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Foreword

The greenhouse effect: economic challenges Roger Guesnerie Collège de France and Paris School of Economics. Foreword. Foreword From a relatively « new entrant » on the subject Trough Government consulting, not Theory A eigtheen month study, Policy report to the French Prime Minister

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Foreword

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  1. The greenhouse effect: economic challenges Roger GuesnerieCollège de France and Paris School of Economics.

  2. Foreword • Foreword • From a relatively « new entrant » on the subject • Trough Government consulting, not Theory • A eigtheen month study, • Policy report to the French Prime Minister • « Kyoto et les enjeux économiques de l’effet de serre »,La Documentation Française 2003. • A subject • Fascinating for everybody • For theorists…. • Plan : • A brief reminder..of the greenhouse effect. • A subjective walk in related and unsatisfqctorily resolved theory problems (with some advertisement for my own investigations). • This lecture : institutional design.

  3. The greenhouse effect : a reminder. • Increase in concentration of greenhouse gases in the atmosphere: • Beginning with the industrial revolution • Human responsibility « Anthropogenic» • For CO2, use of fossil fuels…:oil, gas, coal. • Associated with development • Concentration is going to increase spectacularly. • 1800 : 270 ppmv • 2000 : 360 ppmv • 2100 : 450, 550, 750 ppmv

  4. The diagnosis : sectoral origins

  5. The diagnosis :Emissions across the world. • C02 Emission: • 7 GT C per year • 1 T/capita • Emission variability. • 6 T/capita USA • 0.3 T India • 2.3 T Europe. 1,7 T France • Development linked.

  6. The diagnosis : concentrations • Characteristics : • Cumulative, (Stock) • Weak reversibility. • Concentration • Climate. • Worrying Extrapolations. • 3.5+-1.5 degrees. • Compare with the ice age

  7. Diagnosis :Climate and GES concentration • The Link • Troubling Parallelism. • Theoretically and historically established. • other factors of climate variability, • Models forecasts for 2100 • Significant temp.increases. • Great variability (1,5 à 6,5) • Economic scenario, modelling • 3.5+-1.5, BAU • Major effects/ 2100, « surprises » after (thermo-aline cic.,  permafrost »..)

  8. The economics of the greenhouse effect • In some dimension, a standard problem • Quality of climate : a « global » public good. • The questions are standard • To act or not to act, When to act, How to act.. • In fact, non standard dimensions • Time horizon … • Huge uncertainties • On effects : climate or economic • On abatement costs • Possibly strong irreversibilities • « Nature of the Government » • No government, governance problems. • Limits /economic argument. • Dependant on the climate diagnosis • External Limits. • Moral and metaphysical dimension (H. Jonas) • Intergenerational Equity.

  9. Costs of climate policies. • How to reduce CO2 emissions ? • Pre-industrial life style. • Or ? • Economic Actions. • Decrease consumption of fossil fuels. • Saving energy. • Improving energy efficiency. • Using less carbonized techniques. • Electricity : gaz instead of coal. • Using decarbonized techniques • Changes • in production • At the final demand level • how ?

  10. Snapshots of specific difficulties. • Objectives : • Stress inadequacies of standard theory. • A selective overview… • The selected fields. • Institutional design 1. • The participation issue. • Long run discount rates. • Institutional design 2. • The « prices versus quantities » issue.

  11. Institutional design : Kyoto and post Kyoto How to trigger cooperation and induce LDC to participate ?

  12. The simple economics of internalizing externalities. • The model : • Amount of depollution q • 2(n) firms. • Marginal cost curves. • Rules : • uniform quotas. • The economic argument • An adequate tax lowers total cost. • The economic instruments. • Tax, subsidy. • Markets for permits • Limits of the equivalence. • profit, • Rights • Information Marginal cost. Tax, subsidy optimum q Uniform quota

  13. Kyoto and Kyoto-compatible schemes. • The Kyoto protocol : key features. • National quotas rigid, based on emissions at a year basis • An international market for permits (exchange of quotas). • Voluntary participation (Annex B). • A simplistic formal model : • without uncertainty, Notation q : emissions abatement. • Nash : • q°(i): Max {U[i, Q°(-i)+q(i)]-C(i,q(i)}, iB • iq°(i)=Q° • Kyoto : • Quotas s(i), iB, q°°(i), • q°°(i) : Max {t°°[(q(i)-s(i)]-C(i,q(i)}, iB • iB s(i)= iB q°°(i)=Q°° • IR ? • Market for permits, world carbon price t°°.

  14. Kyoto and Kyoto-compatible schemes. • Variant 1 : Flexible (or negotiable) quotas : FK • Quotas are bargained • Flexibility reflects exposition, etc… • Variant 2 : Open Kyoto : OK • Non Annex B countries would be given BAU objectives • Reminiscent of GPGP…,, • Pershing, Philibert, One sided/non binding • Triggering participation ? … • Variant 3 : OFK Mixes both F and K.

  15. Kyoto compatible schemes and others. • To compare with : • GPGP : the scheme. (Bradford D) • Fixed initial contributions from voluntary countries. • Business As Usual (BAU) level of emissions for all countries • Complex,… contingent assesment. • Even for non participants (generous). • An agency (International Bank for Emissions. Allowances), buys reductions from BAU. • Harmonized taxation.

