Climate

Climate policy (without abstracts)

For background on the market design aspects of climate policy and how to price carbon, see the Global Energy Policy Center.

“How to Negotiate Ambitious Global Emissions Abatement” (with Axel Ockenfels and Steven Stoft), carbon-price.com, May 2013.

“How to Fix the Inefficiency of Global Cap and Trade” (with Steven Stoft), The Economists’ Voice, 9, April 2012.

“Global Climate Games: How Pricing and a Green Fund Foster Cooperation” (with Steven Stoft), Economics of Energy & Environmental Policy, 1:2, March 2012. [Appendix, Spreadsheet, Presentation, Two-minute Video]

“Kyoto’s Climate Game and How to Fix It” (with Steven Stoft), Issue Brief, Global Policy Center, August 2010.

“International Climate Games: From Caps to Cooperation” (with Steven Stoft), Research Paper, Global Energy Policy Center, July 2010.

“Price is a Better Climate Commitment” (with Steven Stoft), The Economists’ Voice, 7:1, February 2010.

“Global Carbon Pricing: A Better Climate Commitment” (with Steven Stoft), Research Paper, Global Energy Policy Center, December 2009.

“Auctioning Greenhouse Gas Emissions Permits in Australia” (with Regina Betz, Stefan Seifert, and Suzi Kerr), Australian Journal of Agricultural and Resource Economics, 54, 219-238, 2010.

“Comments on the RGGI Market Design.” Submitted to RGGI, Inc. by ISO New England and NYISO, 15 November 2007.

“Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather,” (with Suzi Kerr) Energy Policy, 30, 333-345, 2002.

“A Review of Markets for Clean Air: The U.S. Acid Rain Program,” Journal of Economic Literature, 38, 627-633, September 2000.

“The Distributional Effects of Carbon Regulation,” (with Suzi Kerr) in Thomas Sterner (ed.) The Market and the Environment, Cheltenham, United Kingdom: Edward Elgar, chapter 12, 1999.


Climate policy (with abstracts)

“How to Negotiate Ambitious Global Emissions Abatement” (with Axel Ockenfels and Steven Stoft), carbon-price.com, May 2013.

“How to Fix the Inefficiency of Global Cap and Trade” (with Steven Stoft) The Economists’ Voice, 9, April 2012.

Global cap and trade equalizes the price of emissions and leads to efficient abatement across countries, but sets the abatement level inefficiently low. It is set too low, because the global cap is the sum of individual country targets set on the basis of self-interest. The efficiency of a single price does not overcome the inefficiency of the public-goods problem inherent in global cap and trade.

Fortunately, other policies lead to more cooperative and, hence, more efficient outcomes. Replacing the national quantity targets of global cap and trade with a global price target improves outcomes. To improve outcomes further, the price target is combined with a Green Fund. As we demonstrate by example, the Green Fund can induce cooperation between rich countries that want a high global price and poor countries that are more concerned with Green-Fund payments.

“Global Climate Games: How Pricing and a Green Fund Foster Cooperation” (with Steven Stoft), Economics of Energy & Environmental Policy, 1:2, March 2012. [AppendixSpreadsheetPresentationTwo-minute Video]

The international game of cap and trade begins when countries choose their quantity targets, which are largely selected according to self interest. The analogous public-goods game, in which countries choose their abatement levels, has an uncooperative outcome. Compared to that, the Nash equilibrium of the cap-and-trade game shows that abatement can increase but that trade provides opportunities for uncooperative behavior.

By contrast, a game in which all countries vote for a global quantity target or a global price target can lead to a highly cooperative choice of target. However, the assignment of responsibilities for a global quantity target stymies implementation of a global cap. The global-price-target game largely overcomes this barrier because a uniform global price provides a focal point for cooperation. However low-emission countries apparently prefer a much lower global-price than more prosperous countries unless a Green Fund is implemented. A game that couples such a fund to the global price target can largely overcome this barrier to cooperation. We describe such a game along with its equilibrium outcome, which promises to be inexpensive and cooperative.

“Kyoto’s Climate Game and How to Fix It” (with Steven Stoft), Issue Brief, Global Policy Center, August 2010.

The Kyoto summit initiated an international game of cap and trade. Unlike a national policy, the essence of this game is the self-selection of national emission targets. This differs from the standard global public-goods game because targets are met in the context of a global carbon market. This changes the outcome of the notoriously uncooperative public-goods game. The equilibrium of the new game may increase or decrease total abatement. If it increases abatement the resulting carbon price will be no greater than the average public-goods price. Typically, high abaters in the public goods game will target more abatement in the cap-and-trade game, while low abaters will target less. Given such a dismal outcome the policy game should be changed to the global price-target game. In the same setting where cap-and-trade reduces abatement, this game induces optimal abatement. But, realistically, it must include a Green Fund whose strength is linked to the price target. This will induce poor countries to favor as high a price target as rich countries, reversing the polarizing and anti-cooperative tendencies of cap and trade.

“International Climate Games: From Caps to Cooperation” (with Steven Stoft), Research Paper, Global Energy Policy Center, July 2010.

