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on Energy Economics |
| By: | Hua Liao; Jia-Wei Cai; Dong-Wei Yang; Yi-Ming Wei (Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology) |
| Abstract: | Medium-to-long term energy prediction plays a widely-acknowledged role in guiding national energy strategy and policy but could also lead to serious economic and social chaos when poorly executed. A consequent issue may be the effectiveness of these predictions, and sources that errors can be traced back to. The International Energy Agency (IEA) has published its annual World Energy Outlook (WEO) concerning energy demand based on its long term world energy model (WEM) under specific assumptions towards uncertainties such as population, macro economy, energy price and technology etc. Unfortunately, some of its predictions succeeded while others failed. We in this paper attempts to decompose the leading source of these errors quantitatively. Results suggest that GDP acts as the leading source of demand forecasting errors while fuel price comes thereafter, which requires extra attention in forecasting. Gas, among all fuel types witness the most biased projections. Ignoring the catch-up effect of acquiring rapid economic growth in developing countries such as China will lead to huge mistake in predicting global energy demand. Finally, asymmetric cost of under- and over-estimation of GDP suggests a potentially less conservative stance in the future. |
| Keywords: | energy demand; Medium-to-long term prediction; forecast error; social development |
| JEL: | Q54 Q40 |
| Date: | 2016–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:biw:wpaper:92&r=ene |
| By: | Zheming Tong; Yujiao Chen; Malkawi, Ali; Zhu Liu; Richard B. Freeman |
| Abstract: | Natural ventilation (NV) is a key sustainable solution for reducing the energy use in buildings, improving thermal comfort, and maintaining a healthy indoor environment. However, the energy savings and environmental benefits are affected greatly by ambient air pollution in China. Here we estimate the NV potential of all major Chinese cities based on weather, ambient air quality, building configuration, and newly constructed square footage of office buildings in the year of 2015. In general, little NV potential is observed in northern China during the winter and southern China during the summer. Kunming located in the Southwest China is the most weather-favorable city for natural ventilation, and reveals almost no loss due to air pollution. Building Energy Simulation (BES) is conducted to estimate the energy savings of natural ventilation in which ambient air pollution and total square footage at each city must be taken into account. Beijing, the capital city, displays limited per-square-meter saving potential due to the unfavorable weather and air quality for natural ventilation, but its largest total square footage of office buildings makes it become the city with the greatest energy saving opportunity in China. Our analysis shows that the aggregated energy savings potential of office buildings at 35 major Chinese cities is 112 GWh in 2015, even after allowing for a 43 GWh loss due to China?s serious air pollution issue especially in North China. 8?78% of the cooling energy consumption can be potentially reduced by natural ventilation depending on local weather and air quality. The findings here provide guidelines for improving current energy and environmental policies in China, and a direction for reforming building codes. |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:428396&r=ene |
| By: | Asian Development Bank (ADB); Asian Development Bank (ADB) (Sustainable Development and Climate Change Department, ADB); Asian Development Bank (ADB) (Sustainable Development and Climate Change Department, ADB); Asian Development Bank (ADB) |
| Abstract: | This report summarizes the investments in clean energy made by the operations departments of the Asian Development Bank (ADB) in 2015, condensing information from project databases and formal reports in an easy-to-reference format. This report was prepared by ADB’s Clean Energy Program which provides the cohesive agenda that encompasses and guides ADB’s lending and nonlending assistance, initiatives, and plan of action for sustainable growth in Asia and the Pacific. |
| Keywords: | adb, asian development bank, asdb, asia, pacific, poverty asia, adb energy investments, clean energy, renewable energy, solar energy, wind energy, energy efficiency, climate change financing, green cities, clean energy program, sustainable transport, loans, grants, technical assistance |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:asd:wpaper:rpt168065-2&r=ene |
| By: | Knaut, Andreas (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)); Paulus, Simon (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)) |
