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ZhongXiang Zhang (East-West Center, Honolulu) uses a global model based on marginal abatement cost curves for 12 world regions to estimate the contributions of the three flexibility mechanisms under the Kyoto Protocol, i. e. emissions trading, joint implementation, and the clean development mechanism. He shows how the reduction in compliance costs of industrialized regions depends on the extent to which the flexibility mechanisms will be available. Not surprisingly, the fewer the restrictions on the use of flexibility mechanisms will be, the greater the gains from their use. These gains are unevenly distributed, however, with industrialized regions that have the highest autarkic marginal abatement costs tending to benefit the most. Restrictions on the use of flexibility mechanisms not only reduce the potential of the industrialized regions' efficiency gains, but are also not beneficial to developing countries since they restrict the total financial flows to developing countries under the clean development mechanism. Christoph Bohringer (ZEW, Mannheim), Glenn W. Harrison (University of South Carolina, Columbia), and Thomas F. Rutherford (University of Colorado, Boulder) evaluate the welfare implications of alternative ways in which the EU could distribute its aggregate emission reduction commitment under the Kyoto Protocol across member states. Using a large-scale CGE model, they compare a uniform proportional cutback in emissions and the actual EU burden sharing agreement with an equitable allocation scheme derived from an endogenous burden sharing calculation. The latter equalizes the relative welfare cost across member states.




This book contains the proceedings of an international workshop “Empirical Modeling of the Economy and the Environment” held at the Centre for European Economic Research (ZEW, Mannheim) in June 2001. The workshop was organized on occasion of ZEW’s 10th anniversary and in honor of the 60th birthday of Klaus Conrad (University of Mannheim) who has been affiliated with the Centre since its foundation. The papers presented by internationally reputed experts in the field of environmental economics cover a wide spectrum of issues in environmental regulation.
Christoph Böhringer, Andreas Löschel

Environmental Regulation and Productivity Growth: An Analysis of U.S. Manufacturing Industries

We show that traditional measures of productivity change that ignore the unproductive nature of pollution abatement capital within the production process are likely to underestimate the true productivity gains that most manufacturing industries are able to generate in any given year. While the average bias of traditional measures is not large in absolute terms,the bias can be substantial for industries with relatively large pollution abatement capital expenditures. We also find that environmental regulation has a non-trivial adverse effect on productivity change,lowering productivity growth by roughly 0.3% across all industries,and by more than 1% for some industries.
Daniel L. Millimet, Thomas Osang

Environmental Regulation and Competitiveness: An Exploratory Meta-Analysis

The relationship between domestic environmental regulation and international competitiveness has evoked various speculations. The common neoclassical train of thought is that strict environmental regulation is detrimental to the competitiveness of industry,and that it induces phenomena such as ecological dumping,ecological capital flight,and regulatory `chill’ in environmental standards. A different view is that strict environmental regulation triggers industry’s innovation potential,and subsequently increases its competitiveness. The impact of environmental regulation on competitiveness has been analyzed in terms of international capital movements,new firm formation,and international trade. The paper presents a statistically supported evaluation of the literature,in order to assess what the main conclusions regarding the relationship between environmental regulation and competitiveness are when it comes to studies on international trade flows. The synthesis of the literature is subsequently used to present guidelines for future primary research in this area.
Abay Mulatu, Raymond J. G. M. Florax, Cees A. Withagen

Trade, Technology, and Carbon Emissions: A CGE Analysis for West Germany

This paper examines the determinants of the substantial decline of West German production-related carbon intensity in the face of falling energy prices. A computable general equilibrium model is used to determine the simulated effects of observed changes of world energy prices and domestic energy policy on the sectoral patterns of carbon emissions energy consumption output value added and other indicators of structural change. The structural changes not accounted for by energy prices and energy policy are attributed to changing patterns of productivity growth in Germany and the rest of the world (ROW) and changing patterns of ROW demand. Weights on these driving forces are selected by least squares. One key finding is that the contribution of ROW productivity and demand patterns to emission-relevant structural change unaccounted for by energy prices and energy policy is just under 30%. The remainder is split almost equally among patterns of domestic autonomous energy efficiency improvement and domestic labor efficiency patterns.
Heinz Welsch

