Modeling Climate Policy Instruments in a Stackelberg Game with ...

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2 1 INTRODUCTION intensity of weather extremes like hurricanes (IPCC, 2007a, pp. 35–43). Hence, global warming hits humankind in a very sensitive way and has the potential for catastrophic, unpredictable and irreversible consequences. 1.2 The Economics of Climate Change The term economy comes from the Greek words íkos (house) and némo (to distribute or to manage) and hence, ikonomía denotes “one who manages a household”. If we (humans) consider the Earth as our household, economics seems to be an appropriate science to deal with the complex issues of climate change. This demands a deep understanding of physical and technical processes as well as aspects of humans’ (strategical) behavior. For managing the household, physical and natural goods need to be distributed to all its members, i.e. present and future living species including the human species. As only human beings seem to do science, also economic science has a somewhat anthropocentric viewpoint of how to manage the big global household. But since nature provides essential and vital services to everybody, economics – even from such an anthropocentric point of view – is concerned with environmental questions. Humans promoted and still are promoting global warming, but its consequences have the most undesirable consequences effects on mankind. As humans still have the possibility of diminishing these consequences, there is now a great research demand of investigating how to solve this global problem or – in the words of William D. Nordhaus – how to manage the global commons. Thus, the economics of climate change typically deals with the following questions: 1. What are the future (economic) damages of global warming? 2. What are the costs of avoiding dangerous interference to the climate and what are these costs influenced by? 3. What are adequate policy instruments to reach a climate protection target? 4. How can mankind adapt to unavoidable consequences of global warming? All these questions have their own problems to deal with. The first one is about estimating the amplitude of possible damages of climate change and the even more ambitious aim to quantify them. The second issue is about calculating opportunity costs, that is, what welfare losses do we suffer to reach a climate protection target in comparison to a baseline (business as usual) scenario that neglects damages by climate change? These two crucial questions are often considered jointly in cost-benefit-analysis. The costs of potential climate damages are compared to the benefits of omitted mitigation. This way, an optimal economic development can be obtained. Of course, there exist further important constraints, for example strategical behavior of countries, enterprises and consumers following their own payoff maximizing strategies which may be incompatible with the socially optimal outcome. Thus, the third questions seeks for instruments to arrange private and social interests or national and global interests, respectively. Research about costs and mitigation of climate change already started in the late 70s (e.g. Nordhaus (1977): Strategies for the Control of Carbon Dioxide) and theory of environmental economics offered since Pigou’s work in 1932
1.3 Scope of this Thesis 3 a wide palette of policy instruments still valid for today’s global warming problem. However, the economics of adaptation on climate change (fourth issue) is still a young area. First experience with global warming (e.g. see level rise) and uncertainty about whether the global mean temperature will increase less then 2C in the 21st century boosted research activities about adapting on the changing climatic circumstances. 2 Furthermore, each of these questions concerns important normative aspects of justice (distribution of costs and benefits intra- and intergeneral) and risk management (dealing with lots of uncertainties) as additional dimensions of analysis. 1.3 Scope of this Thesis The scope of this work is to find appropriate policy instruments avoiding dangerous climate change and analyze these instruments with respect to their distributional effects. This analysis is orientated on three central questions: Which policy instruments correct the possibly negative effects of the utility maximizing behavior of the market actors that neglect environmental problems? In particular, what are the differences between resource taxation, energy taxation, abatement subsidy and a restriction of cumulative emissions? Which market imperfections – market power and technology spillovers – hinder or help to reach a climate protection goal and how to deal appropriately with them? How do several policy instruments benefit or burden capital, labor, tax or profit income recipients? Existing research about policy instruments usually operates within partial equilibrium analysis and by confining on only market failures only. In contrast, policy models using the more capacious general equilibrium analysis often consider one or two policy instruments – mostly capital and labor taxes. Common integrated assessment models performing a general equilibrium analysis even do not consider policy instruments explicitly as they are social planner models which neglect strategical behavior. Hence, this thesis combines existing approaches to an intergrated policy assessment model which moreover allows for a detailed analysis of distributional effects. The thesis is structured as follows: Sec. 2 describes the state of the art of climate economic research. First basic methods and concepts used in this thesis are described. Next economic disciplines (including policy instruments considerations) are presented, which are related to the economics of climate change. A differentiated overview over important integrated assessment models (IAM) points out existing shortcomings and hence further research necessities which can partially be considered by this thesis. Sec. 3 explains the elements of the economic system and their interactions. After detailed introduction to the basic model structure three crucial extensions are developed – endogenous technological change, renewable energy and market power in the resource sector. It follows a calibration of model parameters that 2 One could also think of integrating the economics of adaptation into the estimation of costs, as there are several interdependencies between costs and adaptation possibilities.
