CO2 Emissions with Lobbying and Technological Change

1. CO2 Emissions with Lobbying and Technological Change Paper for ``Symposium on Energy and CO” Emissions”, Sonderborg, August 18-19, 2009 Tapio Palokangas University of Helsinki and HECER

2. Abstract I examine environmental policy when production hurts welfare through CO2 emissions, but entrepreneurs can improve their efficiency by R&D. I compare laissez-faire with the cases where entrepreneurs lobby a central planner which grants nontraded or traded CO2 permits. If labor and emissions are complementary, the results are the following. The use of nontraded permits decrease emissions relative to laissez-faire. In the case of traded permits, emissions are smaller than in the case of laissez-faire, but larger than in the case of nontraded permits when households dislike CO2 emissions very much.

3. Introduction 1 In this study, I assume that production involves CO2 emissions, but that every entrepreneur can improve its efficiency and decrease its CO2 emissions by research and development (R&D) which has a random outcome. In particular, I examine the following cases of environmental policy:

4. Introduction 2

5. Literature • Corsetti(1997), Smith (1996), Turnovsky (1995,1999) • consider public policy by a growth model where productivity shocks follows a Wiener process. • Soretz(2003) • applies that approach to environmental policy. • Palokangas (2008) examines an economy • which involve emissions in fixed proportion to labor in production • in which uncertainty is embodied in technological change in the form of Poisson processes. • Pareto-optimal taxes for the member regions. • In this paper, I modify Palokangas' (2008) model so that • laborand emissions are different inputs in production • the central planner is self-interested

6. The economy 1

7. The economy 2

8. The economy 3

9. The economy 4

10. Production 1

11. Production 2

12. Research and development

13. Laissez-faire 1

14. Laissez-faire 2

15. Paretooptimum

16. Lobbyingovernontradedpermits 1

17. Lobbyingovernontradedpermits 2

18. Lobbyingovernontradedpermits 3

19. Lobbyingovernontradedpermits 4

20. Lobbyingovernontradedpermits 5

21. Lobbyingovernontradedpermits 6

22. Lobbyingovertradedpermits 1

23. Lobbyingovertradedpermits 2

24. Lobbyingovertradedpermits 3

25. Lobbyingovertradedpermits 4

26. Lobbyingovertradedpermits5

27. Lobbyingovertradedpermits6

28. Conclusions 1 A higher level of centralization decreases the level of output, but increases the growth rate, decreases the exploitation of environment and reduces CO2 emissions, when labor and CO2 emissions are gross complements. Interpretation: The centralization of environmental policy helps to internalize the effect of the use of environment. In that case, a entrepreneur decreases the demand for CO2 emissions by transferring resources from production into R&D. This speeds up growth and decreases total emissions.

29. Conclusions 2 The introduction of the central planner, benevolent or self-interested, as a decision maker for CO2 emissions eliminates the externality through CO2 emissions. In that case, lobbying with nontraded permits for the use of environment leads to the Pareto optimal level of emissions. Interpretation: With traded CO2 permits, CO2 emissions are decided at the level of entrepreneurs rather than at the level of the economy and the externality through CO2 emissions cannot be internalized. In that case, there are less incentives to transfer labor from production into R&D. Furthermore, CO2 emissions increase, when they are gross complements to labor and the households dislike them very much.