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On November 29, 2019, 12 days before its announcement, information on the ambitions of the European Green Deal was leaked. The leakage should have triggered a Europe-wide systemic shock to financial markets without an accompanying announcement of supportive measures. Applying event study methodology to a sample of 600 European large and mid-cap stocks, we find that the overall market reaction was indeed significantly negative, albeit moderate. Abnormal returns gradually decline with increasing greenhouse gas emissions levels. Conversely, the official announcement emphasizing financial support and the green growth narrative did not ignite a positive market reaction. The results are largely robust in multivariate regressions. We conclude that market participants incorporate available emissions information into (short-term) reassessments after a significant change in environmental policy becomes known.

Limiting global warming to 2°Celsius above pre-industrial global mean temperature has become a widely endorsed goal for climate policy. It has also been severely criticized. We show how the limit emerged out of a marginal remark in an early paper about climate policy and distinguish three possible views of it. The catastrophe view sees it as the threshold separating a domain of safety from a domain of catastrophe. The cost-benefit view sees it as a strategy to optimize the relation between the costs and benefits of climate policy. The focal point view sees it as a solution to a complex coordination problem. We argue that the focal point view is the most appropriate. It leads to an emphasis on implementing effective steps towards a near-zero emissions economy, without panicking in the face of a possible temporary overshooting. After several decades of practical experiences, the focal point may or may not be redefined on the basis of knowledge gathered thanks to these experiences.

This paper reviews the major barriers to the adoption of low-carbon technologies, with a focus on market failures that provide a rationale for policy intervention to improve economic efficiency. Market failures include externalities, asymmetric information, institutional failures, regulatory failures, and failures of consumer or firm decision-making. We discuss central generation renewable energy technologies, CCS technology, distribution generation renewable energy, and technologies to reduce the demand for energy. For each technology category, we assess whether and how policy might improve economic efficiency, and point to key open research questions.

Without effective developing country (DC) participation in climate mitigation, it will be impossible to meet global concentration and climate change targets. However, DCS are unwilling and, in many cases, unable to bear the mitigation cost alone. They need huge transfers of resources — financial, knowledge, technology and capability — from industrialized countries (ICs). In this paper, we evaluate instruments that can induce such resource transfers, including tradable credits, mitigation funds and results-based agreements. We identify key constraints that affect the efficiency and political potential of different instruments, including two-sided private information leading to adverse selection; moral hazard and challenging negotiations; incomplete contracts leading to under-investment; and high levels of uncertainty about emissions paths and mitigation potential. We consider evidence on the poor performance of current approaches to funding DC mitigation — primarily purchasing offsets through the Clean Development Mechanism — and explore to what extent other approaches can address problems with offsets. We emphasize the wide spectrum of situations in DCS and suggest that solutions also need to be differentiated and that no one policy will suffice: some policies will be complements, while others are substitutes. We conclude by identifying research needs and proposing a straw man to broaden the range of "contracting" options considered.

In the framework of the Energy Modeling Forum 28, we investigate how climate policy regimes affect market developments under different technology availabilities on the European power markets. We use the partial equilibrium model EMELIE-ESY with focus on electricity markets in order to determine how private investors optimize their generation capacity investment and operation over the horizon 2010 to 2050. For the year 2050, the model projects a minor increase of power consumption of 10% under current climate policy, and a balanced pathway for consumption under ambitious climate policy compared to 2010 levels. These results contrast with findings of POLES and PRIMES models that predict strong consumption increases of 44% to 48% by 2050 and claim competitiveness of nuclear power and CCS options. Under ambitious climate policy, our findings correspond with major increases of wholesale electricity market prices and comparatively less pronounced emission price increases, which trigger no investments into Carbon Capture and Storage (CCS) and a strongly diminishing share of nuclear energy.

This paper provides a novel and comprehensive model-based assessment of possible outcomes of the Durban Platform negotiations with a focus on emissions reduction requirements, the consistency with the 2°C target and global economic impacts. The Durban Platform scenarios investigated in the LIMITS study — all assuming the implementation of comprehensive global emission reductions after 2020, but assuming different 2020 emission reduction levels as well as different long-term concentration targets — exhibit a probability of exceeding the 2°C limit of 22–41% when reaching 450 (450–480) ppm CO₂e, and 35–59% when reaching 500 (480–520) ppm CO₂e in 2100. Forcing and temperature show a peak and decline pattern for both targets. Consistency of the resulting temperature trajectory with the 2°C target is a societal choice, and may be based on the maximum exceedance probability at the time of the peak and the long run exceedance probability, e.g., in the year 2100. The challenges of implementing a long-term target after a period of fragmented near-term climate policy can be significant as reflected in steep reductions of emissions intensity and transitional and long-term economic impacts. In particular, the challenges of adopting the target are significantly higher in 2030 than in 2020, both in terms of required emissions intensity decline rates and economic impacts. We conclude that an agreement on comprehensive emissions reductions to be implemented from 2020 onwards has particular significance for meeting long-term climate policy objectives.

