Investments and Financial Flows Induced by Climate Mitigation Policies

On Monday November the 14th I presented the highlights of the paper "Investments and financial flows induced by climate mitigation polcies" at the International Business Green Economies Dialogue session at the OECD in Paris.

• We show that investments in the power sector increase in all but the moderate carbon tax scenarios, in the long term.

• Investments increase as the price of the carbon tax increases above 50$ per ton of CO2-eq.

• However the ratio of investments in the power sector to investments in all other sector does not increase with respect to the present level, with the only exception being the very high tax scenario.

• Investments in R&D increase about 4-fold in the high tax scenarios.

• Revenues from carbon taxes reach about 3 trillions $ in 2045 in the highest tax scenario. Revenues decline after 2050 because the tax base disappears.

• With the right signals markets can provide sufficient investments in the power sector.

• Governments should finance frontier research in new carbon-free technologies.

• Revenues from carbon taxes are large and can be used to reduce distortionary taxes or provide fundings to cover increased spending for pensions.

The presentation can be downloaded here.

An older version of the paper is here.

Special Issue on INEA: Reconciling Domestic Energy Needs and Global Climate Policy: Challenges and Opportunities for China and India

Carlo Carraro and I have recently edited a special issue of INEA. We collect a set of articles that take stock of the current status of the negotiations and suggest an unconventional, pragmatic way forward.

All the articles recognize that China and India will not enter a textbook-style international climate agreement soon. They are also aware that the future international climate architecture will be fragmented and incomplete at least until 2020. Therefore, the inability to build a large binding agreement with absolute targets is not seen as a tragedy, but rather as a fact that should be considered as a starting point for future steps towards global emission reductions. For this reason all articles take a long-term perspective. As Zhang notes in his article, the real question when dealing with China and India is post‑2020 and not pre‑2020.

 

In the free-access editorial we trace a well-defined pathway to include China and India in the international effort to control global warming. With a more active participation of the two large developing economies, developed countries would find it hard to avoid a more active engagement and the Gordian knot of climate policy could be cut.

We summarize this pathway through six key messages.

First, at least in the next decade, negotiators should focus more on sustainable development goals than on targets and timetables. 

Second, China and India will have a remarkably different impact on global climate change for several decades to come. At the same time, they follow different development paths and therefore should proceed along different negotiating trajectories.

 

Third, China may take on absolute emissions caps around 2030.

Fourth, there are many opportunities in China and India to reduce emissions by a large amount, and at low cost, between 2020 and 2050.

Fifth, in order to achieve consensus on very ambitious climate agreements it is necessary to agree on a new shared definition of the “common but differentiated responsibilities” (CBRD) principle.

Sixth, clear rules that deal with the non-compliance of OECD countries with Kyoto and other climate commitments must be established.

Table of contents:

Reconciling Domestic Energy Needs and Global Climate Policy: Challenges and Opportunities for China and India

Guest Editors: Carlo Carraro and Emanuele Massetti

Editorial, Carlo Carraro and Emanuele Massetti
 

Carbon tax scenarios for China and India: exploring politically feasible mitigation goals, by Emanuele Massetti
 

Climate agreements and India: aligning options and opportunities on a new track, by P. R. Shukla and Subash Dhar

In what format and under what timeframe would China take on climate commitments? A roadmap to 2050,  by Zhongxiang Zhang

China and India’s participation in global climate negotiations, by Sean Walsh, Huifang Tian, John Whalley and Manmohan Agarwal

Technical Innovation, Economic Development and Implications for Energy Use and Emissions

The UNESCO Energy Bulletin has published a longer and more articulated version of the World Bank Development Outreach article on emissions and economic development

Carlo Carraro and Emanuele Massetti. 2011. "Technical Innovation, Economic Development and Implications for Energy Use and Emissions." UNESCO Energy Bulletin, 2(11).

"In order to achieve the target of a 50% reduction of GHGs emissions by 2050 set forth during the G8 Summit in L’Aquila, Italy, in 2009, CO2 emissions per capita need to be lower than 1.14 tons in 2050, using 1990 as the benchmark year and assuming that an equivalent effort is undertaken to reduce emissions of all other GHGs. If we consider that in 2005 CO2 emissions per capita were about 4.5 tons and we expect a median future level in 2050 equal to 6 tons of CO2 per capita, we can easily conclude that we are definitely off-track. The historic pattern that links emissions to economic development needs to be reversed."


"Some solutions are already available and a well-crafted climate policy can stimulate their adoption. However, there are limited options available today to invert drastically the relationship between economic growth and emissions."

First Lead Author Meeting of IPCC AR5 WGIII

I just returned from the first Lead Authors meeting of the International Panel on Climate Change (IPCC) Working Group III in Changwon, South Korea. This was the first of a series of meetings that will serve to prepare the Fifth Assessment Report (AR5). The next meeting will be in New Zealand in Spring 2012. The AR5 will be ready in 2014.

Estimating Ricardian Models With Panel Data - NBER WP

The paper "Estimating Ricardian Models with Panel Data", joint with R. Mendelsohn, was published as NBER working paper last week.

Abstract:

Many nonmarket valuation models, such as the Ricardian model, have been estimated using cross sectional methods with a single year of data. Although multiple years of data should increase the robustness of such methods, repeated cross sections suggest the results are not stable. We argue that repeated cross sections do not properly specify the model. Panel methods that correctly specify the Ricardian model are stable over time. The results suggest that many cross sectional methods including hedonic studies and travel cost studies could be enhanced using panel data.

Massetti, E. and R. Mendelsohn (2011). “Estimating Ricardian Functions with Panel Data.” NBER Working Paper No. 17101, June 2011.

Postdoc at Yale

Starting from May 1st I will be Postdoctoral Fellow at the Yale School of Forestry & Environmental Studies. I will spend two years at Yale as part of the outgoing phase of the International Outgoing Marie Curie Fellowship that I received this year.

The greening of development: no growth without energy

A short article for the World Bank Development Outreach Magazine, issue on Emerging Issues in Development Policy: The winding road to growth and equity, April 2011.

Economic development increases the demand for energy. This is true for countries at all income levels, although as economic growth progresses, the demand tends to increase more in the low- and middle-income countries than in high-income ones. But energy remains a key ingredient for economic growth at all stages of development.
With 5.4 billion people living in low and middle-income countries—out of  a global population of 6.5 billion—energy demand will very likely continue to grow at a fast pace for many years to come. [...]

Download the article.