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Three essays on the economics of climate change

Stagnaro, Carlo (2009) Three essays on the economics of climate change. Advisor: Grea, Prof. Sergio. pp. 150. [IMT PhD Thesis]

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Abstract

This dissertation collects three essays on the economics of global warming and climate policies. The papers, each of whom can be read as a stand‑alone essay, are arranged in a way that goes from a more radical, more general approach to a more pragmatic, more specific one. The first essay deals with the very essence of global warming: is it a global public bad? Does its nature justify, or even require, international collective action in order to let the external costs be internalized? In order to provide an answer, a Coasian approach is undertaken. The starting point is an original interpretation of the socalled Coase Theorem, which is derived from Forte (2007). Forte argues that the symmetry underlying the theorem can only be held true in the short run. In the long run, however, the symmetry ceases to exist because, among the other reasons, a different return on invested capital may emerge under a different initial allocation of rights. It follows that the initial allocation of rights does matter, even in a transactions costs‑free world. An intuitive consequence of this, is that the long‑term consequences of the initial allocation should be considered. In the case of pollution, this may mean that it is not always efficient to follow the Polluter Pays Principle. In fact, while pollution is a negative externality, the venture that causes it may also generate positive externalities. When this is the case, by imposing to the polluter the cost of getting rid of pollution, the positive externality may be lost together with the negative one. The present paper argues that this is precisely the case of global warming. Greenhouse gases emissions – which are suspected of causing man‑made global warming, as opposed to natural climate change – are, at the present state of technology, an unavoidable byproduct of energy production and economic growth. Cutting emissions – as is requested by many stakeholders as well as by international treaties such as the Kyoto Protocol – might result in curbing economic growth, and by so doing it might impose a social cost that is greater than the avoided cost from global warming. The econometric evidence on the costs of global warming and the costs of climate policies, as well as on the respective benefits, is still unclear. Hence, the present scenario is characterized by a deep uncertainty on the side of the costs and benefits of collective action (or the lack thereof), and by a lack of cost‑efficient technological alternatives to the current technologies, particularly in the energy and transportation sectors. By applying the Forte interpretation of the Coase Theorem, it may be argued that—when this is more efficient—it might well be the case to let the cost of pollution (or the cost of eliminating pollution) bear on the polluted party, instead of the polluter. Since the polluted party, as far as global warming is concerned, is future generations, this means that a case can be made against climate change mitigation. Temperatures might be left free to grow (that is, carbon dioxide might be left free to accumulate in the atmosphere) until cost‑efficient technologies become available. Policies should instead focus on accelerating the process of technological innovation, and on developing adaptation measures in order to better face the effects, rather than addressing the alleged causes, of global warming. The second paper looks at the existing patterns from greenhouse gases (GHGs) emissions, widely suspected of contributing to global warming. Assuming that some sort of political action is to be taken, and that some result may follow, it is noted that emissions – both in aggregate, on a per capita basis, and in terms of carbon intensity, i.e. the ratio between total emissions and gross domestic product (GDP) – are stabilizing or slightly declining in most developed countries. On the contrary, total emissions, per capita emissions, and carbon intensity are dramatically increasing in the developing world. A higher carbon intensity is interpreted as a proxy of a more obsolete technology. An analogy is then made with the pattern governing other pollutants, that is the so‑called Environmental Kuznets Curve. Empirical evidence shows that as a general rule in most countries pollutants have increased at first, then peaked and decreased as GDP has grown. This phenomenon has been theoretically understood as a consequence of the increased concentrations of pollutants that made them ever more intolerable on the one hand, and the increased availability of wealth to be invested in newer technologies and/or in innovative investments on the other hand. It is unclear, however, whether or not carbon emissions are following such a bell‑shaped curve, too. Further investigations into this pattern have suggested that GDP growth is not the only independent variable. The existence of free market institutions also matter, in that this allows GDP growth and creates a more favourable environment for investments. An empirical measure of the existence of free market institutions has been gleaned by the Index of Economic Freedom, published yearly by the Heritage Foundation and the Wall Street Journal. A panel dataset has been built with data regarding the Index of Economic Freedom, its subcomponents, total GHGs emissions, and a number of other macroeconomic and environmental indicators. A model has been built that relates GHGs emissions with economic freedom, controlling for one or more of the above‑mentioned variables. A significant, negative correlation has been found, which means that economic freedom – along with other factors – may explain part of the difference in carbon intensity between countries. The correlation is stronger for lower values of economic freedom, consistently with other evidence that correlates economic freedom with economic growth. There are theoretical reasons to believe that the correlation may be a sign of a causal link, even though the empirical evidence is still not enough to support such a claim. If the causal link should be proven true, a policy consequence would be that–all else being equal–increasing economic freedom might lead to a reduced carbon intensity in the developing world, which is expected to account for an increasing share of global emissions in the next few decades. If this is correct, promoting economic freedom could be an effective, no‑regret way to contain future emissions. The third paper focuses on the European Union’s climate policies. A first assessment is made by looking at the stated objectives of the policy, i.e. limiting temperature growth within 2 degrees above the pre‑industrial levels, and the broader context of GHGs emissions. It is shown that the EU is responsible for a relatively small share of world emissions, which is going to decline if the present trends continue. Under this reasonable assumption, the impact that European efforts may or will have on world emissions is negligible, as is their possible consequences on temperatures rise and global warming. This means that EU policies, absent an international cooperation on curbing emissions, can’t hold vis‑à‑vis any cost‑benefit analysis, however low is the “cost” side. The existing policies are not only unlikely to deliver a measurable environmental benefit: they are also working very poorly. The most important European policy is the Emissions Trading Scheme (ETS), a cap & trade scheme that covers some 12,000 facilities in all Europe. In the ETS First Phase (2005‑2007), emissions in the areas covered by the ETS did actually rise. There is evidence that this is at least partly a consequence of an over‑allocation that happened in the initial stage of the process. The Second Phase (2008‑2012) is expected to deliver more substantial emissions cuts, even though it is not yet clear whether ETS or the economic crisis will be the major driver. As to the Third Phase (2013‑2020) new rules are to be implemented, under which a growing number of allowances (starting from 30 % in 2013) will be auctioned instead of distributed free of charge; however, some areas or sub‑areas will still be given extra‑permits free of charge, in order to limit the risk of carbon leakage, i.e. delocalization of energy‑intensive firms exposed to international competition from countries who don’t have stringent emissions regulations. The new framework is critically evaluated, by emphasizing the risk that a very high degree of uncertainty and politicization undermines the system. An alternative policy is then proposed, by suggesting that a carbon tax can be more appropriate. Two different models of carbon taxes are finally examined, one dependent upon the projection of the future costs from warming, the other dependent upon a state‑contingent function that measures the amount of global warming in place at any given time.

Item Type: IMT PhD Thesis
Subjects: H Social Sciences > HB Economic Theory
PhD Course: Economics, Markets, Institutions
Identification Number: 10.6092/imtlucca/e-theses/47
Date Deposited: 13 Jul 2012 08:28
URI: http://e-theses.imtlucca.it/id/eprint/47

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