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All or nothing
(2020)
This paper develops a new perspective on stranded assets in climate policy using a partial equilibrium model of the energy sector. Political-economy related aspects are considered in the government's objective function. Lobbying power of firms or fiscal considerations by the government lead to time inconsistency: The government will deviate from a previously announced carbon tax which creates stranded assets. Under rational expectations, we show that a time-consistent policy outcome exists with either a zero carbon tax or a prohibitive carbon tax that leads to zero fossil investments - an "all-or-nothing" policy. Although stranded assets are crucial to such a bipolar outcome, they disappear again under time-consistent policy. Which of the two outcomes (all or nothing) prevails depends on the lobbying power of owners of fixed factors (land and fossil resources) but not on fiscal revenue considerations or on the lobbying power of renewable or fossil energy firms.
Beyond good faith
(2021)
The ambitious climate targets set by industrialized nations worldwide cannot be met without decarbonizing the building stock. Using Germany as a case study, this paper takes stock of the extensive set of energy efficiency policies that are already in place and clarifies that they have been designed “in good faith” but lack in overall effectiveness as well as cost-efficiency in achieving these climate targets. We map out the market failures and behavioural considerations that are potential reasons for why realized energy savings fall below expectations and why the household adoption of energy-efficient and low-carbon technologies has remained low. We highlight the pressing need for data and modern empirical research to develop targeted and cost-effective policies seeking to correct these market failures. To this end, we identify some key research questions and identify gaps in the data required for evidence-based policy.
Climate-related costs and benefits may not be evenly distributed across the population. We study distributional implications of seasonal weather and climate on within-country inequality in rural India. Utilizing a first difference approach, we find that the poor are more sensitive to weather variations than the non-poor. The poor respond more strongly to (seasonal) temperature changes: negatively in the (warm) spring season, more positively in the (cold) rabi season. Less precipitation is harmful to the poor in the monsoon kharif season and beneficial in the winter and spring seasons. We show that adverse weather aggravates inequality by reducing consumption of the poor farming households. Future global warming predicted under RCP8.5 is likely to exacerbate these effects, reducing consumption of poor farming households by one third until the year 2100. We also find inequality in consumption across seasons with higher consumption during the harvest and lower consumption during the sowing seasons.
How assets get stranded
(2020)
Internalizing external costs of carbon is a fundamental goal of climate policy. Since the seminal work of Arthur Pigou in 1920, economic theory has analyzed the efficiency gains arising from various instruments that internalize externalities and lead to Pareto-improvements. It is widely recognized in environmental economics that a carbon price would effectively reflect the scarcity of the atmospheric disposal space for carbon depending on the temperature target that is to be achieved. The question of how to organize the transition process, i.e. moving from inefficient to efficient allocations, and implementing the necessary policies, has gained increasing attention in recent years. Arguably, the transition process is tightly interwoven with political processes that include complex interactions between societal stakeholders, such as households and firms, on the one hand, and political decision makers, on the other. Accordingly, understanding political-economy aspects of the transition process, including distributional outcomes, is becoming increasingly relevant. While a growing literature discusses the distributional implications of climate policy on households, it is less well understood how asset owners might be affected by climate policy and how these potential impacts would interact with the transition process. This Special Section focuses on public policy challenges related to this transition problem, with special emphasis on asset owners. A core theme is the special role of stranded assets, i.e. a devaluation of capital stocks or financial assets either by introducing a stringent carbon price or by omitting a pre-announced policy of this kind.
We present a novel data set of subnational economic output, Gross Regional Product (GRP), for more than 1500 regions in 77 countries that allows us to empirically estimate historic climate impacts at different time scales. Employing annual panel models, long-difference regressions and cross-sectional regressions, we identify effects on productivity levels and productivity growth. We do not find evidence for permanent growth rate impacts but we find robust evidence that temperature affects productivity levels considerably. An increase in global mean surface temperature by about 3.5°C until the end of the century would reduce global output by 7–14% in 2100, with even higher damages in tropical and poor regions. Updating the DICE damage function with our estimates suggests that the social cost of carbon from temperature-induced productivity losses is on the order of 73–142$/tCO2 in 2020, rising to 92–181$/tCO2 in 2030. These numbers exclude non-market damages and damages from extreme weather events or sea-level rise.
The crises of both the climate and the biosphere are manifestations of the imbalance between human extractive, and polluting activities and the Earth’s regenerative capacity. Planetary boundaries define limits for biophysical systems and processes that regulate the stability and life support capacity of the Earth system, and thereby also define a safe operating space for humanity on Earth. Budgets associated to planetary boundaries can be understood as global commons: common pool resources that can be utilized within finite limits. Despite the analytical interpretation of planetary boundaries as global commons, the planetary boundaries framework is missing a thorough integration into economic theory. We aim to bridge the gap between welfare economic theory and planetary boundaries as derived in the natural sciences by presenting a unified theory of cost-benefit and cost-effectiveness analysis. Our pragmatic approach aims to overcome shortcomings of the practical applications of CEA and CBA to environmental problems of a planetary scale. To do so, we develop a model framework and explore decision paradigms that give guidance to setting limits on human activities. This conceptual framework is then applied to planetary boundaries. We conclude by using the realized insights to derive a research agenda that builds on the understanding of planetary boundaries as global commons.
Coal transitions - part 1
(2021)
A rapid coal phase-out is needed to meet the goals of the Paris Agreement, but is hindered by serious challenges ranging from vested interests to the risks of social disruption. To understand how to organize a global coal phase-out, it is crucial to go beyond cost-effective climate mitigation scenarios and learn from the experience of previous coal transitions. Despite the relevance of the topic, evidence remains fragmented throughout different research fields, and not easily accessible. To address this gap, this paper provides a systematic map and comprehensive review of the literature on historical coal transitions. We use computer-assisted systematic mapping and review methods to chart and evaluate the available evidence on historical declines in coal production and consumption. We extracted a dataset of 278 case studies from 194 publications, covering coal transitions in 44 countries and ranging from the end of the 19th century until 2021. We find a relatively recent and rapidly expanding body of literature reflecting the growing importance of an early coal phase-out in scientific and political debates. Previous evidence has primarily focused on the United Kingdom, the United States, and Germany, while other countries that experienced large coal declines, like those in Eastern Europe, are strongly underrepresented. An increasing number of studies, mostly published in the last 5 years, has been focusing on China. Most of the countries successfully reducing coal dependency have undergone both demand-side and supply-side transitions. This supports the use of policy approaches targeting both demand and supply to achieve a complete coal phase-out. From a political economy perspective, our dataset highlights that most transitions are driven by rising production costs for coal, falling prices for alternative energies, or local environmental concerns, especially regarding air pollution. The main challenges for coal-dependent regions are structural change transformations, in particular for industry and labor. Rising unemployment is the most largely documented outcome in the sample. Policymakers at multiple levels are instrumental in facilitating coal transitions. They rely mainly on regulatory instruments to foster the transitions and compensation schemes or investment plans to deal with their transformative processes. Even though many models suggest that coal phase-outs are among the low-hanging fruits on the way to climate neutrality and meeting the international climate goals, our case studies analysis highlights the intricate political economy at work that needs to be addressed through well-designed and just policies.