Directed technical change with capital-embodied technologies: Implications for climate policy

We develop a theoretical model of directed technical change in which clean (zero-emissions) and dirty (emissions-intensive) technologies are embodied in long-lived capital stocks. Switching from dirty to clean innovation leads to ongoing reductions in the relative costs of producing clean investment goods, making them ever cheaper to purchase and so encouraging clean investment. At the same time, falling replacement costs imply falling asset values. Consequently, continuing innovation in capital-embodied clean technologies also generates obsolescence costs, which are borne by users of clean capital. The negative effect of obsolescence costs on demand for clean investment and consequently on the speed of transition to clean growth has been neglected in the literature on directed technical change.We show theoretically and using numerical simulations that optimal policies differ in our model of embodied technological change, relative to an otherwise comparable model of disembodied technological change. With embodied technologies: (i) optimal emissions taxes start higher and rise faster; (ii) much higher clean research and development subsidies are required to effect the switch to clean innovation; and (iii) climate damages under optimal policies are greater. We suggest that more attention should be paid to the role of obsolescence costs in modelling transitional effects of climate policies.     

Critical analysis of the European Union directive which regulates the use of biofuels: An approach to the Spanish case

For more than a decade we have lived in a period where the so-called “sustainability” is crucial and is motivated primarily by the social awareness of achieving a balance between human development and the conservation of the environment. This philosophy has a direct and inevitable impact on business and politics. Governments have long since been developing standards and encouraging various diverse initiatives whose aim is to defend the environment.In recent times, the global debate on the environment has been centred on CO₂ emissions. This gas is the major cause of the “greenhouse effect” and people are more concerned with the idea that the emissions of this gas should be minimized. As a result of this concern, the Kyoto Protocol was enacted and subscribed to by many countries, setting the maximum gas emissions for them.Fossil fuels are a major source of CO₂ emissions. In 2003 the European Union (EU) directive 2003/30/EC [2003/30/EC Directive of the European Parliament and the Council—8th may 2003. On the promotion of the use of biofuels or other renewable fuels for transport] was developed with the aim of promoting the use of biofuels as a substitute for diesel or petrol among European Union countries as well as to contribute to fulfilling the commitments on climate change, security of supply in environmentally friendly conditions and the promotion of renewable energy sources.In order to achieve these goals, the directive forces all EU members to ensure that at least 5.75% of all petrol and diesel fuels sold for transport purposes are biofuels before December 31 of 2010. European Union countries have social and economic characteristics unique to themselves. The energy dependence from foreign sources, the features of the agricultural sector or the degree of industrialization varies greatly from one country to another. In this context, it is questionable whether the obligation imposed by this directive applies to achieve uniform and/or identical goals in each of the countries involved and whether the actions of the various governments are also aligned with these goals.     

The European climate change program: An evaluation of stakeholder involvement and policy achievements

In order to step up its efforts in reducing climate change, the European Commission (hereafter: the Commission) has launched in June 2000 its European climate change program (hereafter: ECCP). This wide-ranging stakeholder consultation aimed at identifying and developing all elements necessary for a European climate change strategy. The ECCP formally came to a close in April 2003.     

Tax exemption for biofuels in Germany: Is bio-ethanol really an option for climate policy?

In 2002 the German Parliament decided to exempt biofuels from the gasoline tax to increase their competitiveness compared to conventional gasoline. The policy to promote biofuels is being justified by their allegedly positive effects on climate, energy, and agricultural policy goals. An increased use of biofuels would contribute to sustainable development by reducing greenhouse-gas emissions and the use of non-renewable resources. The paper takes a closer look at bio-ethanol as a substitute for gasoline. It analyzes the underlying basic German, European, and worldwide conditions that provide the setting for the production and promotion of biofuels. It is shown that the production of bio-ethanol in Germany is not competitive and that imports are likely to increase. Using energy and greenhouse-gas balances we then demonstrate that the promotion and a possible increased use of bio-ethanol to reduce greenhouse-gas emissions are economically inefficient and that there are preferred alternative strategies. In addition, scenarios of the future development of the bio-ethanol market are derived from a model that allows for variations in all decisive variables and reflects the entire production and trade chain of bio-ethanol, from the agricultural production of wheat and sugar beet to the consumption of bio-ethanol in the fuel sector.     

