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Energy Journal Issue

The Energy Journal
Volume 30, Special Issue #2

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How Does Climate Policy Affect Technical Change? An Analysis of the Direction and Pace of Technical Progress in a Climate-Economy Model

Carlo Carraro, Emanuele Massetti, Lea Nicita

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-2
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This paper analyses whether and how a climate policy designed to stabilize greenhouse gases in the atmosphere is likely to change the direction and pace of technical progress. The analysis is performed using an upgraded version of WITCH, a dynamic integrated regional model of the world economy. In this version, a non-energy R&D sector, which enhances the productivity of the capital-labor aggregate, has been added to the energy R&D sector included in the original WITCH model. We find that, as a consequence of climate policy, R&D is re-directed towards energy knowledge. Nonetheless, total R&D investments decrease, due to a more than proportional contraction of non-energy R&D. Indeed, when non-energy and energy inputs are weakly substitutable, the overall contraction of the economic activity associated with a climate policy induces a decline in total R&D investments. However, enhanced investments in energy R&D and in the energy sector are found not to �crowd-out� investments in non-energy R&D.

The impact of Treaty nonparticipation on the Costs of Slowing Global Warming

William Nordhaus

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-3
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The Impact of Treaty nonparticipation on the Costs of Slowing Global Warming William Nordhaus* One of the important features of public bads like global warming is that countries face widely disparate incentives to participate in measures to mitigate the impacts.1 In the specific case of global warming, these differences in in�centives reflect differences in income, political structure, environmental attitudes, country size, geography, and perceptions of the eventual damage. For example, Russia may believe that it will benefit from at least limited warming, while India may believe it will suffer significant harm.2 The structures of the Framework Convention on Climate Change and the Kyoto Protocol assign very different responsibilities to high-income and low-income countries. Indeed, the Framework Convention requires only high-income countries to participate, while the Kyoto Protocol excludes major developing countries in principle and the United States in practice.3 A realistic analysis of policy toward global warming, or of any policy that involves coordination among multiple nations, must allow for differing national or sectoral rates of participation in international agreements. It is critical that analysts and policymakers understand the potential costs of allowing incom�plete participation. Are these costs large or small? This is the question to which the present study is addressed.

Cross Border Trading and Borrowing in the EU ETS

A. Denny Ellerman and Raphael Trotignon

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-4
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Cross Border Trading and Borrowing in the EU ETS A. Denny Ellerman* and Raphael Trotignon** This paper exploits a little used data resource within the central registry of the European Union�s Emissions Trading System (EU ETS) to analyze cross border trading and inter-year borrowing during the first trading period (2005- 2007). Cross-border flows were small in the aggregate but remarkably frequent in matching allowance deficits and surpluses at the installation level throughout the EU. These data also indicate that a novel feature of the EU ETS�the ability to borrow allowances from the forward allocation to satisfy current compliance requirements�was also used. These data provide evidence that the precondition of efficient abatement in a cap-and-trade system�widespread use of trading opportunities�was present in the first period of the EU ETS.

The Role of Emission Trading in Domestic Climate Policy

Michael Hanemann

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-5
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This paper focuses on two specific issues in the design of a domestic cap and trade program for GHGs � whether the cap should be located upstream or downstream, and whether trading alone will suffice to achieve the desired reduction in GHGs or will need to be supplemented with additional regulatory measures. The paper argues for a downstream cap accompanied by measures such as a renewable portfolio standard, efficiency standards for vehicles, appliances and buildings, and a low carbon fuel standard. For this argument, it is necessary to address both the theory and the empirical evidence of emission trading. After reviewing the theory, the paper examines the actual experience in the U.S. with emission trading for SO2, to see whether the assumptions used in the theory actually applied in practice. What actually happened deviated in several important respects from what was supposed to happen according to the conventional theorizing. The design of a cap and trade program for GHG is then discussed, first considering the similarities between the past regulation of air pollutants and the challenge posed by GHGs, and then making the case for a downstream cap and complementary policies.