This paper looks into the regional mitigation strategies of five major economies (China, EU, India, Japan, and USA) in the context of the 2°C target, using a multi-model comparison. In order to stay in line with the 2°C target, a tripling or quadrupling of mitigation ambitions is required in all regions by 2050, employing vigorous decarbonization of the energy supply system and achieving negative emissions during the second half of the century. In all regions looked at, decarbonization of energy supply (and in particular power generation) is more important than reducing energy demand. Some differences in abatement strategies across the regions are projected: In India and the USA the emphasis is on prolonging fossil fuel use by coupling conventional technologies with carbon storage, whereas the other main strategy depicts a shift to carbon-neutral technologies with mostly renewables (China, EU) or nuclear power (Japan). Regions with access to large amounts of biomass, such as the USA, China, and the EU, can make a trade-off between energy related emissions and land related emissions, as the use of bioenergy can lead to a net increase in land use emissions. After supply-side changes, the most important abatement strategy focuses on end-use efficiency improvements, leading to considerable emission reductions in both the industry and transport sectors across all regions. Abatement strategies for non-CO₂ emissions and land use emissions are found to have a smaller potential. Inherent model, as well as collective, biases have been observed affecting the regional response strategy or the available reduction potential in specific (end-use) sectors.

In this article we explore regional burden-sharing regimes for the allocation of greenhouse gas emission reduction obligations needed to reach a 2°C long-term global climate change control target by performing an integrated energy-economy-climate assessment with the bottom–up TIAM-ECN model. Our main finding is that, under a burden-sharing scheme based on the allowed emissions per capita, the sum of merchandized carbon certificates yields about 2000 billion US$/yr worth of inter-regional trade around 2050, with China and Latin America the major buyers, respectively Africa, India, and other Asia the main sellers. Under a burden-sharing regime that aims at equal cost distribution, the aggregated amount of transacted carbon certificates involves less than 500 billion US$/yr worth of international trade by 2050, with China and other Asia representing the vast majority of selling capacity. Restrictions in the opportunities for international certificate trade can have significant short- to mid-term impact, with an increase in global climate policy costs of up to 20%.

This paper uses an integrated assessment model to quantify the climate R&D investment strategy for a variety of scenarios fully consistent with 2°C. We estimate the total climate R&D investment needs in approximately 1 USD Trillion (all monetary values in this paper are given in 2005 US dollars using market exchange rates) cumulatively in the period 2010–2030, and 1.6 USD Trillions in the period 2030–2050. Most of the R&D would be carried out in industrialized countries initially, but would be evenly split after 2030. We also assess a "climate R&D deal" in which countries cooperate on innovation (while innovation is a broad topic, in this paper, we will be referring to its R&D component) in the short term, and find that an R&D agreement slightly underperforms a climate policy based on the extension of the Copenhagen pledges till 2030. Both policies are inferior to full cooperation on mitigation starting in 2020. A global agreement on clean energy innovation beyond 2030 without sufficiently stringent GHG emissions reduction policies is found to be incompatible with 2°C.

The implementation of mitigation policies will be complicated by several real-world imperfections ("second-best conditions") and constraints typically not included in the more idealized economies assumed in Integrated Assessment Models (IAMs), based on which such policies are derived. But which of these numerous imperfections found in real economies are actually relevant in this context? And how could they — in principle — be taken into account by IAMs? Based on a literature review, we propose a typology of three categories of obstacles inhibiting "first-best" conditions and outcomes: first, obstacles impeding the setting of least-cost abatement incentives; second, obstacles limiting the supply and exploitation of abatement options; and, third, obstacles creating distortions between the price and marginal costs of abatement. By reviewing the implementation of energy policy in China, we put our typology into practice and identify specific empirical evidence for each category. IAMs in principle can (and in practice often do) incorporate several relevant obstacles by means of additional cost or quantity constraints. However, the nature of some obstacles relating to strategic interactions between economic agents appears to be incompatible with the standard representative agent social-planner framework often employed in IAMs, suggesting a need for complementary analysis with decentralized "Integrated Policy Assessment Models".

