Climate Agreements and Technology Policy

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Climate Agreements and Technology Policy

• Rolf Golombek
• Lavutslippsutvalget
• March 6th 2006

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Emission reductions - principles

• Two main questions
• How much to reduce emissions?
• Radical abatement is possible, but very costly
  worthwhile?
• Costs vs. benefits
• For given emission target how to obtain cost
  effectiveness?
• Choice of instruments/policies
• Technology important
• Abatement costs depend on technology
• Instruments affect prices, profits and thus RD

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• Is the answer more and better technnology?
• Technology development requires resources, which
  have have opportunity costs
• How much to spend on RD?
• What type of RD?
• General answer Benefits vs. costs to determine
  RD
• Most knowledge is imported Technology level in
  Norway depends on RD in other countries through
  technology spillovers
• Own choices of abatement should also depend on
  choices taken by other countries
• GHG Total emissions matters
• International environmental agreements

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Outline of talk

• Constraints on own choices
• International climate agreement
• Types of international climate agreement
• First-best (no constraints on instruments)
• Second-best (constraints on instruments)
• Ranking of second-best agreements
• Price of carbon, technology subsidy, technology
  level

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Constraints on own choices international
climate agreements

• Total emissions among signatories may be given
  (quota agreement)
• Domestic actions may have no impact on total
  emissions among the signatories
• If Norway has a radical abatement target
• Throw, not sell, quotas economic loss
• Have pushed up prices on permits
• May other signatories demand redistribution of
  quotas? (No)
• Instruments might be given by the agreement (e.g.
  tax agreement)
• If Norway has a radical abatement target
• Increase the imposed tax (or stricter standards)

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Constraints on own choices international
climate agreements

• Technology agreement definiton?
• Agreement on RD subsidy or RD level and/or
  technology standards
• If Norway has a radical abatement target
• No problem (except own costs)

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International climate agreements

• Different climate agreements will have different
  prices on carbon and different RD policies
• Costs for Norway will differ across types of
  agreement
• Can we rank the prices and subsidies?
• Need a point of reference
• Total emissions
• Second-best agreements

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International climate agreements basic results

• When technology is given (standard model)
• Quota and tax agreement equivalent
• The market supports efficient solution
• When technology is not given technology depends
  on RD in all countries through technology
  spillovers
• Quota agreement dominates tax agreeemnt
• The market does not support efficient solution

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What makes technology change standard economic
theory

• Economists are simple (or simle minded?)
• Technology level tomorrow Technolog level today
  (predetermined) investment today
• Takes time to change technology level
• Investment by private firms determined by
  profitability
• Present and future prices, costs, subsidies,
  taxes
• Regulations, patents, standards and market
  structue (winner takes all?)
• Modifications
• Technology spillovers you learn from others
• not only own RD expenditures matters
• Own learning may also depend on own skills
• Learn more if your skills are high

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International climate agreements externalities

• Emissions of GHGs
• Harmful effects for all countries ( too much
  emissions in a free market )
• Use a carbon tax to obtain efficiency
• RD investments
• Positive spillovers to all other firms ( too
  litttle RD in a free market )
• Stimulate (subsidize) RD investments to obtain
  efficiency
• Standard economic theory
• Two externalities require two instruments to
  obtain efficiency (first-best outcome)
• First-best agreement Use a carbon tax and RD
  policy (RD subsidy)
• No RD policy elements in Kyoto agreement
• Assume
• International agreements have no RD policy
  elements
• RD policy determined by individual countries
• Second-best agreements

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Second best international climate agreements
framework

• Two types of agreements
• Quota or tax
• Three levels of decisions
• Group of all countries
• Maximizes global welfare
• Determines quota allocations or common carbon tax
• Each country
• Maximizes own welfare
• Determines RD subsidy (technology policy)
• Each firm
• Maximizes own profits
• Determines abatement and RD investments
• RD is increasing in RD subsidy and price of
  carbon

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Second best international climate agreements
quota vs. tax

• Quota and tax agreement Each country neglects
  that own RD are beneficial for other countries
• National RD subsidies too low
• First-best outcome is not reached
• Tax agreement
• Imposed common tax exceeds the countrys desired
  tax rate ( marginal damage costs)
• Incentive to decrease abatement, accomplished
  through reduced RD subsidy
• Quota agreement better than tax agreement

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Second best international climate agreements
ranking

• RD subsidy
• First-best gtQuotaNo AgreementgtTax
• Price of carbon
• QuotagtFirst-bestgtTaxgtNo Agreement
• Technology level
• Depends on price of carbon and RD subsidy
• QuotagtNo AgreementgtTax
• If international spillovers are small
  First-bestgtQuota

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Non-second best int. climate agreements Common
level of emissions

• Ranking of technology level
• QuotagtTax

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Main results

• Emissions are man made possible to reduce
  emissions, but abatement is costly and beneficial
• Climate policy in Norway depends on type of
  international climate agreement
• Price of carbon, RD subsidy and technology level
  differ across types of agreements
• Costs of reaching a climate target in Norway
  depends on whether there is an int. climate
  agreement and type of agreeement