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In this two-part paper we evaluate the effect of "endogenizing” technological learning and strategic behavior of agents in economic models used to assess climate change policies. In the first part we show the potential impact of R&D policies or demonstration and deployment (D&D) programs in the context of stringent stabilization scenarios. In the second part we show how game-theoretic methods can be implemented in climate change economic models to take into account three types of strategic interactions: (i) the market power of the countries benefiting from very low abatement costs on international markets for CO2 emissions, (ii) the strategic behavior of governments in the domestic allocation of CO2 emissions quotas, and (iii) the non-cooperative behavior of countries and regions in the burden sharing of CO2 concentration stabilization. The two topics of endogenous learning and game-theoretic approach to economic modeling are two manifestations of the need to take into account the strategic behavior of agents in the evaluation of climate change policies. In the first case an R&D policy or a demonstration and deployment (D&D) program are put in place in order to attain a cost reduction through the learning effect; in the second case the agents (countries) reply optimally to the actions decided by the other agents by exploiting their strategic advantages. Simulations based on integrated assessment models illustrate the approaches. These studies have been conducted under the Swiss NCCR-Climate program

in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/)., Existing fuel taxes play a major role in determining the welfare effects of exempting the transportation sector from measures to control greenhouse gases. To study this phenomenon we modify the MIT Emissions Prediction and Policy Analysis (EPPA) model to disaggregate the household transportation sector. This improvement requires an extension of the GTAP data set that underlies the model. The revised and extended facility is then used to compare economic costs of cap-and-trade systems differentiated by sector, focusing on two regions: the USA where the fuel taxes are low, and Europe where the fuel taxes are high. We find that the interplay between carbon policies and pre-existing taxes leads to different results in these regions: in the USA exemption of transport from such a system would increase the welfare cost of achieving a national emissions target, while in Europe such exemptions will correct pre-existing distortions and reduce the cost., Supported by the US Department of Energy, Office of Biological and Environmental Research [BER] (DE-FG02-94ER61937); the US Environmental Protection Agency (X-827703-01-0); the Electric Power Research Institute; and by a consortium of industry and foundation sponsors.

Includes bibliographical references (p. 30-32)., in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/), We estimate reference CO₂ emission projections in the European Union, and quantify the economic impacts of the Kyoto commitment on Member States. We consider the case where each EU member individually meets a CO₂ emissions target, applying a country-wide cap and trade system to meet the target but without trade among countries. We use a version of the MIT Emissions Prediction and Policy Analysis (EPPA) model, here disaggregated to separately include 9 European Community countries and commercial and household transportation sectors. We compare our results with that of four energy-economic models that have provided detailed analyses of European climate change policy. In the absence of specific additional climate policy measures, the EPPA reference projections of carbon emissions increase by 14% from 1990 levels. The EU-wide target under the Kyoto Protocol to the Framework Convention on Climate Change is a reduction in emissions to 8% below 1990 levels. EPPA emissions projections are similar to other recent modeling results but there are underlying differences in energy and carbon intensities among the projections. If EU countries were to individually meet the EU allocation of the Community-wide carbon cap specified in the Kyoto Protocol, we find using EPPA that carbon prices vary from $91 in the United Kingdom to $385 in Denmark; welfare costs range from 0.6 to 5%., Supported in part by the Institut Français de l'Energie

in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/)., Economic efficiency is a major argument for the inclusion of an international emission permit trading system under the Kyoto Protocol. Using a partial equilibrium framework, energy system models have shown that implementing tradable permits for greenhouse gases internationally could reduce compliance costs associated with the emission targets. However, we show that international emission trading could be welfare decreasing under a general equilibrium framework. We describe a case of immiserizing growth in the sense of Bhagwati where the negative terms of trade and tax-interaction effects wipeout the primary income gains from emission trading. Immiserizing emission trading occurs only when there are pre-existing distortions in the economy. Simulation results based on a CGE model developed at MIT (the EPPA model) show that under an EU-wide emission trading regime the introduction of a permit trading system cause welfare losses for some of the trading countries.