Lobbying friends and foes in climate policy: The case of business and environmental interest groups in the European Union

Drawing on two conflicting hypotheses from the theoretical literature on lobbying, I consider the strategies applied by interest groups lobbying to influence climate policy in the European Union (EU). The first hypothesis claims that interest groups lobby their ‘friends’, decision-makers with positions similar to their own. The second claims that interest groups lobby their ‘foes’, decision-makers with positions opposed to their own. Using interviews with lobbyists and decision-makers, I demonstrate that in the field of climate policy, interest groups in the EU lobby both friends and foes, but under different conditions. Moreover, I find that the interest groups’ motives are not always in line with the theoretical hypotheses. Interest groups lobby their friends on single policy decisions to exchange information, to further a common cause and to exert pressure, and their foes because a foe on one issue might prove to be a friend on another issue. Interest groups direct general lobbying towards both friends and foes. This paper provides a new empirical contribution to a literature that has so far been heavily dominated by studies focusing on lobbying in the US.     

Global climate change: Implications for thailand's energy systems

An energy/environmental model has been developed to estimate Thailand's energy consumption and CO₂ emissions through the end of the National Tenth Plan (year 2011). The projection suggests that fossil-fuel consumption, not deforestation, will be the major source of emissions during 1990–2011. By the year 2011, energy-efficiency improvement measures could bring about a 14% reduction of CO₂ emissions. Any reduction beyond this level would require switches of fuel mix in the power, transportation, and industrial sectors. Fuel shifts in the power sector alone could cut emissions by up to 20% to 30%. In the longer run, Thailand should consider adopting unconventional sources of energy, as well as make use of reforestation policy to absorb future CO₂ emissions.     

French perspectives in the emerging European Union energy policy

The debate over a common European energy policy, its necessity and its establishment has been going on for a number of decades. The discussions have been recently brought back into the spotlight by the evolution of energy market fundamentals and the taking into account of environmental protection. In spite of the energy diversity of the European Union (EU), a common vision has always been shared by all over energy development for the future. The achievements of the internal market, the fight against climate change and supply security are the common energy battles that call for a solution in common. This policy remains the responsibility of the States, but decisions vary from one country to the next. To move from a shared vision to a European energy policy, large steps are necessary. The European construction is making evolve the “typically French vision” of energy policy. France was often characterized as the “black sheep” in the EU. In the political context of president elections, the energy debate in French is of a high interest. This paper discusses the main issues with the French energy policy in the emerging European energy policy.     

European Union energy policy integration: A case of European Commission policy entrepreneurship and increasing supranationalism

Focusing on gas, this article explores the role of the European Commission in the process of European Union energy security policy development, and the extent to which the policy area is becoming increasingly supranational. Situating the article within the literature on agenda-setting and framing, it is argued that a policy window was opened as a result of: enlargement to include more energy import dependent states, a trend of increasing energy imports and prices, and gas supply disruptions. From the mid-2000s, the Commission contributed to a shift in political norms, successfully framing import dependency as a problem requiring an EU-level solution, based on the institution’s pre-existing preferences for a diversified energy supply and internal energy market. Whilst Member States retain significant sovereignty, the Commission has achieved since 2006 creeping competencies in the internal, and to a lesser extent external, dimensions of EU energy policy.     

Promoting biofuels: Implications for developing countries

Interest in biofuels is growing worldwide as concerns about the security of energy supply and climate change are moving into the focus of policy makers. With the exception of bioethanol from Brazil, however, production costs of biofuels are typically much higher than those of fossil fuels. As a result, promotion measures such as tax exemptions or blending quotas are indispensable for ascertaining substantial biofuel demand. With particular focus on developing countries, this paper discusses the economic justification of biofuel promotion instruments and investigates their implications. Based on data from India and Tanzania, we find that substantial biofuel usage induces significant financial costs. Furthermore, acreage availability is a binding natural limitation that could also lead to conflicts with food production. Yet, if carefully implemented under the appropriate conditions, biofuel programs might present opportunities for certain developing countries.     

Indirect land use change for biofuels: Testing predictions and improving analytical methodologies

Current practices for estimating indirect land use change (iLUC) due to United States biofuel production rely on assumption-heavy, global economic modeling approaches. Prior iLUC studies have failed to compare their predictions to past global historical data. An empirical approach is used to detect evidence for iLUC that might be catalyzed by United States biofuel production through a “bottom-up”, data-driven, statistical approach. Results show that biofuel production in the United States from 2002 to 2007 is not significantly correlated with changes in croplands for corn (coarse grain) plus soybean in regions of the world which are corn (coarse grain) and soybean trading partners of the United States. The results may be interpreted in at least two different ways: 1) biofuel production in the United States through 2007 (the last date for which information is available) probably has not induced any indirect land use change, and 2) this empirical approach may not be sensitive enough to detect indirect land use change from the historical data. It seems clear that additional effort may be required to develop methodologies to observe indirect land use change from the historical data. Such efforts might reduce uncertainties in indirect land use change estimates or perhaps form the basis for better policies or standards for biofuels.     

