The environment as a factor of production

This paper uses firm-level data about electric utilities to develop an empirical model of how electric utilities use and bank SO₂ pollution permits under the Acid Rain Program. The empirical model considers emissions, fuels, and labor as variable inputs with quasi-fixed stocks of permits and capital. Consequently, substitution possibilities between the environment and other production factors can be measured and tested. The results reveal substantial substitution between emissions, permit stocks, capital, fuel, and labor. The empirical findings also indicate that firms bank permits primarily as a hedge against uncertainty and for other firm-specific reasons. Overall, the results suggest that cap-and-trade approaches can reduce the cost of meeting environmental goals by providing a mechanism for addressing regulatory and market risks and by signaling an appropriate price for factor use, especially irreversible capital investments.     

Some Welfare Effects of Emission Allowance Trading in a Twice-Regulated Industry

The 1990 Clean Air Act Amendments establish a national market in emission allowances to dramatically reduce SO₂, emissions from electric utilities, who already face economic regulation. Regulatory treatment of allowances will affect the new market. We present simulation results for a simple industry in which two electric utilities face a common Averch-Johnson regulatory constraint and an emissions constraint. In this model the performance of the allowance market depends importantly upon the rate-making treatment of compliance assets by utility regulators. Compared to a command and control scheme, the allowance market substantially reduces the cost of achieving a given environmental standard.     

Green tax reform,endogenous innovation and the growth dividend

We study theoretically and numerically the effects of an environmental tax reform using endogenous growth theory. In the theoretical segment, mobile labor between manufacturing and R&D activities, and elasticity of substitution between labor and energy in manufacturing lower than unity allow for a growth dividend, even if we consider preexisting tax distortions. The scope for innovation is reduced when we consider direct financial investment in the lab, or elastic labor supply. We then apply the core theoretical model to a real growing economy and find that a boost in long-run economic growth following such a carbon policy is a possible outcome. Redistribution of additional carbon tax revenue by lowering capital taxation performs best in terms of effciency measured by aggregate welfare. In terms of equity among social segments the progressive character of lump-sum redistribution fails when we consider very high emissions reduction targets.     

Towards a 3D National Ecological Footprint Geography

In the last decades several indicators have been proposed to guide decision makers and help manage natural capital. Among such indicators is the Ecological Footprint, a resource accounting tool with a biophysical and thermodynamic basis. In our recent paper (Niccolucci et al., 2009), a three dimensional Ecological Footprint (^3DEF) model was proposed to better explain the difference between human demand for natural capital stocks and resource flows. Such ^3DEF model has two relevant dimensions: the surface area (or Footprint size - EF_size) and the height (or Footprint depth - EF_depth). EF_size accounts for the human appropriation of the annual income from natural capital while EF_depth accounts for the depletion of stocks of natural capital and/or the accumulation of stocks of wastes. Building on the 2009 Edition of the National Footprint Accounts (NFA), global trends (from 1961 to 2006) for both EF_size and EF_depth were analyzed. EF_size doubled from 1961 to 1986; after 1986 it reached an asymptotic value equal to the Earth's biocapacity (BC) and remained constant. Conversely, EF_depth remained constant at the “natural depth” value until 1986, the year in which global EF first exceeded Earth's BC. A growing trend was observed after that. Trends in each Footprint land type were also analyzed to better appraise the land type under the higher human induced stress. The usefulness of adopting such ^3DEF model in the National Footprint Accounts was also discussed. In comparing any nation's demand for ecological assets with its own biocapacity in a given year, four hypothetical cases were identified which could serve as the basis for a new Footprint geography based on both size and depth concepts. This ^3DEF model could help distinguish between the use of natural capital flows and the depletion of natural capital stocks while maintaining the structure and advantages of the classical Ecological Footprint formulation.     

Uncertainty analysis of climate change mitigation options in the forestry sector using a generic carbon budget model

Industrialized countries agreed on a reduction of greenhouse gas emissions under the Kyoto Protocol. Many countries elected forest management activities and the resulting net balance of carbon emissions and removals of non-CO₂ greenhouse gases by forest management in their climate change mitigation measures. In this paper a generic dynamic forestry model (FORMICA) is presented. It has an empirical basis. Several modules trace C pools relevant for the Kyoto Protocol and beyond: biomass, litter, deadwood and soil, and harvested wood products. The model also accounts for the substitution of fossil fuels by wood products and bioenergy.     