in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/), Includes bibliographical references (p. 17-18)., To what extent do the welfare costs associated with the implementation of the Burden Sharing Agreement in the European Union depend on sectoral allocation of emissions rights? What are the prospects for strategic climate policy to favor domestic production? This paper attempts to answer those questions using a CGE model featuring a detailed representation of the European economies. First, numerical simulations show that equalizing marginal abatement costs across domestic sectors greatly reduces the burden of the emissions constraint but also that other allocations may be preferable for some countries because of pre-existing tax distortions. Second, we show that the effect of a single country's attempt to undertake a strategic policy to limit impacts on its domestic energy-intensive industries has mixed effects. Exempting energy-intensive industries from the reduction program is a costly solution to maintain the international competitiveness of these industries; a tax-cum-subsidy approach is shown to be better than exemption policy to sustain exports. The welfare impact either policy -- exemption or subsidy -- on other European countries is likely to be small because of general equilibrium effects.

in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/)., As a result of the allocation of emissions reductions, and the differential willingness of countries to ratify, it turns out that Russia is a central player in the Kyoto Protocol. With the U.S. out and Japan and the EU ratifying, the Protocol cannot enter into force without Russian ratification. In part, U.S. rejection of the Kyoto Protocol resulted from the fact that, had the U.S. been in, its least costly road to implementation would have involved large purchases of emissions credits from Russia. With the U.S. out, Russian credits are worth much less but Russia may be able to exploit monopoly power to increase the value of those permits, or Russia could bank permits on the expectation that prices will rise in the future, perhaps as a result of the U.S. reentry into the Protocol in later periods. The Russian decision is more complex, however, in that it is also a major fossil fuel exporter. To the extent it withholds permits from the market, fossil energy prices are depressed further, and the value of its exports of energy are reduced. Thus, Russia faces a tradeoff between maximizing its permit revenue and its revenue from fossil energy exports. We develop this problem as a simple dynamic optimization problem and calibrate the model to the results of two CGE models (EPPA and GEMINI-E3) that fully capture interactions of energy trade, permit trade, and permit and energy prices. We show that carbon prices are relatively insensitive to Russia's behaviors when the U.S. is assumed to participate. It also shows that, in the absence of U.S. participation, the impact of market power by Russia and Ukraine is largely dependent on the elasticity of demand for permits. Finally, we focus on the uncertainty about the supply of CDM by developing countries. It is shown that permit prices are relatively insensitive to CDM supply in the short run but not in the long run.

Includes bibliographical references (p. 9-11)., in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/), In March 2000, the European Commission presented a Green Paper on greenhouse gas emissions trading within Europe, supporting implementation of a Community-wide scheme in which the design and regulation of all essential elements would be harmonized at the Community level. The present paper analyzes economic arguments used to justify such a coordinated scenario, showing these arguments to be based on misleading rhetoric about fair trade and harmonization. Diverse allocations of emissions allowances across Member States are justified in theory. In practice, too, no empirical evidence or model-based results demonstrate that an uncoordinated European trading scheme would adversely affect competitiveness to any significant extent or substantially increase industrial relocations., Supported in part by the Institut Français de l'Energie.

This chapter presents in a broad perspective the links that exist between climate and economic dynamics. We deal in particular with the interactions and feedbacks that may link these two dynamical systems and with possible approaches to modelling, and ultimately controlling, them in order to reach a sustainable development path. The paper provides a general introduction to the different chapters that constitute the rest of the book.

This chapter presents in a broad perspective the links that exist between climate and economic dynamics. We deal in particular with the interactions and feedbacks that may link these two dynamical systems and with possible approaches to modelling, and ultimately controlling, them in order to reach a sustainable development path. The paper provides a general introduction to the different chapters that constitute the rest of the book.