Modeling endogenous technological change for climate policy analysis

The approach used to model technological change in a climate policy model is a critical determinant of its results in terms of the time path of CO₂ prices and costs required to achieve various emission reduction goals. We provide an overview of the different approaches used in the literature, with an emphasis on recent developments regarding endogenous technological change, research and development, and learning. Detailed examination sheds light on the salient features of each approach, including strengths, limitations, and policy implications. Key issues include proper accounting for the opportunity costs of climate-related knowledge generation, treatment of knowledge spillovers and appropriability, and the empirical basis for parameterizing technological relationships. No single approach appears to dominate on all these dimensions, and different approaches may be preferred depending on the purpose of the analysis, be it positive or normative.     

Representing induced technological change in models for climate policy analysis

Induced technological change (ITC), whereby the relative price effects of reducing greenhouse gas emissions stimulate innovation that mitigates the cost of abatement, is both tantalizing to decision makers and challenging to represent in the computational economic and engineering models used to analyze climate change policy. This overview reconciles the divergent views of technology and technological change within different types of models, elucidates the theoretical underpinnings of ITC, introduces the reader to the techniques of their practical implementation, and evaluates the implications for models' results.     

Land use change in a biofuels hotspot: The case of Iowa, USA

This study looks at the land use impact of the biofuels expansion on both the intensive and extensive margin, and its environmental consequences. We link economic, geographical and environmental models by using spatially explicit common units of analysis and use remote sensing crop cover maps and digitized soils data as inputs. Land use changes are predicted via economic analysis of crop rotation choice and tillage under alternative crop prices, and the Environmental Policy Integrated Climate (EPIC) model is used to predict corresponding environmental impacts. The study focuses on Iowa, which is the leading biofuels hotspot in the U.S. due to intensive corn production and the high concentration of ethanol plants that comprise 28% of total U.S. production. We consider the impact of the biofuels industry both on current cropland and on land in the Conservation Reserve Program (CRP), a land set-aside program. We find that substantial shifts in rotations favoring continuous corn rotations are likely if high corn prices are sustained. This is consistent with larger scale analyses which show a shift of the current soybean production out of the Corn Belt. We find that sediment losses increase substantially on the intensive margin, while nitrogen losses increase less. Returning CRP land into production has a vastly disproportionate environmental impact, as non-cropped land shows much higher negative marginal environmental effects when brought back to row crop production. This illustrates the importance of differentiating between the intensive and extensive margin when assessing the expansion of biofuel production.     

A multi-criteria evaluation method for climate change mitigation policy instruments

This paper presents an integrated multi-criteria analysis method for the quantitative evaluation of climate change mitigation policy instruments. The method consists of: (i) a set of criteria supported by sub-criteria, all of which describe the complex framework under which these instruments are selected by policy makers and implemented, (ii) an Analytical Hierarchy Process (AHP) process for defining weight coefficients for criteria and sub-criteria according to the preferences of three stakeholders groups and (iii) a Multi-Attribute Theory (MAUT)/Simple Multi-Attribute Ranking Technique (SMART) process for assigning grades to each instrument that is evaluated for its performance under a specific sub-criterion. Arguments for the selected combination of these standard methods and definitions for criteria/sub-criteria are quoted. Consistency and robustness tests are performed. The functionality of the proposed method is tested by assessing the aggregate performances of the EU emission trading scheme at Denmark, Germany, Greece, Italy, Netherlands, Portugal, Sweden and United Kingdom. Conclusions are discussed.     