| Abstract: | System security in electricity markets relies crucially on the interaction between demand and supply over time. However, research on electricity markets has been mainly focusing on the supply side arguing that demand is rather inelastic. Assuming perfectly inelastic demand might lead to delusive statements regarding the price formation in electricity markets. In this article we quantify the short-run price elasticity of electricity demand in the German day-ahead market and show that demand is adjusting to price movements in the short-run. We are able to solve the simultaneity problem of demand and supply for the German market by incorporating variable renewable electricity generation for the estimation of electricity prices in our econometric approach. We find a daily pattern for demand elasticity on the German day-ahead market where price-induced demand response occurs in early morning and late afternoon hours. Consequently, price elasticity is lowest at night times and during the day. Our measured price elasticity peaks at a value of approximately -0.006 implying that a one percent increase in price reduces demand by 0.006 percent |
| Keywords: | electricity markets; hourly price elasticity of demand; empirical demand analysis |
| JEL: | C26 L94 Q21 Q41 |
| Date: | 2016–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:ris:ewikln:2016_007&r=ene |
| By: | Sucarrat, Genaro; Escribano, Álvaro |
| Abstract: | Electricity prices are characterised by strong autoregressive persistence, periodicity (e.g. intraday, day-of-the week and month-of-the-year effects), large spikes or jumps, GARCH and -as evidenced by recent findings- periodic volatility. We propose a multivariate model of volatility that decomposes volatility multiplicatively into a non-stationary (e.g. periodic) part and a stationary part with log-GARCH dynamics. Since the model belongs to the log-GARCH class, the model is robust to spikes or jumps, allows for a rich variety of volatility dynamics without restrictive positivity constraints, can be estimated equation-by-equation by means of standard methods even in the presence of feedback, and allows for Dynamic Conditional Correlations (DCCs) that can –optionally- be estimated subsequent to the volatilities. We use the model to study the hourly day-ahead system prices at Nord Pool, and find extensive evidence of periodic volatility and volatility feedback. We also find that volatility is characterised by (positive) leverage in half of the hours, and that a DCC model provides a better fit of the conditional correlations than a Constant Conditional Correlation (CCC) model. |
| Keywords: | Nord Pool; inverse leverage; Dynamic Conditional Correlations; Multivariate GARCH; log-GARCH; exponential GARCH; ARCH; volatility; financial return; Electricity prices |
| JEL: | C58 C51 C32 C22 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:23436&r=ene |
| By: | Escribano, Alvaro; Sucarrat, Genaro |
| Abstract: | Electricity prices are characterised by strong autoregressive persistence, periodicity (e.g. intraday, day-of-the week and month-of-the-year effects), large spikes or jumps, GARCH and -- as evidenced by recent findings -- periodic volatility. We propose a multivariate model of volatility that decomposes volatility multiplicatively into a non-stationary (e.g. periodic) part and a stationary part with log-GARCH dynamics. Since the model belongs to the log-GARCH class, the model is robust to spikes or jumps, allows for a rich variety of volatility dynamics without restrictive positivity constraints, can be estimated equation-by-equation by means of standard methods even in the presence of feedback, and allows for Dynamic Conditional Correlations (DCCs) that can -- optionally -- be estimated subsequent to the volatilities. We use the model to study the hourly day-ahead system prices at Nord Pool, and find extensive evidence of periodic volatility and volatility feedback. We also find that volatility is characterised by (positive) leverage in half of the hours, and that a DCC model provides a better fit of the conditional correlations than a Constant Conditional Correlation (CCC) model. |
| Keywords: | Electricity prices, financial return, volatility, ARCH, exponential GARCH, log-GARCH, Multivariate GARCH, Dynamic Conditional Correlations, inverse leverage, Nord Pool |
| JEL: | C22 C32 C51 C58 |
| Date: | 2016–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72736&r=ene |
| By: | Robert Baumann (Department of Economics, College of the Holy Cross); Bryan Engelhardt (Department of Economics, College of the Holy Cross); David L. Fuller (College of Business, University of Wisconsin - Oshkosh) |
| Abstract: | We show if a speculator can benefit from reducing a monopoly’s rents through short selling, then a speculator may take a short position in a monopoly, overcome the barriers to entry, and compete with the monopoly. The competition drives down the monopoly’s rents, and as a result, the short position becomes profitable and covers the cost of entry. If entry is impossible, then the speculator may coordinate and pay the firm’s counter-parties to stop trading with the monopoly rather than entering. Either way, increasing a speculator’s ability to short a firm’s rents results in a constraint on the monopoly and forces it to act more like a price taker. The mechanism is a market based approach to antitrust. |