Market Power in Pollution Permit Markets

Juan-Pablo Montero

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-6
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As with other commodity markets, markets for trading pollution permits have not been immune to market power concerns. In this paper, I survey the existing literature on market power in permit trading but also contribute with some new results and ideas. I start the survey with Hahn�s (1984) dominant-firm (static) model that I then extend to the case in which there are two or more strategic firms that may also strategically interact in the output market, to the case in which current permits can be stored for future use (as in most existing and proposed market designs), to the possibility of collusive behavior, and to the case in which permits are auctioned off instead of allocated for free to firms. I finish the paper with a review of empirical evidence on market power, if any, with particular attention to the U.S. sulfur market and the Southern California NOx market.

Neoclassical Growth, Environment and Technological Change: The Environmental Kuznets Curve

Santiago J. Rubio, Jose L. Garcia and Jose L. Hueso

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-7
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This paper investigates socially optimal patterns of economic growth and environmental quality in a neoclassical growth model with endogenous technological progress. In the model, environmental quality has a positive effect not only on utility but also on production. Moreover, cleaner technologies can be used in the economy if a part of the output is used in environmentally oriented R&D. In this framework, if the initial level of capital is low, then the shadow price of a cleaner technology is low in relation to the cost of developing it, given by the marginal utility of consumption, and it is not worth investing in R&D. Thus, there will be a first stage of growth based only on the accumulation of capital with environmental quality decreasing until there is enough pollution to make investing in R&D profitable. After this turning point, if the new technologies are efficient enough, the economy can evolve along a balanced growth path with increasing environmental quality. The result is that the optimal investment pattern supports an environmental Kuznets curve.

Soft Fiscal Policies for a Polluting Monopolist

Manel Antelo and Maria L. Loureiro

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-8
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This paper examines optimal environmental taxation in an incomplete-information two-period model in which a monopolistic firm produces and pollutes. The firm is privately informed about its costs of production and abatement, and the regulator � which can only infer the firm�s technology after observing the output from the period 1 � has the chance to set environmental taxes in period 1 to correct the firm�s opportunistic behavior. The regulator is aware that the polluter may strategically choose a given level of production (and pollution) in period 1 in order to manipulate the regulator�s beliefs concerning its technology and, consequently, adjusts the tax paid in period 2. We show that if the regulator reduces pollution taxes in the first period below the level under symmetric information, then the clean firm will signal its type by further reducing its output. Having gathered information from the firm with respect to its technology and emissions, the regulator raises pollution taxes in the second period. In the light of the present results, soft fiscal policies based on initial low-taxes, which are later increased, may be used in the presence of asymmetric information to provide incentives for a firm to reveal its true level of emissions and mitigate opportunistic behavior.

Disentangling The Effects of oil Shocks: The Role of Rigidities and Monetary Policy

Carlos de Miguel , Baltasar Manzano, Jose M. Martin-Moreno and Jesus Ruiz

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-9
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Using a new Keynesian, stochastic, dynamic model of a small open monetary economy that imports oil and applying it to the Spanish economy, this paper addresses the question of why the effects of oil shocks from the mid-1980�s on output and inflation were smaller. We depart from the previous literature on this topic by simulating a theoretical model whose parameters are estimated using Kalman Filter techniques. The paper is particularly appealing to study the effects of high energy prices, which would be associated to climate change policies, and to the feedback effects of those policies on the economy. The results of the paper support the hypothesis of smaller macroeconomic effects of oil shocks from the mid-1980�s. The results emerge from the different features of the economy: both labor market rigidities and the oil share have decreased over time and the monetary policy has changed in that it is more focused on controlling inflation.

An Integrated Approach to Simulate the impacts of Carbon Emissions Trading Schemes

Xavier Labandeira, Pedro Linares and Miguel Rodriguez

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-10
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The present paper aims to reliably depict the impact of the European Union Emissions Trading Scheme (EU ETS) on Spain under different assumptions about the industries involved. Prior analyses, based either on highly aggregated macroeconomic or specific electricity industry models, have been limited in degree of detail or scope. Two types of modeling were combined in the present study: general equilibrium was used to assess the impact on different industries and to explain cross-industry changes, and partial equilibrium to suitably model the complex and crucial electricity system. Combining and interrelating these two models yields the effects on price, carbon dioxide (CO2) emissions and distributional patterns in Spain of both the current policy and of an alternative in which all industries take part in the EU ETS. Since Spain is a key participant in this scheme, the conclusions and policy implications stemming from this paper are relevant to and useful for post-Kyoto arrangements.