The greenhouse effect: economic challenges Roger Guesnerie Collge de France and Paris School of Econ

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The greenhouse effect economic challenges Roger
GuesnerieCollège de France and Paris School of
Economics.

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Foreword

• 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 leffet de
  serre ,La Documentation Française 2003.
• A subject
• Fascinating for everybody
• For theorists.
• Plan
• 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.

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The greenhouse effect a reminder.

• Increase in concentration of greenhouse gases in
  the atmosphere
• Beginning with the industrial revolution
• Human responsibility  Anthropogenic
• For CO2, use of fossil fuelsoil, gas, coal.
• Associated with development
• Concentration is going to increase spectacularly.
  
• 1800 270 ppmv
• 2000 360 ppmv
• 2100 450, 550, 750 ppmv

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The diagnosis sectoral origins
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The diagnosis Emissions across the world.

• C02 Emission
• 7 GT C per year
• 1 T/capita
• Emission variability.
• 6 T/capita USA
• 0.3 T India
• 2.3 T Europe. 1,7 T France
• Development linked.

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The diagnosis concentrations

• Characteristics
• Cumulative, (Stock)
• Weak reversibility.
• Concentration
• Climate.
• Worrying Extrapolations.
• 3.5-1.5 degrees.
• Compare with the ice age

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Diagnosis Climate and GES concentration

• The Link
• Troubling Parallelism.
• Theoretically and historically established.
• other factors of climate variability,
• 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 ..)

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The economics of the greenhouse effect

• In some dimension, a standard problem
• Quality of climate a  global  public good.
• The questions are standard
• To act or not to act, When to act, How to act..
• In fact, non standard dimensions
• Time horizon
• Huge uncertainties
• On effects climate or economic
• On abatement costs
• Possibly strong irreversibilities
•  Nature of the Government 
• No government, governance problems.
• Limits /economic argument.
• Dependant on the climate diagnosis
• External Limits.
• Moral and metaphysical dimension (H. Jonas)
• Intergenerational Equity.

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Costs of climate policies.

• How to reduce CO2 emissions ?
• Pre-industrial life style.
• Or ?
• Economic Actions.
• Decrease consumption of fossil fuels.
• Saving energy.
• Improving energy efficiency.
• Using less carbonized techniques.
• Electricity gaz instead of coal.
• Using decarbonized techniques
• Changes
• in production
• At the final demand level
• how ?

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Snapshots of specific difficulties.

• Objectives
• Stress inadequacies of standard theory.
• A selective overview
• The selected fields.
• Institutional design 1.
• The participation issue.
• Long run discount rates.
• Institutional design 2.
• The  prices versus quantities  issue.

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Institutional design Kyoto and post Kyoto

• How to trigger cooperation and induce LDC to
  participate ?

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The simple economics of internalizing
externalities.

• The model
• Amount of depollution q
• 2(n) firms.
• Marginal cost curves.
• Rules
• uniform quotas.
• The economic argument
• An adequate tax lowers total cost.
• The economic instruments.
• Tax, subsidy.
• Markets for permits
• Limits of the equivalence.
• profit,
• Rights
• Information

Marginal cost.
Tax, subsidy
optimum
q
Uniform quota
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Kyoto and Kyoto-compatible schemes.

• 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 Ui, 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.

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Kyoto and Kyoto-compatible schemes.

• Variant 1 Flexible (or negotiable) quotas FK
• Quotas are bargained
• Flexibility reflects exposition, etc
• Variant 2 Open Kyoto OK
• Non Annex B countries would be given BAU
  objectives
• Reminiscent of GPGP,,
• Pershing, Philibert, One sided/non binding
• Triggering participation ?
• Variant 3 OFK Mixes both F and K.

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Kyoto compatible schemes and others.

• 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.

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Formal definitions.

• Open Flexible Kyoto.
• 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 Ui, 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?Btq(i) ?i?NBtq(i) ?i?BF(i)

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Formal definitions

• FOK
• 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
• 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))

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Questions for the comparison..

• Participation short run
• A limited viewpoint/ participation of non-Annex B
  countries.
• Effects on efficiency and ..participation of
  Annex B countries.
• Participation long run aspects.
•  Dynamic  participation,
• The  ratchet effect .
•  Full Stability  issues
• Efficiency issues
• Prices versus quantities.
• Taxation and the prices of fossil fuel.
• Etc

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Comparing GPGP and Kyoto variants 1- short run
participation. RG  The design post Kyoto
climate schemes an introductory analytical
assesment (2006)

• An equivalence  Theorem  ?
• Is GPGP essentially  identical to OFK ?
• The   game form  , the characteristics
  function, ..
• Connections
• Given FOK, ? a (family) of GPGP/ same total
  abatment (welfare of non annex B countries is
  lower)
• 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).

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Comparing GPGP and Kyoto variants 3-
Coalitional Stability.

• The full stability problem is much more complex
• The Core is empty
• non excludable public good.
• Free riding.
• What is the arrangement more conducive to global
  effort in a given bargaining situation ?
• 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..
• An extensive literature..
• Chandler-Tulkens (2006), Carraro (1999).

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Some references.

• 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

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Some references.

• 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 léconomie 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.

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Some references.

• 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 lEnergie 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