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

22 3 MODEL DEVELOPMENT AND ANALYSIS
arbitrarily prices and quantities indirectly. A crucial question is the choice of
the objective function of the government that need not necessarily equal the
objective function of the household sector (although in most IAMs it does).
Following a main theorem of tax theory it does not matter on which side of
the market participants the tax is formally charged. Thus, the choice where to
charge the tax is driven by practical considerations of easier technical implementation.
Within this work, the concept tax generally allows for the possibility of
positive as well as negative tax rates, i.e. subsidies.
Except for the unit resource tax ς R and the non-distorting lump-sum tax
Γ all taxes are ad-valorem taxes. Gross price p changes with tax rate τ to
¯p := p(1 + τ). The tax income for the amount q of traded goods therefore is
pτq. 18
Following Edenhofer et al. (2005) I want to go the ambitious way to consider
endogenous technological change in both – energy and production – sectors to
analyze a potential bias in different technology enhancing measures. Technological
change is implemented by a combination of learning-by-doing spillovers of
investments and public R&D expenditures that augment knowledge stocks and
hence efficiency.
Further Assumptions and Simplifications The model presented in this
work does not contain a climate module that calculates future temperature
changes as result of economic and political acting. The extraction path of fossil
resources gives a first measure of emitted carbon because all extracted resources
are transformed to energy with carbon emission as side-effect. Assuming a total
and homogenous oxidation of fossil resources and the absence of carbon capture
and sequestration technologies 19 each extracted fossil resource unit produces the
same amount of GHG. The impact of economizing can therefore be evaluated
by the analysis of the resource extraction path. Otherwise global warming is
influenced by the concentration of GHG in the atmosphere and only indirectly
by the yearly emissions of GHG. Neglecting decay and degradation processes
of GHG in the atmosphere the integral over the emission path ∫ R gives the
change of the GHG concentration due to fossil energy consumption. 20 The
purpose of this model is neither to predict GHG concentration or temperature
changes nor to calculate exact values of mitigation costs. Thus above mentioned
simplifications bring an easier handling of the model without significant restrictions
in its explanatory power. With the shown link from extracted resources
R to GHG concentration a mitigation goal is formulated as an upper bound
of accumulated emissions ∫ T
R for a specific time space (that in my numerical
0
calculations corresponds to the time horizon).
18 Note, that although formally only ¯p changes by charging a tax, the tax also influences net
price p due to modified demand.
19 Within several carbon dioxide capture and storage (CCS) technologies, emerging CO2 is
separated from industrial and energy-related production process and transported to a storage
location which provides a long-term isolation from the atmosphere (IPCC, 2005, p. 3; see
the whole report also for further information about technical implementation, feasibility and
remaining problems of CCS).
20 As CO2 does not decay in the atmosphere (in contrast to other GHG with chemical
degradation) it can only be absorbed by plants, oceans and further sinks. Hence, there is no
exact lifetime of CO2 in the atmosphere computable and estimation of CO2 transfers to other
sinks of the global carbon cycle is confronted with uncertainties and extremely diverging time
scales (IPCC, 2007c, p. 824–825). However, Nordhaus and Boyer (2000, p. 60–61) estimate
the remaining share of CO2 pulse after 100 years with about 30 %.