Optimal investment policies with exhaustible resources: An information-based model

An information-based model of the “optimal control” type is developed using concepts from information theory to explore the dynamics of fossil resource exhaustion and the phenomenon of substitution by other forms of capital and technological knowledge. All exhaustible resources stocks and forms of capital (and knowledge) are taken to be equivalent to forms of information in the physical sense. It is shown that, with optimal policies, the planning period, or cycle, has several distinct phases, with different optimal investment patterns. The model has two important qualitative implications: (1) economic growth rates are inherently discontinuous and (2) the model predicts an evolutionary structural change, viz., the creation of a new sector in response to the progressive exhaustion (or obsolescence) of previously essential resources or capital stocks. A multiperiod extension is suggested, leading to a tentative explanation for the Kondratieff long-wave phenomenon.     

Growth accounting in a fishery

Since 1950, the real value of fish catches in Norway has about doubled, while the number of fishermen has declined by about 85 percent. This has made it possible to maintain fishermen's incomes roughly on par with other occupational groups in Norway. It is investigated to what extent this increase in labor productivity is due to accumulation of capital, increasingly abundant fish stocks, or technological progress. Since the capital stock in recent years is not much greater in real terms than in the early 1960s, it is tempting to ascribe most of the increase in labor productivity to technical progress. This, however, would leave out the role of fish stocks; if stocks have increased over this period, this would explain some of what otherwise appears as a technical progress. Using data on labor, capital, fish catches, and fish stock abundance 1961–2004 the development of total factor productivity is examined. Ignoring changes in fish stocks, total factor productivity is estimated to have increased by 0.8 percent per year. Accounting for changes in fish stocks raises this to 1.7–4.3 percent per year, depending on the importance assigned to stocks as factors of production.     

A Model of Intertemporal Emission Trading, Banking, and Borrowing

This paper provides a general treatment of emission trading, banking, and borrowing in an intertemporal, continuous-time model. Using optimal-control theory, the decentralized behavior of firms is shown to lead to the least-cost solution attainable under joint-cost minimization. Explicit solutions for the time paths of emissions and permit prices are derived when firms are allowed to both bank and borrow and when firms are only allowed to bank emission permits. The policy implications of emission banking and borrowing are discussed.     

Emissions trading systems with cap adjustments

Emissions Trading Systems (ETSs) with fixed caps lack provisions to address systematic imbalances in the supply and demand of permits due to changes in the state of the regulated economy. We propose a mechanism which adjusts the allocation of permits based on the current bank of permits. The mechanism spans the spectrum between a pure quantity instrument and a pure price instrument. We solve the firms׳ emissions control problem and obtain an explicit dependency between the key policy stringency parameter—the adjustment rate—and the firms׳ abatement and trading strategies. We present an analytical tool for selecting the optimal adjustment rate under both risk-neutrality and risk-aversion, which provides an analytical basis for the regulator׳s choice of a responsive ETS policy.     

The dynamic causal links between CO2 emissions from transport,real GDP,energy use and international tourism

This study examines the dynamic causality relationship between international tourism and carbon dioxide (CO₂) emissions from transport, real gross domestic product and energy use. The vector error correction model and Granger causality test approach have been used to investigate these relationships for the top ten international tourism destinations spanning the period 1995–2013. Results reveal a unidirectional causality running from CO₂ emissions to economic growth without feedback; a bidirectional causality between economic growth and energy use; a bidirectional causality between international tourism and economic growth; and a bidirectional causality between international tourism and energy use. They also suggest that energy use and international tourism both contribute to the decrease of emissions level coming from transport sector, while economic growth leads to the increase of CO₂ emissions. This study can be used in policy recommendations by encouraging countries to use clean energy and to stimulate tourism sector for combating global warming.     

