Lessons from history highlight the importance of: experimenting at early stages; tying goals, not instruments, to outcomes; placing instruments at many different causal stages; introducing expert understandings slowly; and anticipating long delays for adaptation or reform. Finally, the difficult case of climate change is presented and the lessons for causal reasoning and goal setting are applied in the hopes of identifying plausible alternative climate policies.

Climate change policy, market structure, and carbon leakage

The 1997 Kyoto Protocol on climate change obliges the industrialized countries to initiate the international effort of abating anthropogenic greenhouse gas (GHG) emissions. If such an initiative is to be taken, the associated competitive effects may lead to significant relocation of developed countries' energy-intensive production. This paper examines this issue. I adopt an oligopolistic structure combined with increasing returns to scale production technologies to represent the strategic interaction among the firms producing energy-intensive products. This representation is then embedded within a multi-regional computable general equilibrium model, which in turn is used for quantifying these relocational effects. The results suggest that significant relocation of energy intensive industries away from the OECD may occur, depending on the type of market structure, with leakage rates as high as 130%, in which case GHG control policies in the industrialized countries actually lead to higher global emissions.

© 2004 Elsevier

Climate change versus climate policy: An integrated global model analysis

We use the MIT Integrated Global System Model (IGSM), which couples a global climate/chemistry model, a Global Land System for terrestrial hydrology and ecology, and the Emissions Prediction and Policy Analysis (EPPA) model. EPPA is a global, applied general equilibrium model of economic growth, international trade, and greenhouse gas emissions (CO2, CO, CH4, SO2, NOx, N2O, NH3, CFCs, PFCs, HFCs, SF6) from a set of trade-linked economic regions. Holistically, the IGSM is used to analyze the processes that produce greenhouse-relevant emissions, and to assess the climate and economic consequences of policy proposals intended to control these emissions. In conjunction with the recent CCSP exercise, a suite of emission/stabilization scenarios (450, 550, 650, 750 ppm, and BAU) generated by EPPA has been employed. For each of these emission scenarios, we perform a 400-member ensemble simulation with the IGSM, which samples combinations of plausible states of climate sensitivity, ocean heat uptake, precipitation frequency change, and ecosystem fertilization effect. We present results (mainly via PDF analyses) that quantify the range of response of various climate, hydrologic, ecologic and socio-economic sectors, and how various climate policies affect these trajectories.

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