| Keywords: | antitrust, monopoly, short selling |
| JEL: | L12 K21 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:hcx:wpaper:1603&r=ene |
| By: | Aghion, Philippe; Dechezleprêtre, Antoine; Hemous, David; Martin, Ralf; Van Reenen, John |
| Abstract: | Can directed technical change be used to combat climate change? We construct new firm-level panel data on auto industry innovation distinguishing between "dirty" (internal combustion engine) and "clean" (e.g. electric and hybrid) patents across 80 countries over several decades. We show that firms tend to innovate relatively more in clean technologies when they face higher tax-inclusive fuel prices. Furthermore, there is path dependence in the type of innovation both from aggregate spillovers and from the firm's own innovation history. Using our model we simulate the increases in carbon taxes needed to allow clean to overtake dirty technologies. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:faseco:27759048&r=ene |
| By: | Satoshi Nakano; Kazuhiko Nishimura |
| Abstract: | A favorable population schedule for the entire potential human family is sought, under the overlapping generations framework, by treating population as a control variable in a dynamic social welfare maximization context. The Benthamite and Rawlsian social welfare functions are examined, with zero future discounting, while infinity in the maximand is circumvented by introducing the depletion of energy resources and its postponement through technological innovations. The model is formulated as a free-horizon dynamic planning problem, solved via a non-linear optimizer. Under exploratory scenarios, we visualize the potential trade-offs between the two welfare criteria. |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1608.01535&r=ene |
| By: | Lei Gu; Yi-Xin Zhang; Jian-Zhou Wang; Gina Chen; Hugh Battye |
| Abstract: | This paper discusses the history and present status of different categories of biogas production in China, most of which are classified into rural household production, agriculture-based engineering production, and industry-based engineering production. To evaluate the future biogas production of China, five models including the Hubbert model, the Weibull model, the generalized Weng model, the H–C–Z model, and the Grey model are applied to analyze and forecast the biogas production of each province and the entire country. It is proved that those models which originated from oil research can also be applied to other energy sources. The simulation results reveal that China’s total biogas production is unlikely to keep on a fast-growing trend in the next few years, mainly due to a recent decrease in rural household production, and this greatly differs from the previous goal set by the official department. In addition, China’s biogas production will present a more uneven pattern among regions in the future. This paper will give preliminary explanation for the regional difference of the three biogas sectors and propose some recommendations for instituting corresponding policies and strategies to promote the development of the biogas industry in China. |
| Keywords: | biogas production; China; temporal-spatial-forecast; policy |
| JEL: | N0 J50 |
| Date: | 2016–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:67274&r=ene |
| By: | Lyu, Wanning; Yuan Li; Dabo Guan; Hongyan Zhao; Qiang Zhang; Zhu Liu |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:428386&r=ene |
| By: | Alvarez, Francisco; André, Francisco J.; Mazón, Cristina |
| Abstract: | We study the efficiency of the uniform auction as an allocation mechanism for emission permits among polluting firms. In our model, firms have private information about their abatement costs, which differ across firms and across units, and bidders' demands are linear. We show that there is a continuum of interior Bayesian-Nash equilibria, and only one is effcient, minimizing abatement costs. We find that the existence of many bidders is not a sufficient condition to guarantee an efficient equilibrium in the uniform auction. Additionally, bidders' types have to be uncorrelated. |
| Keywords: | Emission permits, Uniform auction, Efficiency, Incomplete information Simultaneous games |
| JEL: | D44 Q58 |
| Date: | 2016–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72827&r=ene |
| By: | Asian Development Bank (ADB); Asian Development Bank (ADB) (Sustainable Development and Climate Change Department, ADB); Asian Development Bank (ADB) (Sustainable Development and Climate Change Department, ADB); Asian Development Bank (ADB) |