Directed technical change and differentiation of climate policy

This paper studies the cost effectiveness of climate policy if there are technology externalities. For this purpose, we develop a forward looking model that captures empirical links between CO₂ emissions associated with energy use, directed technical change and the economy. We find our most cost effective climate policy to include a combination of R&D subsidies and CO₂ emission constraints, although R&D subsidies raise the shadow value of the CO₂ constraint (i.e. CO₂ price) because of a strong rebound effect from stimulating innovation. Furthermore, we find that cost effectiveness of climate policy improves if it is differentiated between technologies. Even our rudimentary distinction between CO₂ intensive technologies and non-CO₂ intensive technologies lead to this result. Such differentiated climate policy encourages growth in the non-CO₂ intensive sectors and discourages growth in CO₂ intensive sectors by harnessing positive effects of technology externalities on total factor productivity in the former and letting the latter bear relatively more of the abatement burden. This result is robust to whether emission constraints, R&D subsidies or combinations of both are used as climate policy instruments.     

The GHG balance of biofuels taking into account land use change

The contribution of biofuels to the saving of greenhouse gas (GHG) emissions has recently been questioned because of emissions resulting from land use change (LUC) for bioenergy feedstock production. We investigate how the inclusion of the carbon effect of LUC into the carbon accounting framework, as scheduled by the European Commission, impacts on land use choices for an expanding biofuel feedstock production. We first illustrate the change in the carbon balances of various biofuels, using methodology and data from the IPCC Guidelines for National Greenhouse Gas Inventories. It becomes apparent that the conversion of natural land, apart from grassy savannahs, impedes meeting the EU's 35% minimum emissions reduction target for biofuels. We show that the current accounting method mainly promotes biofuel feedstock production on former cropland, thus increasing the competition between food and fuel production on the currently available cropland area. We further discuss whether it is profitable to use degraded land for commercial bioenergy production as requested by the European Commission to avoid undesirable LUC and conclude that the current regulation provides little incentive to use such land. The exclusive consideration of LUC for bioenergy production minimizes direct LUC at the expense of increasing indirect LUC.     

Uncertainty and endogenous technical change in climate policy models

Until recently endogenous technical change and uncertainty have been modeled separately in climate policy models. In this paper, we review the emerging literature that considers both these elements together. Taken as a whole the literature indicates that explicitly including uncertainty has important quantitative and qualitative impacts on optimal climate change technology policy.     

Indirect land use change and biofuels: Mathematical analysis reveals a fundamental flaw in the regulatory approach

In the Renewable Fuel Standard (RFS2) program, the United States Environmental Protection Agency (U.S. EPA) has used partial equilibrium models to estimate the overall indirect land use change (iLUC) associated with the biofuel scenario mandated by the Energy Independence and Security Act of 2007 (EISA). For regulatory purposes, the U.S. EPA “shocks” (changes) the amount of each biofuel in the economic models one at a time to estimate the threshold values for specific biofuels (single-shock analysis). The primary assumption in the single-shock analysis is that iLUC is a linear process with respect to biofuels, i.e., that interactions between different biofuels are trivially small. However, the assumption of linearity in the single-shock analysis is not appropriate for estimating the threshold values for specific biofuels when the interactions between different biofuels are not small.Numerical results from the RFS2 program show that the effects of interactions between different biofuels are too large to be ignored. Thus, the threshold values for specific biofuels determined by the U.S. EPA are scenario-dependent and value choice-driven. They do not reflect real impacts of specific biofuels. Using scenario-dependent values for regulation is arbitrary and inappropriate. Failure to deal appropriately with interactions between different biofuels when assigning iLUC values to specific biofuels is a mathematical and systematic flaw; it is not an “uncertainty” issue. The U.S. EPA should find better ways to differentiate the contribution of one biofuel versus another when assigning iLUC values or find better means of regulating the land use change impact of biofuel production.     

The impact of climate change on the European energy system

Climate change can affect the economy via many different channels in many different sectors. The POLES global energy model has been modified to widen the coverage of climate change impacts on the European energy system. The impacts considered are changes in heating and cooling demand in the residential and services sector, changes in the efficiency of thermal power plants, and changes in hydro, wind (both on- and off-shore) and solar PV electricity output. Results of the impacts of six scenarios on the European energy system are presented, and the implications for European energy security and energy imports are presented.Main findings include: demand side impacts (heating and cooling in the residential and services sector) are larger than supply side impacts; power generation from fossil-fuel and nuclear sources decreases and renewable energy increases; and impacts are larger in Southern Europe than in Northern Europe.There remain many more climate change impacts on the energy sector that cannot currently be captured due to a variety of issues including: lack of climate data, difficulties translating climate data into energy-system-relevant data, lack of detail in energy system models where climate impacts act. This paper does not attempt to provide an exhaustive analysis of climate change impacts in the energy sector, it is rather another step towards an increasing coverage of possible impacts.