Environmental Policies in Open Economies and Leakage Problems

Pollution leakage is an important issue when countries address international environmental problems unilaterally. Leakage in this context is the increase in foreign emissions after a reduction in domestic emissions which results from international market interdependencies. In this paper,1 consider two markets,the first one for a polluting input (e.g. energy) and the second one for internationally mobile capital. Leakage is decomposed into its two components and the magnitudes of the effects are determined for a calibrated version of the model. Towards the end of the paper,normative questions related to the optimality of environmental policies are addressed.
Michael Rauscher

Pollution Charges and Incentives

Most investigations of the consequences of environmental policies and Pigouvian taxes (pollution charges,in particular carbon taxes) using CGE models reveal an only modest impact on economic activity; some report even positive economic side effects. Yet the slowdown in economic growth and in particular of productivity,see Conrad and Wastl (1995),suggest a stronger and negative influence in particular if one accounts for the fortunately very low energy prices that accompanied the ambitious goals of environmental policies in the late 1980s and the 1990s. This paper attempts to explain this apparent difference. In particular it will be shown that environmental policies,here investigated for pollution charges,call for a modification of incentives such that the power of optimal incentives is reduced to which workers will respond with less effort. This friction,which may add up to significant numbers for the economy at large,is neglected in both the theoretical literature and in the application of CGE-models. Accounting for this friction and the empirical evidence so far suggests to take the optimistic findings concerning the consequences of environmental policies on economic growth at least cum grano salis.
Franz Wirl

An Economic Assessment of the Kyoto Protocol Using a Global Model Based on the Marginal Abatement Costs of 12 Regions

The Kyoto Protocol incorporates emissions trading,joint implementation,and the clean development mechanism to help Annex 1 countries to meet their Kyoto targets at a lower overall cost. Using a global model based on the marginal abatement costs of 12 countries and regions,this paper estimates the contributions of the three Kyoto flexibility mechanisms to meet the total greenhouse gas emissions reductions required of Annex 1 countries under the three trading scenarios respectively. Our results clearly demonstrate that the fewer the restrictions on the use of flexibility mechanisms the gains from their use are greater. The gains are unevenly distributed,however,with Annex 1 countries that have the highest autarkic marginal abatement costs tending to benefit the most. Our results also indicate that restrictions on the use of flexibility mechanisms not only reduce potential of the Annex 1 countries’ efficiency gains,but also are not beneficial to developing countries because they restrict the total financial flows to developing countries under the clean development mechanism.
ZhongXiang Zhang

Sharing the Burden of Carbon Abatement in the European Union

We evaluate the welfare implications of alternative ways in which the EU could distribute its aggregate emission reduction commitment under the Kyoto Protocol across member states. An endogenous burden sharing calculation, in which the welfare costs across member states are equalized, differs substantially from uniform proportional cutbacks as well as the specific burden sharing rule actually adopted by the EU.
Christoph Böhringer, Glenn W. Harrison, Thomas F. Rutherford

Banking and Trade of Carbon Emission Rights: A CGE Analysis

This paper analyses trading and banking of carbon emission rights. Within the framework of a modestly simple,integrated assessment model that breaks the world economy in just two regions,North and South,it can be shown: (1) There exists separability between environmental targets and the choice of instruments. Increasing the “when and where” flexibility in greenhouse gas abatement either through banking or trading of carbon emission permits or both positively affects global welfare. It has,however,almost no impact on global climate change. (2) Depending upon the choice of instruments there are significant distributional effects across regions. Both regions can improve welfare simultaneously,if carbon emission rights are traded on open international markets. But if it were feasible to bank or borrow carbon permits,then — independent of whether there is trading of carbon rights or not — the South suffers welfare losses compared to a No-Trade-No-Banking situation.
Gunter Stephan, Georg Müller-Fürstenberger

Cost-Efficiency Methodology for the Selection of New Car Emission Standards in Europe