Greenhouse gas abatement is a public good, so climate policy is a public-goods game and suffers from the free-rider incentives that make the outcome of such games notoriously uncooperative. Adopting an international agreement can change the nature of the game, reducing or exacerbating the uncooperative tendencies of the players. We analyze alternative international agreements as variations of the public-goods game, and examine the incentives for cooperation under each alternative. The addition of cap-and-trade rules to the basic public-goods game is found to polarize the free-rider incentives of that game, encouraging those who would abate the most to target even higher abatement levels and those who would abate the least to target lower, and even negative, abatement levels. Such polarization between developed and developing countries is familiar from both the Kyoto and Copenhagen climate summits. Since cap-and-trade rules decrease cooperation by developing countries, developed countries are led to reject the game’s outcome and in the process prevent agreement on a set of quantity targets. To break this deadlock and shift the equilibrium toward cooperation, a modification of the public-goods game based on price rather than quantities is needed. This involves a global price target and equity transfers via a Green Fund that rewards adoption of and compliance with such a target. The Nash equilibrium of one such game is analyzed for a group of three countries similar to the United States, China and India.

“Price is a Better Climate Commitment” (with Steven Stoft), The Economists’ Voice, 7:1, February 2010.

Developing countries justifiably reject meaningful emission targets. This prevents the Kyoto Protocol from establishing a global price for greenhouse gas emissions, and leaves almost all new emissions unpriced. This paper proposes a new pair of commitments—a commitment to a binding carbon-price target and to a Green Fund financed by a form of carbon pricing. The result is global carbon pricing that neither requires developing countries to accept emission caps nor requires industrial countries to accept carbon taxes. The cost of complying with these commitments is subject to far less risk than the cost of an emissions cap, and the combined cost of a $30/ton price target and the Green Fund is only 23 cents per person per day for the United States and is negative for India. The combined advantages should significantly increase the chance that developing countries will commit to a substantial carbon price, and this should increase the chance of cap and trade passing the U.S. Senate.

“Global Carbon Pricing: A Better Climate Commitment” (with Steven Stoft), Research Paper, Global Energy Policy Center, December 2009.

Developing countries reject meaningful emission targets (recent intensity caps are no exception), while many industrialized countries insist that developing countries accept them. This impasse has prevented the Kyoto Protocol from establishing a global price for greenhouse gas emissions. This paper presents a solution to this dilemma—allow countries to commit to a binding global carbon-price target. This commitment could be met by cap and trade, a carbon tax, or any combination. This would allow developing countries to accept the same carbon price as the most advanced countries instead of accepting a cap that is as low as U.S. emissions in the 1800s. And it would allow the U.S. and the E.U. to keep their cap and trade schemes. The paper defines a carbon-price target, and shows how compliance could be induced using both carrots and sticks. We also demonstrate that carbon pricing can be guaranteed to be inexpensive under a carbon-price target. A Green Fund is suggested that reinforces rather than subverts cooperation on global carbon pricing. The combined cost of a $30/ton price target and the Green Fund is only 23 cents per person per day for the United States and is negative for India. Together, these advantages should greatly increase the chance that developing countries will commit to a substantial carbon price, and this should increase the chance of cap and trade passing the U.S. Senate. Such a policy would also reduce the world oil price. For China and the United States, this savings might well cover the full cost of the proposed initial climate agreement.

“Auctioning Greenhouse Gas Emissions Permits in Australia” (with Regina Betz, Stefan Seifert, and Suzi Kerr), Australian Journal of Agricultural and Resource Economics, 54, 219-238, 2010.

The allocation of permits is an important design aspect of an emissions trading scheme. Traditionally, governments have favoured the free allocation of greenhouse gas permits based on individual historical emissions (‘grandfathering’) or industry benchmark data. Particularly in the EU, the free allocation of permits has proven complex and inefficient and the distributional implications are politically difficult to justify; auctioning emissions permits has therefore become more popular. The EU is now moving to auction more than 50 per cent of all permits in 2013, and in the US the Regional Greenhouse Gas Initiative (RGGI) has begun auctioning more than 90 per cent of total allowances. Another case in point is the Australian proposal for a Carbon Pollution Reduction Scheme (CPRS), which provides for auctioning a significant share of total permits. This paper discusses the proposed Australian CPRS’s auction design. A major difference to other emissions trading schemes is that the CPRS plans to auction multiple vintages of emissions permits simultaneously.

“Comments on the RGGI Market Design.” Submitted to RGGI, Inc. by ISO New England and NYISO, 15 November 2007.

“Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather,” (with Suzi Kerr) Energy Policy, 30, 333-345, 2002.

An auction of carbon permits is the best way to achieve carbon caps set by international negotiation to limit global climate change. To minimize administrative costs, permits would be required at the level of oil refineries, natural gas pipe lines, liquid sellers, and coal processing plants. To maximize liquidity in secondary markets, permits would be fully tradable and bankable. The government would conduct quarterly auctions. A standard ascending-clock auction in which price is gradually raised until there is no excess demand would provide reliable price discovery. An auction is preferred to grandfathering (giving polluters permits in proportion to past pollution), because it allows reduced tax distortions, provides more flexibility in distribution of costs, provides greater incentives for innovation, and reduces the need for politically contentious arguments over the allocation of rents.

“A Review of Markets for Clean Air: The U.S. Acid Rain Program,” Journal of Economic Literature, 38, 627-633, September 2000.

“The Distributional Effects of Carbon Regulation,” (with Suzi Kerr) in Thomas Sterner (ed.) The Market and the Environment, Cheltenham, United Kingdom: Edward Elgar, chapter 12, 1999.

We examine the distributional effects of carbon regulation. An auction of carbon permits is the best way to achieve carbon caps set by international negotiation to limit global climate change. An auction is preferred to grandfathering (giving polluters permits in proportion to past pollution), because it allows reduced tax distortions, provides more flexibility in distribution of costs, provides greater incentives for innovation, and reduces the need for politically contentious arguments over the allocation of rents.