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The Transition to Endogenous Technical Change in Climate-Economy Models: A Technical Overview to the Innovation Modeling Comparison Project

Jonathan Kohler, Michael Grubb, David Popp and Ottmar Edenhofer 

Year: 2006
Volume: Endogenous Technological Change
Number: Special Issue #1
DOI: 10.5547/ISSN0195-6574-EJ-VolSI2006-NoSI1-2
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Abstract:
This paper assesses endogenous technical change (ETC) in climate-economy models, using the models in the Innovation Modeling Comparison Project (IMCP) as a representative cross-section. ETC is now a feature of most leading models. Following the new endogenous growth literature and the application of learning curves to the energy sector, there are two main concepts employed: knowledge capital and learning curves. The common insight is that technical change is driven by the development of knowledge capital and its characteristics of being partly non-rival and partly non-excludable. There are various different implementations of ETC. Recursive CGE models face particular difficulties in incorporating ETC and increasing returns. The main limitations of current models are: the lack of uncertainty analysis; the limited representation of the diffusion of technology; and the homogeneous nature of agents in the models including the lack of representation of institutional structures in the innovation process.



Induced Technological Change: Exploring its Implications for the Economics of Atmospheric Stabilization: Synthesis Report from the Innovation Modeling Comparison Project

Ottmar Edenhofer, Kai Lessmann, Claudia Kemfert, Michael Grubb and Jonathan Kohler 

Year: 2006
Volume: Endogenous Technological Change
Number: Special Issue #1
DOI: 10.5547/ISSN0195-6574-EJ-VolSI2006-NoSI1-3
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Abstract:
This paper summarizes results from ten global economy-energy-environment models implementing mechanisms of endogenous technological change (ETC). Climate policy goals represented as different CO2 stabilization levels are imposed, and the contribution of induced technological change (ITC) to meeting the goals is assessed. Findings indicate that climate policy induces additional technological change, in some models substantially. Its effect is a reduction of abatement costs in all participating models. The majority of models calculate abatement costs below 1 percent of present value aggregate gross world product for the period 2000-2100. The models predict different dynamics for rising carbon costs, with some showing a decline in carbon costs towards the end of the century. There are a number of reasons for differences in results between models; however four major drivers of differences are identified. First, the extent of the necessary CO2 reduction which depends mainly on predicted baseline emissions, determines how much a model is challenged to comply with climate policy. Second, when climate policy can offset market distortions, some models show that not costs but benefits accrue from climate policy. Third, assumptions about long-term investment behavior, e.g. foresight of actors and number of available investment options, exert a major influence. Finally, whether and how options for carbon-free energy are implemented (backstop and end-of-the-pipe technologies) strongly affects both the mitigation strategy and the abatement costs.



Mitigation Strategies and Costs of Climate Protection: The Effects of ETC in the Hybrid Model MIND

Ottmar Edenhofer, Kai Lessmann, Nico Bauer

Year: 2006
Volume: Endogenous Technological Change
Number: Special Issue #1
DOI: 10.5547/ISSN0195-6574-EJ-VolSI2006-NoSI1-10
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Abstract:
MIND is a hybrid model incorporating several energy related sectors in an endogenous growth model of the world economy. This model structure allows a better understanding of the linkages between the energy sectors and the macro-economic environment. We perform a sensitivity analysis and parameter studies to improve the understanding of the economic mechanisms underlying opportunity costs and the optimal mix of mitigation options. Parameters representing technological change that permeates the entire economy have a strong impact on both the opportunity costs of climate protection and on the optimal mitigation strategies e.g. parameters in the macro-economic environment and in the extraction sector. Sector-specific energy technology parameters change the portfolio of mitigation options but have only modest effects on opportunity costs e.g. learning rate of the renewable energy technologies. We conclude that feedback loops between the macro-economy and the energy sectors are crucial for the determination of opportunity costs and mitigation strategies.



ADAM's Modeling Comparison Project - Intentions and Prospects

Ottmar Edenhofer , Brigitte Knopf, Marian Leimbach and Nico Bauer

Year: 2010
Volume: Volume 31
Number: Special Issue
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-NoSI-1
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Abstract:
Despite of the failure of the Copenhagen Summit in December 2009 the world will move forward with plans to limit greenhouse gas emissions much more aggressively than before. The Copenhagen Accord makes reference to the 2�C target as a potential goal for global climate protection. Moreover, it indicates that this goal will be evaluated by 2015 including a consideration of strengthening the long-term goal, referencing various matters presented by science. It seems that the scientific debate on the feasibility of a high chance of achieving the 2�C target will become important over the next few years. It is open to debate as to which extent such a low stabilization target can technically be achieved and at what costs. Therefore, a good understanding of all the major mitigation cost projections is of the utmost importance.