An experimental analysis of compliance in dynamic emissions markets

Two important design elements for emission trading programs are whether and to what extent firms are able to bank emissions permits, and how these programs are to be enforced. In this paper we present results from laboratory emissions markets designed to investigate enforcement and compliance when these markets allow permit banking. Banking is motivated by a decrease in the aggregate permit supply in the middle of multi-period trading sessions. Consistent with theoretical insights, our experiments suggest that high permit violation penalties have little deterrence value in dynamic emissions markets, and that the main challenge of enforcing these programs is to motivate truthful self-reports of emissions.     

An experimental analysis of compliance in dynamic emissions markets

Two important design elements for emission trading programs are whether and to what extent firms are able to bank emissions permits, and how these programs are to be enforced. In this paper we present results from laboratory emissions markets designed to investigate enforcement and compliance when these markets allow permit banking. Banking is motivated by a decrease in the aggregate permit supply in the middle of multi-period trading sessions. Consistent with theoretical insights, our experiments suggest that high permit violation penalties have little deterrence value in dynamic emissions markets, and that the main challenge of enforcing these programs is to motivate truthful self-reports of emissions.     

Emissionen und Minderungspotential von HFKW, FKW und SF6 in Deutschland

The greenhouse gases subject to emission reduction commitments under the UN Climate Convention include the fluorinated compounds sulphur hexafluoride (SF₆), perfluorocarbons (PFCs) and hydrofluorocarbons (HFCs). The present study projects the emissions of these gases in Germany over the 1995–2010 period, with and without additional emission abatement efforts In the business-as-usual scenario, total emissions of the three fluorinated gases rise over the 1995–2010 period from 11,1 to 27.4 million tonnes CO₂ equivalent. This rise is attributable to 72% to HFCs, used above all for refrigeration and stationary air-conditioning, for mobile air-conditioning, for blowing extruded polystyrene (XPS) foam and for one-component polyurethane (PU) foam. Soundproof glazing is the largest SF₆ emission sector. Most PFC emissions come from semiconductor manufacturing and aluminium smelting. The reduction scenario does not achieve a stabilisation of fluorinated gas emissions either. The rate of growth is only slowed, with 11.1 million tonnes CO₂ equivalent in 1995 growing to 14.9 million in 2010. The measures proposed to attenuate emissions growth are: mandatory equipment maintenance in refrigeration and stationary air-conditioning, refrigerant substitution of HFCs by CO₂ in mobile air-conditioning, partial HFC substitution by CO₂ in XPS foam blowing, 95% HFC substitution by flammable hydrocarbons in one-component PU foam. Complete SF₆ phase-out is considered to be feasible in soundproof glazing. The PFC emissions of the semiconductor industry can be cut by 85% by new chamber cleaning technologies.     

Emissions targets and the real business cycle: Intensity targets versus caps or taxes

For reducing greenhouse gas emissions, intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps. For the same expected emissions, however, the economic responses to unexpected productivity shocks differ. Using a real business cycle model, we find that a cap dampens the effects of productivity shocks in the economy on all variables except for the shadow value of the emissions constraint. An emissions tax leads to the same expected outcomes as a cap but with greater volatility. Certainty-equivalent intensity targets maintain higher levels of labor, capital, and output than other policies, with lower expected costs and no more volatility than with no policy.     

Emissions targets and the real business cycle: Intensity targets versus caps or taxes

For reducing greenhouse gas emissions, intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps. For the same expected emissions, however, the economic responses to unexpected productivity shocks differ. Using a real business cycle model, we find that a cap dampens the effects of productivity shocks in the economy on all variables except for the shadow value of the emissions constraint. An emissions tax leads to the same expected outcomes as a cap but with greater volatility. Certainty-equivalent intensity targets maintain higher levels of labor, capital, and output than other policies, with lower expected costs and no more volatility than with no policy.     

When do environmental regulations backfire? Onsite industrial electricity generation,energy efficiency and policy instruments

More than half of all energy produced by electric utilities is lost in the form of waste heat. However, when manufacturing facilities choose to produce their own electricity, this waste heat is captured by Combined Heating and Power (CHP) technologies and used in the production process. As a result, manufacturers' pollution footprint can be dramatically reduced by choosing to produce electricity onsite rather than purchasing it from a utility. This paper uses Census microdata to study manufacturers’ decision to produce electricity onsite and examines how plants adjust onsite generation when they are subject to environmental regulations. Environmental regulations will backfire if they cause manufacturers to produce less electricity onsite and shift to electricity from less efficient, offsite electric utilities. We find that manufacturing plants subject to NOx command-and-control regulations decrease onsite electricity generation, increase electricity purchases from off-site utilities and see declines in their energy efficiency. However, manufacturers subject to cap-and-trade see no decline in onsite generation and experience improvements in energy efficiency. These findings demonstrate the importance of instrument selection and identify a new pathway through which emissions leakage may occur.     