| Abstract: | Asia and the Pacific has achieved rapid economic expansion in the recent years and has become a major source of greenhouse gas (GHG) emissions. With more than half of the world’s population and high rates of economic growth, the region is especially vulnerable to the effects of climate change and therefore must play its part in cutting GHG emissions. The Paris Agreement adopted last December 2015 at the United Nations Framework Convention on Climate Change COP21 aims to restrict global warming to well below 2o C above preindustrial levels and to pursue efforts to reach 1.5oC - which is especially relevant to Asia and the Pacific region given its vulnerability. This knowledge product highlights how robust policies on emissions trading systems (ETS) can be important tools in reducing GHG emissions in a cost-effective manner, as well as supporting the mobilization of finance together with deployment of innovative technologies. There are currently 17 ETSs in place in four continents and account for nearly 40% of global gross domestic product. In Asia and the Pacific region, there are 11 systems operating, with more being planned. The growing wealth of experience on ETSs can be valuable to support DMCs that are planning and designing new systems of their own. This knowledge product summarizes some of the most significant learning experiences to date and discusses some of the solutions to alleviate challenges that have been faced. It also examines the possibilities for future linked carbon markets in the region. |
| Keywords: | carbon pricing, carbon pricing instruments, emissions, carbon emissions, emissions trading, emissions trading systems, linking emissions trading systems, greenhouse gas, carbon trading, climate change, mitigation, renewable energy policy, renewable energy |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:asd:wpaper:rpt167931-2&r=ene |
| By: | Ke Wang; Xian Zhang; Xueying Yu; Yi-Ming Wei (Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology); Bin Wang |
| Abstract: | This study evaluates the efficiency advantage of a market-based emission permit trading policy instrument over a command and control policy instrument in the case of China's thermal power industry. We estimate the unrealized gains achievable through emission permit trading with an optimization frontier analysis. These unrealized gains include potential recoveries of electricity generation through eliminating spatial and temporal regulatory rigidity on emission permit trading. The results of an ex post estimation during 2006 and 2010 indicate a potential gain of 8.48% increase in electricity generation if both the intra- and inter-period regulatory rigidities CO2 emission permits trading had been eliminated. In addition, if the permit trading systems for three air pollutions, CO2, SO2, and NOx, had been completely integrated, a positive net synergy effect of 1.43% increase in electricity generation could have been secured. The unrealized gains identified in this study provide supports for establishing a nationwide emission permit trading system in China. |
| Keywords: | Data envelopment analysis, CO2 emissions, Regulatory rigidity, Synergy effect, Tradable permits |
| JEL: | Q54 Q40 |
| Date: | 2016–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:biw:wpaper:95&r=ene |
| By: | Ke Wang |
| Abstract: | Purpose This study provides an estimation of CO2 emission abatement costs in China's industry sector during the period of 2006-2010, and additionally provide an ex-post estimation of CO2 abatement cost savings that would be realized if carbon emission permits trading among different industry sectors of 30 provinces in China during the same period was allowed, in order to answer the question that whether the industrial carbon emission abatement cost can (partially) be recovered from carbon emission trading in China. Design/methodology/approach The joint production framework associated with the environmental technology is utilized for formulating the models for estimating abatement costs and simulating emission permits trading scheme. Several Data Envelopment Analysis (DEA) based models that could deal with both the desirable and undesirable outputs with in the above framework is utilized for abatement cost saving estimation. The weak disposability assumption and variable returns to scale assumption are applied in the modelling. Findings In China's industry sector, during 2006-2010: (i) The estimated CO2 emission abatement cost is 1842 billion yuan which accounts for 2.45% of China¡¯s total industrial output value; (ii) The emission abatement cost saving from emission permits trading would be 315 billion yuan, which accounts for 17.12% of emission opportunity abatement cost. (iii) Additional 1065.95 million tons of CO2 emission reductions would be realized from emission permits trading, and this accounts for 4.75% of the total industrial CO2 emissions. Research limitations/implications The estimation is implemented at the regional level, i.e., the emission permits trading subjects are the whole industry sectors in different Chinese provinces, because of the data limitation in this study. Further estimation could be implemented at the enterprise level in order to provide a deeper insight into the abatement cost recovery from emission permits trading. Practical implications The estimation models and calculation process introduced in this study could be applied for evaluating the efficiency and effectiveness of pollutant emission permits trading schemes from the perspective that whether these market-based abatement policy instruments help to realize the potential abatement cost savings. Originality/value To the best of our knowledge, no study has provided the estimation of CO2 emission abatement cost and the estimation of CO2 abatement cost saving effect from emission permits trading for China¡¯s industry sector. This study provides the first attempt to fill this research gap. |