Energy security improvement is often presented as a co-benefit of climate policies. This paper evaluates this claim. It investigates whether climate policy would improve energy security, while accounting for the difficulties entailed by the many-faceted nature of the concept and the large uncertainties on the determinants of future energy systems. A multi-dimension analysis grid is used to capture the energy security concept, and a database of scenarios allows us to explore the uncertainty space. The results, focusing on Europe, reveal there is no unequivocal effect of climate policy on all the perspectives of energy security. Moreover, time significantly matters: the impact of climate policies is mixed in the short term and globally good in the medium term. In the long term, there is a risk of degradation of the energy security. Lastly, we examine the robustness of our results to uncertainties on drivers of economic growth, availability of fossil fuels and the potentials and low-carbon technologies, and find that they are sensitive mainly to fossil fuels availability, low carbon technologies in the energy sector and improvements in energy efficiency.

With reference to the newly emerging climate finance architecture under the post-Kyoto framework, this paper argues that a stronger focus must be placed on how the funds are to be spent in the recipient countries according to different needs, an issue we call the 'mode of funding'. We make our points based on a noncooperative two-country framework in which an industrialized and a developing country decide on mitigation in the first stage and on adaptation in the second stage of the game. The funding instruments recently agreed upon in UN climate negotiations are modeled in a stylized manner that highlights their specific modes of funding, such as tying the industrialized countries' transfer payments to a reduction in the developing countries' potential or actual loss and damages, mitigation or adaptation costs. We show that the various modes of funding may give rise to strategic choices when it comes to the countries' mitigation efforts. Moreover, some such modes (compensation for actual loss and damages and for adaptation costs) fall short of two essential minimum requirements for enabling Pareto improvements for donor and recipient alike and thus cannot guarantee sustained voluntary funding. We also demonstrate that the presumed equivalence of sequencing the decision on mitigation before adaptation compared to deciding simultaneously on mitigation and adaptation does not hold if different modes of climate funding are considered.

Substantially reducing carbon dioxide (CO₂) emissions from electricity production will require a transformation of the resources used to produce power. Several different incentive-based policies have been proposed ranging from setting minimums for clean generation sources to maximum emission rate standards and caps on CO₂ emissions, all of which are allowed under the EPA’s Clean Power Plan. This paper analyzes the economic consequences of a suite of different flexible and comprehensive policies to reduce CO₂ emissions from the power sector, including a carbon tax, a tradable emissions rate performance standard, and two versions of a clean energy standard (CES). Modeling results suggest that policies that encourage emissions reductions along multiple margins can be substantially more cost-effective than less flexible policies. The margins are intra and inter fuel, and technology substitution, electricity demand, and generator fuel efficiency. Despite cost differences, all of the policies result in substantial increases in social welfare.

China is currently attempting to reduce greenhouse gas emissions and increase natural gas consumption as a part of broader national strategies to reduce the air pollution impacts of the nation’s energy system. To assess the scenarios of natural gas development up to 2050, we employ a global energy-economic model — the MIT Economic Projection and Policy Analysis (EPPA) model. The results show that a cap-and-trade policy will enable China to achieve its climate mitigation goals, but will also reduce natural gas consumption. An integrated policy that uses a part of the carbon revenue obtained from the cap-and-trade system to subsidize natural gas use promotes natural gas consumption, resulting in a further reduction in coal use relative to the cap-and-trade policy case. The integrated policy has a very moderate welfare cost; however, it reduces air pollution and allows China to achieve both the climate objective and the natural gas promotion objective.

We consider a carbon emissions tax announced today, but implemented after a known time-lag. Before implementation, the announcement induces higher emissions than without intervention. In welfare terms, this adverse announcement effect could more than outweigh the gain after tax implementation. We quantify a “critical lag” such that a shorter (longer) implementation lag is a welfare gain (loss) over no-intervention. We identify resource scarcity as the main driver for a short critical lag. The model is a global Ramsey Model extended by an exhaustible carbon resource and linked to a climate model.

