Transcript Institutional design

The greenhouse effect:
economic challenges
Roger Guesnerie
Collège de France and
Paris School of Economics.
Foreword
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Foreword
• From a relatively « new entrant » on the subject
• Trough Government consulting, not Theory
• A eigtheen month study,
• Policy report to the French Prime Minister
• « Kyoto et les enjeux économiques de l’effet de serre »,La
Documentation Française 2003.
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A subject
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Plan :
Fascinating for everybody
For theorists….
• A brief reminder..of the greenhouse effect.
• A subjective walk in related and unsatisfqctorily resolved
theory problems (with some advertisement for my own
investigations).
• This lecture : institutional design.
The greenhouse effect : a reminder.
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Increase in concentration of greenhouse
gases in the atmosphere:
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•
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•
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Beginning with the industrial revolution
Human responsibility « Anthropogenic»
For CO2, use of fossil fuels…:oil, gas, coal.
Associated with development
Concentration is going to increase
spectacularly.
• 1800 : 270 ppmv
• 2000 : 360 ppmv
• 2100 : 450, 550, 750 ppmv
The diagnosis : sectoral origins
40
35
30
25
Energie
Transports
Industrie
Ag+résidentiel
20
15
10
5
0
France
P Ind.
The diagnosis :
Emissions across the world.
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C02 Emission:
• 7 GT C per year
• 1 T/capita
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Emission variability.
• 6 T/capita USA
• 0.3 T India
• 2.3 T Europe. 1,7 T
France
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Development linked.
6
5
4
3-D
Colu
mn 1
3
2
1
0
France
Inde
The diagnosis : concentrations
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préindust
riel
2000
1600
1400
1200
1000
Characteristics :
• Cumulative, (Stock)
• Weak reversibility.
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450
800
600
400
200
0
conc. CO2
Objec.
2100
BAU
2100
Scen.ext
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Concentration
Climate.
Worrying
Extrapolations.
• 3.5+-1.5 degrees.
• Compare with the
ice age
Diagnosis :
Climate and GES concentration
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The Link
• Troubling Parallelism.
• Theoretically and historically
established.
• other factors of climate
variability,
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Models forecasts for 2100
• Significant
temp.increases.
• Great variability (1,5 à
6,5)
• Economic scenario,
modelling
• 3.5+-1.5, BAU
• Major effects/ 2100,
« surprises » after
(thermo-aline
cic., permafrost »..)
The economics of the greenhouse
effect
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In some dimension, a standard problem
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Quality of climate : a « global » public good.
The questions are standard
• To act or not to act, When to act, How to act..
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In fact, non standard dimensions
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Time horizon …
Huge uncertainties
• On effects : climate or economic
• On abatement costs
• Possibly strong irreversibilities
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« Nature of the Government »
• No government, governance problems.
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Limits /economic argument.
• Dependant on the climate diagnosis
• External Limits.
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Moral and metaphysical dimension (H. Jonas)
Intergenerational Equity.
Costs of climate policies.
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How to reduce CO2 emissions ?
• Pre-industrial life style.
• Or ?
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Economic Actions.
• Decrease consumption of fossil fuels.
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Saving energy.
Improving energy efficiency.
Using less carbonized techniques.
• Electricity : gaz instead of coal.
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Using decarbonized techniques
• Changes
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how ?
in production
At the final demand level
Snapshots of specific difficulties.
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Objectives :
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Stress inadequacies of standard theory.
A selective overview…
The selected fields.
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Institutional design 1.
• The participation issue.
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Long run discount rates.
Institutional design 2.
• The « prices versus quantities » issue.
Institutional design :
Kyoto and post Kyoto
How to trigger cooperation
and induce LDC to participate
?
The simple economics of
internalizing externalities.
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The model :
• Amount of depollution q
• 2(n) firms.
• Marginal cost curves.
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Rules :
Marginal cost.
• uniform quotas.
• The economic argument
• An adequate tax lowers
total cost.
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The economic instruments.
• Tax, subsidy.
• Markets for permits
• Limits of the equivalence.
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profit,
Rights
Information
Tax, subsidy
optimum
q
Uniform quota
Kyoto and Kyoto-compatible schemes.
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The Kyoto protocol : key features.
• National quotas rigid, based on emissions at a year basis
• An international market for permits (exchange of quotas).
• Voluntary participation (Annex B).
A simplistic formal model :
without uncertainty, Notation q : emissions abatement.
Nash :
 q°(i): Max {U[i, Q°(-i)+q(i)]-C(i,q(i)}, iB
 iq°(i)=Q°
Kyoto :
 Quotas s(i), iB, q°°(i),
 q°°(i) : Max {t°°[(q(i)-s(i)]-C(i,q(i)}, iB
 iB s(i)= iB q°°(i)=Q°°
 IR ?
• Market for permits, world carbon price t°°.
Kyoto and Kyoto-compatible schemes.
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Variant 1 : Flexible (or negotiable) quotas
: FK
• Quotas are bargained
• Flexibility reflects exposition, etc…
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Variant 2 : Open Kyoto : OK
• Non Annex B countries would be given BAU
objectives
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Reminiscent of GPGP…,,
Pershing, Philibert, One sided/non binding
• Triggering participation ? …
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Variant 3 : OFK Mixes both F and K.
Kyoto compatible schemes and others.
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To compare with :
GPGP : the scheme. (Bradford D)
• Fixed initial contributions from voluntary
countries.
• Business As Usual (BAU) level of emissions for
all countries
 Complex,… contingent assesment.
 Even for non participants (generous).
• An agency (International Bank for Emissions.
Allowances), buys reductions from BAU.
Harmonized taxation.
Formal definitions.
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Open Flexible Kyoto.