  16. Formal definitions. • Open Flexible Kyoto. • Quotas s(i), iB, q**(i), • q**(i): Max {t**[(q(i)-s(i)]-C(i,q(i)}, iB • q*(i): Max {t**(q(i)-C(i,q(i)}, iNB • iBs(i)=iq**(i)=Q** • GPGP : • Fixed Contributions F(i), iB, q*(i), • q*(i): Max {U[i, Q*(-i)+q(i)]+t*(q(i)-C(i,q(i)}, iB • q*(i): Max {t*(q(i)-C(i,q(i)}, iNB • iBt*q*(i)+ iNBt*q*(i)= iBF(i)

  17. Formal definitions • FOK • Quotas s(i), iB, q**(i), • q**(i): Max {t**[(q(i)-s(i)]-C(i,q(i)}, iB • q*(i): Max {t**(q(i)-C(i,q(i)}, iNB • iBs(i)=iq**(i)=Q**. • IR • Harmonised taxation : • q°’(i) : Max {t°’[(q(i)]-C(i,q(i))}, iB •  iI q°’(i)=Q°’ • Welfare : U(i, Q°’)-C(i, q°’(i))

  18. Questions for the comparison.. • Participation : short run • A limited viewpoint/ participation of non-Annex B countries. • Effects on efficiency and ..participation of Annex B countries. • Participation : long run aspects. • « Dynamic » participation, • The « ratchet effect ». • « Full Stability » issues • Efficiency issues : • Prices versus quantities. • Taxation and the prices of fossil fuel. • Etc…

  19. Comparing GPGP and Kyoto variants : 1- short run participation. RG « The design post Kyoto climate schemes : an introductory analytical assesment »(2006) • An equivalence « Theorem » ? : • Is GPGP « essentially » identical to OFK ? • The  « game form  », the characteristics function, .. • Connections : • Given FOK,  a (family) of GPGP/ same total abatment (welfare of non annex B countries is lower) • In some cases, Annex B welfare is higher • Similar cost functions, similar B preferences • Given a GPGP equilibrium,  an OFK / same total abatment (welfare of non annex B countries is higher).

  20. Comparing GPGP and Kyoto variants : 3- Coalitional Stability. • The full stability problem is much more complex : • The Core is empty : • non excludable public good. • Free riding. • What is the arrangement more conducive to global effort in a given bargaining situation ? • HT does not solve LDC participation • If LDC are involved the tax instrument is less conducive to high level effort, but the arrangements may be more stable between B countries ? • Etc.. • An extensive literature.. • Chandler-Tulkens (2006), Carraro (1999).

  21. Some references. • Aldy, J.E., P. R. Orszag and J. E. Stiglitz, ''(2001) ''Climate Change: An Agenda for Global Collective Action'', Prepared for the conference on ``The Timing of Climate Change Policies'', Pew Center on Global Climate Change, October. • Bradford, D.F. (2001), « Improving on Kyoto: A No Cap but Trade Approach to Greenhouse Gas control » Princeton University. • Chakrovorty U, Magné B. and Moreaux M, (2003) « Energy resource substitution and carbon concentration targets with non stationary needs'', Leerna 31, Université de Toulouse. • Cooper, R., (1998), ''Toward a real global warming treaty'', Foreign Affairs, vol. 77 no 2, March-April C • Carraro C.(1999) ''The Structure of International Agreements on Climate Change''in C. Carraro C. (ed), International Environmental Agreements on Climate Change, Kluwer Academic Publishers, Dordrecht, NL • Chandler L and Tulkens H. (2005) « Stability issues and climate related dynamic externalities »38p

  22. Some references. • Freixas X, Guesnerie R, et Tirole J. (1985) « Planning under incomplete information and the ratchet effect », Review of Economic Studies, LII, 173-191.. • Guesnerie R. (2003) « Les enjeux économiques de l'effet de serre » in «Kyoto et l‘économie de l'effet de serre », sous la direction de R. Guesnerie, La Documentation Française, Paris. • Guesnerie R. ( 2004) « Calcul Economique et Développement Durable », Revue Economique, p.363-382. • Guesnerie R. (2005) ''Assessing Rational Expectations :2- ''Eductive'' stability in economics », MIT Press, 453 P. • Guesnerie R. (2006) The design post Kyoto climate schemes : an introductory analytical assesment ».  • Ha-Duong M, Grubb M et. Hourcade J.C, (1997) ''Influence of socio--economic inertia and uncertainty on optimal CO2-emissions abatment'', Nature, Vol. 390. • Newell, R.G. and W.A. Pizer, (2000), « Regulating Stock Externalities Under Uncertainty », Discussion Paper 99-10, Resources for the Future, Washington DC, February.

  23. Some references. • Nordhaus, W.D, (2002), ''After Kyoto: Alternative Mechanisms to Control Global Warming'', Paper prepared for the meetings of the American Economic Association and the Association of.IEA/SLT(2002)28 • Philibert, C. (2000). ``How could emissions trading benefit developing countries.'' Energy Policy , volume 28, no 13. • Philibert, C., and J. Pershing. (2001). ``Des objectifs climatiques pour tous les pays : les options.'' Revue de l‘Energie 524. • Pizer, W.A., (2001), ''Combining Price and Quantity Control to Mitigate Global Climate Change'', Journal of Public Economics, 85,(3), 409-434. • Rieu J.(2002) ''Politiques nationales de lutte contre le changement climatique et réglementation de la concurrence : le cas de la fiscalité », mimeo. • Weitzman, M. L., (1974) ''Prices vs. Quantities'', Review of Economic Studies, vol.41, October. • Weitzman, M. L., (2000),AER

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