The Economics of Low Stabilization: Model Comparison of Mitigation Strategies and Costs

Ottmar Edenhofer , Brigitte Knopf, Terry Barker, Lavinia Baumstark, Elie Bellevrat, Bertrand Chateau, Patrick Criqui, Morna Isaac, Alban Kitous, Socrates Kypreos, Marian Leimbach, Kai Lessmann, Bertrand Magne, Serban Scrieciu, Hal Turton, Detlef P. van Vuuren

Year: 2010
Volume: Volume 31
Number: Special Issue
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-NoSI-2
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Abstract:
This study gives a synthesis of a model comparison assessing the technological feasibility and economic consequences of achieving greenhouse gas concentration targets that are sufficiently low to keep the increase in global mean temperature below 2 degrees Celsius above pre-industrial levels. All five global energy-environment-economy models show that achieving low greenhouse gas concentration targets is technically feasible and economically viable. The ranking of the importance of individual technology options is robust across models. For the lowest stabilization target (400 ppm CO2 eq), the use of bio-energy in combination with CCS plays a crucial role, and biomass potential dominates the cost of reaching this target. Without CCS or the considerable extension of renewables the 400 ppm CO2 eq target is not achievable. Across the models, estimated aggregate costs up to 2100 are below 0.8% global GDP for 550 ppm CO2 eq stabilization and below 2.5% for the 400 ppm CO2 eq pathway.



Technological Change and International Trade - Insights from REMIND-R

Marian Leimbach, Nico Bauer, Lavinia Baumstark, Michael Luken and Ottmar Edenhofer

Year: 2010
Volume: Volume 31
Number: Special Issue
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-NoSI-5
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Abstract:
Within this paper, we explore the technical and economic feasibility of very low stabilization of atmospheric GHG concentration based on the hybrid model REMIND-R. The Fourth Assessment Report of the IPCC and the scientific literature have analyzed some low stabilization scenarios but with as yet little attention being given to the regional distribution of the global mitigation costs. Our study helps to fill this gap. While we examine how technological development and international trade affect mitigation costs, this paper is novel in addressing the interaction between both. Simulation results show for instance that reduced revenues from fossil fuel exports in a low stabilization scenario tend to increase mitigation costs borne by the exporting countries, but this impact varies with the technology options available. Furthermore it turns out that the use of biomass in combination with carbon capturing and sequestration is key in order to achieve ambitious CO2 reduction targets. Regions with high biomass potential can clearly benefit from the implementation of low stabilization scenarios due to advantages on the carbon market. This may even hold if a reduced biomass potential is assumed.



Managing the Low-Carbon Transition - From Model Results to Policies

Brigitte Knopf, Ottmar Edenhofer, Christian Flachsland, Marcel T. J. Kok, Hermann Lotze-Campen, Gunnar Luderer, Alexander Popp, Detlef P. van Vuuren

Year: 2010
Volume: Volume 31
Number: Special Issue
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-NoSI-9
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Abstract:
Model analysis within the ADAM project has shown that achieving low greenhouse gas concentration levels, e.g. at 400ppm CO2-eq, is technologically feasible at costs of a few percent of GDP. However, models simplify the dynamics involved in implementing climate policy and the results depend on critical model assumptions such as global participation in climate policy and full availability of current and newly evolving technologies. The design of a low stabilization policy regime in the real world depends on factors that can only be partly covered by models. In this context, the paper reflects on limits of the integrated assessment models used to explore climate policy and addresses the issues of (i) how global participation might be achieved, (ii) which kind of options are available to induce deep GHG reductions inside and outside the energy sector, and (iii) which risks and which co-benefits of mitigation options are not assessed by the models.



Investments in Imperfect Power Markets under Carbon Pricing: A Case Study Based Analysis

Michael Pahle, Kai Lessmann, Ottmar Edenhofer, and Nico Bauer

Year: 2013
Volume: Volume 34
Number: Number 4
DOI: 10.5547/01956574.34.4.10
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Abstract:
This article addresses the question of how investments in imperfectly competitive electricity markets interact with a price on carbon. The analysis is based on a dynamic numerical Cournot model calibrated to the German market and focuses on (a) the level of investments and technology choice and (b) welfare impacts under optimal carbon pricing. As a special feature, we also restrict access to one technology (coal) to strategic players ("technological market power"). The main results are: (a) In the long-run prices reach competitive levels due to entry by the competitive fringe. If technological market power prevails, this can only be accomplished through high carbon prices. (b) Investment levels and technology choice show different patterns under market power and perfect competition. (c) Apart from driving investments, carbon pricing also renders old carbon-intensive capacities unprofitable and thus induces more extensive fleet turnover. (d) Welfare almost always increases as a result of carbon pricing.



Why Wind Is Not Coal: On the Economics of Electricity Generation

Lion Hirth, Falko Ueckerdt, and Ottmar Edenhofer

Year: 2016
Volume: Volume 37
Number: Number 3
DOI: 10.5547/01956574.37.3.lhir
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Abstract:
Electricity is a paradoxical economic good: it is highly homogeneous and heterogeneous at the same time. Electricity prices vary dramatically between moments in time, between location, and according to lead-time between contract and delivery. This three-dimensional heterogeneity has implication for the economic assessment of power generation technologies: different technologies, such as coal-fired plants and wind turbines, produce electricity that has, on average, a different economic value. Several tools that are used to evaluate generators in practice ignore these value differences, including "levelized electricity costs", "grid parity", and simple macroeconomic models. This paper provides a rigorous and general discussion of heterogeneity and its implications for the economic assessment of electricity generating technologies. It shows that these tools are biased, specifically, they tend to favor wind and solar power over dispatchable generators where these renewable generators have a high market share. A literature review shows that, at a wind market share of 30-40%, the value of a megawatt-hour of electricity from a wind turbine can be 20-50% lower than the value of one megawatt-hour as demanded by consumers. We introduce "System LCOE" as one way of comparing generation technologies economically.





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