Efficient air pollution abatement for regions in China

This paper computes the efficient air pollution abatement ratios of 30 regions in China during the period 1996–2002. Three air emissions (SO₂, soot and dust) are considered. Data envelopment analysis (DEA) with a single output (real GDP) and five inputs (labour, real capital stock, SO₂, dust and soot emissions) is used to compute the target emissions of each region for each year. The efficient abatement ratios of each region in each year are then obtained by dividing the target emission by the actual emission of an air pollutant. Our major findings are: 1. The eastern area is the most efficient region with respect to SO₂, soot and dust emissions in every year during the research period. 2. The eastern, central and western areas have the lowest, medium and highest 1996–2002 average target abatement ratios of SO₂ (22.09%, 42.23% and 57.58%), soot (26.19%, 56.34% and 66.37%) and dust (15.20%, 29.09% and 40.59%), respectively. 3. These results are consistent with the Environmental Kuznets Curve (EKC) theory, whereby a more developed area will use environmental goods more efficiently than a less developed area. 4. Compared to dust emission, the average target abatement ratios for SO₂ and soot emissions (as direct outcomes of burning coal) are relatively much higher for all three areas.     

Carbon leakage and capacity-based allocations: Is the EU right?

Competitiveness and carbon leakage are major concerns for the design of CO₂ emissions permits markets. In the absence of a global carbon tax and of border carbon adjustments, output-based allocation is a third-best solution and is actually implemented (Australia, California, New Zealand). The EU has followed a different route; free allowances are allocated to existing or new capacities in proportion to a benchmark, independent of actual production. This paper compares these two schemes in a formal setting and shows that the optimal one is in fact a combination of both schemes, or output-based allocation alone if uncertainty is limited. A key assumption of our analysis is that the short-term import pressure depends both on the existing capacities and the level of demand, which is typical in capital intensive and internationally traded sectors. A calibration of the model is used to discuss the EU scheme for the cement sector in the third phase of the EU-ETS (2013–2020). This allows for a quantification of various policies in terms of welfare, investment, production, company profits, public revenues and leakage.     

How deep is the footprint? A 3D representation

Depletion of natural capital stocks and use of natural capital flows are the central issues in the sustainability debate. Differentiation of these two components, considering natural capital and its limits, is important for planning and management of land use. This paper offers insights into this issue and proposes a new perspective of the Ecological Footprint (EF) in three dimensions, considering not only its size but also its depth: according to this viewpoint the footprint is not an area but a volume, although maintaining the same value as the one in two dimensions. Use of annual flows provided by the Earth is represented by the footprint size, expressed in global hectares (gha) and plotted in the (x,y) plane. Footprint depth represents the demand for extra land to meet human needs through depletion of stocks of natural capital. It is plotted on the z-axis. It can be seen as the number of years necessary to regenerate resources liquidated in 1 year (and to absorb the respective wastes) or as the number of planets necessary to support the inhabitants of the planet Earth. The evolution of these two components in the last five decades is studied and discussed.     

Strategic pollution control and capital tax competition

In an analytical model of symmetric countries with mobile capital and local or transboundary pollution we investigate whether competition in emissions taxes (or emissions caps) and capital taxes leads to efficient outcomes when governments act strategically. When they have capital taxes and emissions caps at their disposal, they refrain from taxing capital and set their caps inefficiently lax [efficient] for transboundary [local] pollution. When they have the option to tax capital and emissions, capital is subsidized [untaxed] and emissions taxes are inefficiently low [efficient] for transboundary [local] pollution. In case of transboundary pollution emissions caps are Pareto-superior to emissions taxes. That holds regardless of whether the environmental policy is applied as stand-alone policy or combined with capital tax competition.