| JEL: | Q54 Q40 |
| Date: | 2016–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:biw:wpaper:94&r=ene |
| By: | Giovanni Marin (IRCrES-CNR, Milano, Italy); Roberto Zoboli (DISEIS, Catholic University of Milano, Italy) |
| Abstract: | The structural change of the economy towards an increasing share of services is seen in environmental economics as a fundamental driver of ‘decoupling’ between economic growth and environmental pressures. The environmental and socio-economic consequence of structural change, however, can be less straightforward when economic interdependencies are considered. In this paper we evaluate the implications of structural change towards services in the EU in terms of environmental pressures (aggregate and by sector, direct and indirect). The changing patterns in environmental pressures are analyses vis à vis the corresponding changes in the distribution of employment and value added. For carrying out this integrated assessment we use Environmentally Extended Multi Regional Input Output modelling applied to data from the World Input Output Database (WIOD). The results suggest that the service sectors is characterized by a lower emission intensity than the industrial sectors, when looking at direct emissions (‘production perspective’) but this gap is much smaller when considering also indirect emissions in a ‘vertically integrated’ approach (‘consumption perspective’). Moreover, changes in the production structure of the EU economy in absence of relevant changes in the composition of the final demand induce an increased reliance on environmental pressures, employment and value added generated abroad. The integrated assessment of these ‘global footprints’ suggests that the EU is transferring worldwide more emissions that value added and employment. This form of ‘unequal exchange’ can be relevant for development and environmental policies, in particular those on global climate change. |
| Keywords: | EE-MRIO; structural change; carbon leakage; production and consumption perspective; international trade |
| JEL: | C67 F18 Q52 Q55 Q56 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:srt:wpaper:0816&r=ene |
| By: | Dorin JULA (Institute for Economic Forecasting, Romanian Academy and Faculty of Economics, Ecological University of Bucharest); Nicoleta JULA ("Nicolae Titulescu" University of Bucharest) |
| Abstract: | In the paper, we use Kaya identity and the cointegration relationship between the dynamics of population, economic growth, energy intensity of gross domestic product and carbon intensity of energy produced in order to estimate, on long-run, the greenhouse gas emissions. |
| Keywords: | Kaya identity, greenhouse gas emissions, panel data model |
| JEL: | C33 Q54 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:eub:wpaper:2016-01&r=ene |
| By: | Quaas, Martin F.; Bröcker, Johannes |
| Abstract: | We develop an overlapping generations endogenous growth model with stocks of produced capital, human capital, a non-renewable resource, and irreversibly accumulated greenhouse gases in deterministic and stochastic versions. The model allows for analyzing different elasticities of substitution. We present a full analytical solution and characterization of the transition dynamics. We show that, as a rule of thumb, the social cost of carbon grow at a rate equal to the economy's growth rate divided by the elasticity of substitution. We analytically study sensitivity of the social cost of carbon with respect to key parameters: the intergenerational discount rate, the elasticity of substitution, and climate uncertainty. We show that the social cost of carbon explode at a finite level of log-normally distributed climate uncertainty. We illustrate results in a calibrated version of the model. |
| Keywords: | overlapping generations,substitutes vs. complements,stochastic resource dynamics,optimum growth,climate policy |
| JEL: | Q54 O44 Q32 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201609&r=ene |
| By: | Mattia Cai, Niccolò Cusumano, Arturo Lorenzoni, Federico Pontoni |