Page 1: Matthias Kalkuhl Modeling Climate P
Page 5 and 6: CONTENTS III Contents 1 Introductio
Page 7 and 8: LIST OF FIGURES V List of Figures 1
Page 9 and 10: LIST OF ABBREVIATIONS VII List of A
Page 11 and 12: EXECUTIVE SUMMARY IX Executive Summ
Page 13: 1 “Climate change is a result of
Page 17 and 18: 5 2 Methods and Economic Theory 2.1
Page 19 and 20: 2.3 Economic Theory and Policy Inst
Page 29 and 30: 2.4 Review of Climate Economic Mode
Page 31 and 32: 2.6 Implications and Challenges 19
Page 33 and 34: 21 3 Model Development and Analysis
Page 35 and 36: 23 Although population growth is an
Page 37 and 38: 3.1 Description of the Basemodel 25
Page 45 and 46: 3.2 Model Extensions 33 3.2 Model E
Page 47 and 48: 3.2 Model Extensions 35 first-stage
Page 49 and 50: 3.2 Model Extensions 37 augments fa
Page 51 and 52: 3.3 Model Calibration 39 Resource S
Page 53 and 54: 3.3 Model Calibration 41 3.3.4 Elas
Page 55 and 56: 3.3 Model Calibration 43 3.5 3 T =
Page 57 and 58: 3.4 Analysis 45 ˜F(K Y , K E , K R
Page 59 and 60: 3.4 Analysis 47 imply lim µ(S −
Page 61 and 62: 3.4 Analysis 49 Ċ = Ẏ − I ˙ (
Page 63 and 64: 3.4 Analysis 51 of Barro and i Mart
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3.4 Analysis 53 Figure 10: Shares o
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55 4 Evaluation of Policy Instrumen
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4.1 Price vs. Quantity Policy 57 Fi
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4.1 Price vs. Quantity Policy 59 To
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4.2 Input vs. Output Taxation 61 Fi
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4.2 Input vs. Output Taxation 65 th
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4.3 Competition Policy 69 should me
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4.3 Competition Policy 71 100 95 Pe
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4.3 Competition Policy 73 equations
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4.3 Competition Policy 75 2.5 2 Mon
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4.4 Technology Policy 77 no tax m e
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4.4 Technology Policy 79 Figure 29:
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4.4 Technology Policy 81 without R&
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4.4 Technology Policy 85 LbD R&D Lb
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4.4 Technology Policy 87 300 250 Ba
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91 5 Concluding Remarks and Reflect
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93 market power, ad-valorem tax pro
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climate policy not only may help to
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97 A Reformulating the Discrete Opt
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99 B Derivatives of Several Functio
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101 C The Stackelberg Leader Optimi
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103 Government C gov =Γ + τ K rK
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105 E List of Variables and Paramet
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E.2 Parameters 107 s elasticity of
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REFERENCES 109 References Abadie, J
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REFERENCES 111 Hanley, N., J. F. Sh
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REFERENCES 113 Pigou, A. C. (1932).
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REFERENCES 115 van der Zwaan, B. C.
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Ehrenwörtliche Erklärung Hiermit
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