In the Auto-Oil Programme,the European Commission looks for emission limits for cars such that the urban air quality targets are reached at minimum cost. This optimization problem was solved by Degraeve et al. (1998). In this paper we deal with two methodological problems in this cost efficiency approach. We study first what is known as the overachievement problem in cost-effectiveness analysis. In a pure cost-efficiency approach,there is a tendency to understate the merits of federal regulatory measures: Because these measures are uniform they will always do more than required in some regions. We prove this and show how this problem can be solved using minimum information on the benefits of environmental improvements. The second problem we study is the implementation problem of local measures. From a European wide perspective,it may be cost-efficient that some regions take local measures but this is not necessary in the interest of these regions when there is transfrontier pollution. When this behavioral constraint is taken into account,the cost efficient bundle will change. We show how these two considerations affect the selection of optimal emission standards for cars in Europe.
Zeger Degraeve, Stef Proost, Gunther Wuyts

Commitment and Time Consistency of Environmental Policy and Incentives for Adoption and R&D

In this paper we survey recent developments on the incentives through environmental policy instruments to adopt advanced abatement technology. We further investigate repercussions on R&D. First we study the case where the regulator makes long-term commitments to policy levels and does not anticipate the arrival of new technology. We show that taxes provide stronger incentives than permits,auctioned and free permits offer identical incentives,and standards may give stronger incentives than permits. Second,we investigate scenarios where the regulator anticipates new technologies. We show that with taxes and permits the regulator can induce first-best outcomes if he moves after firms have invested,whereas this does not always hold if he moves first. Third,we consider a model where a polluting downstream industry is regulated either by emission taxes or by tradable permits. A separate monopolistic or duopolistic upstream industry engages in R&D and,in case of R&D success,sells an advanced abatement technology to the downstream firms. We study three different timings of environmental policy,ex post taxation (or issuing permits),ex interim commitment to a tax rate (a quota of permits) after observing R&D success but before adoption,and finally ex ante commitment before and independent of R&D success. We show that ex interim commitment always dominates ex post environmental policy. Moreover,ex interim second best taxation dominates ex interim second best optimal permit policy. There is no unique ranking,however,between ex ante and ex interim commitment. Finally we sketch ways to generalize the model to upstream duopoly.
Till Requate

Ecological Tax Reform and Efficiency of Taxation: A Public Good Perspective

Revenue-neutral ecological tax reforms are known to yield a green dividend,but not an efficiency dividend,in general. This result is shown to be not counterintuitive when one looks at such reforms as providing more of the costly public good `environmental quality’ financed by distortionary taxes. In that perspective the double dividend conjecture is tantamount to assuming that more environmental quality can be bought for less money,which is rather unlikely even if general equilibrium interdependencies are accounted for.
Rüdiger Pethig

Optimal Intertemporal Pricing of Resource Stocks: The Case of Fossil Fuel Extraction and Atmospheric CO2 Deposits

The purpose of this paper is to extend the dynamic resource allocation problem by including stock externalities like accumulated CO 2 and SO 2 emissions as well as flow externalities like pollutants which can be abated (SO 2 ). The objective is to examine how the evolution of energy-, CO 2- or S0 2- tax rates can address these problems in an optimal way. The concern about the time profile of an energy tax arises from the fact that fossil fuels are an exhaustible resource and that global warming,being a consequence of carbon accumulation in the atmosphere,is a stock externality problem. We use a micro model of a firm,which maximizes profits,uses energy as one of its inputs and is confronted with a varying energy tax. It reacts by substitution,by changing its output level or by purchasing abatement equipment. The government is well aware about firms’ reaction on price signals. It maximizes a stream of social welfare by choosing an optimal path of its instrument — an energy tax. Our analyses supports the idea of a tax first rising and later falling over time.
Klaus Conrad

Balancing the Interests of the Present and the Future

From an ethical perspective intergenerational discounting often is justified by the desire to avoid distributions of welfare that are immoderately unbalanced in favor of future generations. In this paper it is shown in a two-generation framework that for productive economies it is well possible to use undiscounted utilitarianism instead in order to make ethically acceptable choices on intergenerational distributions. When intergenerational discounting is nevertheless used as a pragmatic device it also follows from our approach that time-inconsistency might no longer be an important problem.
Wolfgang Buchholz
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