| Abstract: | A massive deployment of renewable electricity generation took place in Italy in less than eight years. A generous feed-in tariff, coupled with favourable institutional conditions, allowed the installation of more than 28 GW of PV, wind and other RES technologies. By 2014, Italy has already attained its 2020 goals on RES production. Besides, environmental objectives and compliance with EU targets, the policy was aimed at promoting green jobs and industrial production of RES technologies. Exante economic analyses advocated considerable economic and industrial spill-overs from the introduction of RES support policies. Despite official rhetoric and ex-ante studies about jobs and economic growth associated to RES adoption, at scholarly level there is no consensus on the actual effects and implications of these policies on National economies. This paper provides a first comprehensive ex-post analysis of the Italian case, filling an important gap. Our analysis is carried out with the development of a specific input-output model, with refined technological vectors and with the internalization of trade coefficients. We show that the effects have been unequivocally lower than expected; that most of the jobs created belonged to the service sector and not to the industrial sector and that the value added was much lower than expected due to significant export leakages. |
| Keywords: | Value added, job creation, import leakage, renewable energy, support schemes |
| JEL: | J08 O13 Q40 Q42 Q48 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bcu:iefewp:iefewp88&r=ene |
| By: | Marion Dupoux |
| Abstract: | Land use change (LUC) is the second human-induced source of greenhouse gases (GHG). This paper warns about the LUC time-accounting failure in internalizing GHG impacts in economic appraisal (within policies). This emerges from (i) relative carbon prices commonly following the Hotelling rule as if climate change were regarded as an exhaustible resource problem and (ii) a uniform annualization (i.e. constant flows over time) of LUC impacts supported by most energy policies. First, carbon prices time evolution should account for the climate change framework specificities (natural carbon absorption, uncertainty), which makes a departure from the Hotelling rule necessary. Second, there is a carbon dynamic after land conversion: GHG impact flows are strictly decreasing over time. With a theoretical framework, I show that the employment of the uniform annualization, within a benefit-cost analysis, enhances both the discounting overwhelming effect and the carbon price increase, whatever the type of impact (emissions or sequestrations). It results in skewed values of LUC-related projects as long as relative carbon prices deviate from the Hotelling rule. I apply this framework to global warming impacts of bioethanol in France and quantify this bias. In particular, carbon profitability payback periods under the uniform approach do not reflect the LUC effective carbon investment. This potentially modifies the conclusions regarding a project’s achievement of imposed environmental criteria. |
| Keywords: | Benefit-cost analysis, Discounting, Global warming, Land use change, Relative carbon price |
| JEL: | D61 H43 Q15 Q16 Q48 Q54 |
| Date: | 2016–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:apu:wpaper:2016/02&r=ene |
| By: | Elettra Agliardi (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy) |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:16-22&r=ene |
| By: | Mi, Zhifu; Zhang, Yunkun; Dabo Guan; Shan, Yuli; Zhu Liu; Cong, Ronggang; Yuan, Xiao-Chen; Wei, Yi-Ming |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:428381&r=ene |
| By: | Soham Baksi; Amrita Ray Chaudhuri |
| Abstract: | We examine the impacts of trade liberalization and border tax adjustment (BTA) on the incentives of heterogeneous countries to cooperate when regulating emissions of a global pollutant. We consider an oligopoly model of trade between two countries, North and South, where production generates transboundary pollution and the pollution damage parameter is higher in the North. Each country imposes a pollution tax on its domestic firm, where the tax rate can be chosen either cooperatively or non-cooperatively. We analyze the sustainability of environmental cooperation between the countries within an infinitely repeated game framework using trigger strategies. While the North has a stronger incentive to cooperate than the South, we find that an increase in the degree of heterogeneity between the two countries in terms of their pollution damage parameter reduces the likelihood of cooperation between them. Trade liberalization increases both the global gains from cooperation as well as the likelihood of cooperation between the countries. Further, we consider the use of a border tax adjustment under non-cooperation, where the North imposes a tariff on imports of the polluting good from the South, and the tariff rate reflects the difference in pollution tax rates across the two countries. We find that imposing the BTA makes the North less likely to cooperate, while the South is more likely to cooperate provided the countries are sufficiently heterogeneous. |
| Keywords: | International environmental agreements, Transboundary pollution, International trade, Border tax adjustment |
| JEL: | Q54 Q58 F18 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:win:winwop:2016-03&r=ene |