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Quotas s(i), iB, q**(i),
q**(i): Max {t**[(q(i)-s(i)]-C(i,q(i)}, iB
q*(i): Max {t**(q(i)-C(i,q(i)}, iNB
iBs(i)=iq**(i)=Q**
GPGP :
• Fixed Contributions F(i), iB, q*(i),
• q*(i): Max {U[i, Q*(-i)+q(i)]+t*(q(i)-C(i,q(i)},
iB
• q*(i): Max {t*(q(i)-C(i,q(i)}, iNB
• iBt*q*(i)+ iNBt*q*(i)= iBF(i)
Formal definitions
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FOK
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Quotas s(i), iB, q**(i),
q**(i): Max {t**[(q(i)-s(i)]-C(i,q(i)}, iB
q*(i): Max {t**(q(i)-C(i,q(i)}, iNB
iBs(i)=iq**(i)=Q**.
IR
Harmonised taxation :
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q°’(i) : Max {t°’[(q(i)]-C(i,q(i))}, iB
 iI q°’(i)=Q°’
Welfare : U(i, Q°’)-C(i, q°’(i))
Questions for the comparison..
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Participation : short run
• A limited viewpoint/ participation of non-Annex B
countries.
• Effects on efficiency and ..participation of Annex B
countries.
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Participation : long run aspects.
• « Dynamic » participation,
• The « ratchet effect ».
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« Full Stability » issues
Efficiency issues :
• Prices versus quantities.
• Taxation and the prices of fossil fuel.
• Etc…
Comparing GPGP and Kyoto variants :
1- short run participation.
RG « The design post Kyoto climate schemes : an introductory analytical
assesment »(2006)
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An equivalence « Theorem » ? :
• Is GPGP « essentially » identical to OFK ?
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The « game form », the characteristics function, ..
Connections :
• Given FOK,  a (family) of GPGP/ same total
abatment (welfare of non annex B countries is
lower)
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In some cases, Annex B welfare is higher
Similar cost functions, similar B preferences
• Given a GPGP equilibrium,  an OFK / same
total abatment (welfare of non annex B
countries is higher).
Comparing GPGP and Kyoto variants :
3- Coalitional Stability.
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The full stability problem is much more complex :
• The Core is empty :
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non excludable public good.
Free riding.
• What is the arrangement more conducive to global effort
in a given bargaining situation ?
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HT does not solve LDC participation
If LDC are involved the tax instrument is less conducive to
high level effort, but the arrangements may be more stable
between B countries ?
• Etc..
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An extensive literature..
• Chandler-Tulkens (2006), Carraro (1999).
Some references.
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Aldy, J.E., P. R. Orszag and J. E. Stiglitz, ''(2001) ''Climate
Change: An Agenda for Global Collective Action'', Prepared for the
conference on ``The Timing of Climate Change Policies'', Pew
Center on Global Climate Change, October.
Bradford, D.F. (2001), « Improving on Kyoto: A No Cap but Trade
Approach to Greenhouse Gas control » Princeton University.
Chakrovorty U, Magné B. and Moreaux M, (2003) « Energy
resource substitution and carbon concentration targets with non
stationary needs'', Leerna 31, Université de Toulouse.
Cooper, R., (1998), ''Toward a real global warming treaty'', Foreign
Affairs, vol. 77 no 2, March-April
C
Carraro C.(1999) ''The Structure of International Agreements on
Climate Change''in C. Carraro C. (ed), International Environmental
Agreements on Climate Change, Kluwer Academic Publishers,
Dordrecht, NL
Chandler L and Tulkens H. (2005) « Stability issues and climate
related dynamic externalities »38p
Some references.
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Freixas X, Guesnerie R, et Tirole J. (1985) « Planning under
incomplete information and the ratchet effect », Review of
Economic Studies, LII, 173-191..
Guesnerie R. (2003) « Les enjeux économiques de l'effet de
serre » in «Kyoto et l‘économie de l'effet de serre », sous la
direction de R. Guesnerie, La Documentation Française, Paris.
Guesnerie R. ( 2004) « Calcul Economique et Développement
Durable », Revue Economique, p.363-382.
Guesnerie R. (2005) ''Assessing Rational Expectations :2''Eductive'' stability in economics », MIT Press, 453 P.
Guesnerie R. (2006) The design post Kyoto climate schemes : an
introductory analytical assesment ».
Ha-Duong M, Grubb M et. Hourcade J.C, (1997) ''Influence of
socio--economic inertia and uncertainty on optimal CO2-emissions
abatment'', Nature, Vol. 390.
Newell, R.G. and W.A. Pizer, (2000), « Regulating Stock
Externalities Under Uncertainty », Discussion Paper 99-10,
Resources for the Future, Washington DC, February.
Some references.
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Nordhaus, W.D, (2002), ''After Kyoto: Alternative Mechanisms to
Control Global Warming'', Paper prepared for the meetings of the
American Economic Association and the Association
of.IEA/SLT(2002)28
Philibert, C. (2000). ``How could emissions trading benefit
developing countries.'' Energy Policy , volume 28, no 13.
Philibert, C., and J. Pershing. (2001). ``Des objectifs climatiques
pour tous les pays : les options.'' Revue de l‘Energie 524.
Pizer, W.A., (2001), ''Combining Price and Quantity Control to
Mitigate Global Climate Change'', Journal of Public Economics,
85,(3), 409-434.
Rieu J.(2002) ''Politiques nationales de lutte contre le changement
climatique et réglementation de la concurrence : le cas de la
fiscalité », mimeo.
Weitzman, M. L., (1974) ''Prices vs. Quantities'', Review of
Economic Studies, vol.41, October.
Weitzman, M. L., (2000),AER