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

18 2 METHODS AND ECONOMIC THEORY
2. distribution of benefits and costs
3. minimizing the risk of failing the political goal due to uncertainties
4. political feasibility
While the first three criteria can be analyzed via quantitative model experiments,
the last cannot be treated within a model but with plausibility considerations.
Determinants of political feasibility are next to distributional effects the state’s
influence on the economy (state’s share). Another normative criterion not primarely
covered by the social welfare function is the claim for sustainability (e.g.
Arrow et al., 2004) that guarantees welfare to future generations.
The IPCC (2007b, p. 751) states in principle the same four criteria (instead
of risk minimizing he speaks of environmental effectiveness), emphasizing the
importance of a fair distribution of costs and benefits: “[...] distributional
considerations may be more important than aggregate cost effectiveness when
policymakers evaluate an instrument.” (IPCC, 2007b, p. 752)
2.6 Implications and Challenges
Above presentation showed that extensive research already exists on the problem
of avoiding dangerous global change.
The shortcoming of existing integrated assessment models lies in their restrictive
scope of aggregated socially optimal climate protection. Cost-benefit
IAMs ask what might be optimal temperature levels while cost-effective IAMs
calculate mitigation costs of given temperature or concentration levels. Policy
instruments are only considered secondary, e.g. by assuming a Pigovian tax
of the level of damage. Because these model frameworks neglect strategical
behavior of important sectors they can neither compute nor evaluate appropriate
policy instruments with respect to efficiency and distribution. Furthermore,
these models cannot deal with second-best instruments and existing market
distortions (Böhringer et al., 2007).
On the other hand, detailed analysis of policy instruments for specific market
failures is often performed in partial equilibrium models which neglect important
macroeconomic feedback effects. Common analysis of factor taxation
within general equilibrium models widely concentrates on only one or two policy
instruments like capital and labor tax (e.g. Judd, 1987) and does not consider
environmental aspects.
Most of the policy instruments above mentioned can be categorized in three
classes which will be considered in this thesis: taxes (including subsidies), quantity
restrictions and R&D expenditures. Thus, an integrated assessment model
which combines the general equilibrium approach of existing climate-orientated
IAMs by strategical constraints of economic actors and simultaneously by a portfolio
of policy instruments could provide important insights in concrete measures
of effective and efficient climate protection. Such a model can also help to highlight
distributional effects of mitigation policies by analyzing several factor and
tax payment flows.
This approach allows to reconsider important policy design questions like
the debate about price and quantity instruments and input–output taxation.
A further task of this work will be to investigate in more detail the interferences
of multiple market failures and their consequences for climate protection
and functional income distribution. None of the presented IAMs or climate