This paper is an introduction to, “The EMF 32 Study on U.S. Carbon Tax Scenarios,” part of the Stanford Energy Modeling Forum (EMF) Model Inter-comparison Project (MIP) number 32. Eleven modeling teams participated in this study examining the economic and environmental impacts of various carbon tax trajectories and differing uses of carbon tax revenues. This special issue of Climate Change Economics documents the results of this study with four cross-cutting papers that summarize results across models, and ten papers from individual modeling teams.

This paper presents a multi-model assessment of the distributional impacts of carbon pricing. A set of harmonized representative CO₂ taxes and tax revenue recycling schemes is implemented in five large-scale economy-wide general equilibrium models. Recycling schemes include various combinations of uniform transfers to households and labor and capital income tax reductions. Particular focus is put on equity — the distribution of impacts across household incomes — and efficiency, evaluated in terms of household welfare. Despite important differences in the assumptions underlying the models, we find general agreement regarding the ranking of recycling schemes in terms of both efficiency and equity. All models identify a clear trade-off between efficient but regressive capital tax reductions and progressive but costly uniform transfers to households; all agree upon the inferiority of labor tax reductions in terms of welfare efficiency; and all agree that different combinations of capital tax reductions and household transfers can be used to balance efficiency and distributional concerns. A subset of the models go further and find that equity concerns, particularly regarding the impact of the tax on low income households, can be alleviated without sacrificing much of the double-dividend benefits offered by capital tax rebates. There is, however, less agreement regarding the progressivity of CO₂ taxation net of revenue recycling. Regionally, the models agree that abatement and welfare impacts will vary considerably across regions of the U.S. and generally agree on their broad geographical distribution. There is, however, little agreement regarding the regions which would profit more from the various recycling schemes.

I examine the general equilibrium costs of climate policies that levy taxes on carbon dioxide (CO₂) emissions in the United States and return the revenue in the form of lump-sum rebates and tax relief over the years 2020 to 2040 using the US regional version of the Applied Dynamic Analysis of the Global Economy (ADAGE-US) forward-looking dynamic Computable General Equilibrium (CGE) model. I approximate the value of co-benefits to these policies that arise from concomitant reductions in nongreenhouse gas (GHG) emissions using the CO-Benefits Risk Assessment model (COBRA). There is significant heterogeneity in costs and co-benefits from climate policies across space and income. Policy costs are generally less than 0$.$5% in equivalent variation terms (between a few tens of dollars and several hundred per household, depending on the income quintile), can be fully neutralized for the lowest- quintile households at a modest increase in overall policy cost, and tend to be lower for upper-quintile households in coastal regions. The policy co-benefit values range widely across regions, approximately $150–1250 per household, exceeding the gross cost of the policy for many households, particularly those in the Midwest. Last, I identify a marginal welfare cost of $58$∕$tCO₂ and a marginal co-benefit of $31$∕$tCO₂ at a national level over all households, which implies a required climate benefit of $27$∕$tCO₂ or less to justify the level of abatement achieved by a $25$∕$tCO₂ tax growing at 5%.

We examine the lifetime incidence and intergenerational distributional effects of an economy-wide carbon tax swap using a numerical dynamic general equilibrium model with overlapping generations of the U.S. economy. We highlight various fundamental choices in policy design including (1) the level of the initial carbon tax, (2) the growth rate of the carbon tax trajectory of over time, and (3) alternative ways for revenue recycling. Without revenue recycling, we find that generations born before the tax is introduced experience smaller welfare losses, or even gain, relative to future generations. For sufficiently low growth rates of the tax trajectory, the impacts for distant future generations decrease over time. For future generations born after the introduction of the tax, the negative welfare impacts are the smallest (largest) when revenues are recycled through lowering pre-existing capital income taxes (through per-capita lump-sum rebates). For generations born before the tax is introduced, we find that lump-sum rebates favor very old generations and labor (capital) income tax recycling favors very young generations (generations of intermediate age).

This paper examines impacts of nationally-imposed carbon taxes on different regions of the United States. The goal is to see what can be learned about the drivers of regional political support for and opposition to such measures. Whether at the state, regional or national levels, carbon taxes are one option for reducing greenhouse gas emissions; several state and regional programs are already under way and lowering emissions. This analysis uses a U.S. regional version of the DIEM computable general equilibrium model to explore relationships between carbon taxes, emissions, and economic growth. One area of emphasis is how the distribution of impacts may be affected by differences in regional household spending patterns, the types of industries and electricity generation situated in those regions, and the locations of energy production and energy-intensive manufacturing. The modeling also explores how carbon tax revenues can be used to offset impacts on regional factor earnings.