G. Klaassen

Economics of sustainability or the sustainability of economics: Different paradigms

This article reviews different views of neo-classical and ecological economics on the sustainability of economic growth and welfare. Neo-classical economics concludes that, due to substitution and technical progress, consumption can be sustained even if production depends on a natural resource that is being depleted. If production depends on an essential, renewable resource, there is a level of consumption that can be sustained forever. Pollution lowers the level of consumption that can be sustained. If production depends on an exhaustible resource, recycling of waste is insufficient for sustaining consumption unless 100% recycling is possible. Sustainable economic development is possible if the resource growth potential exceeds the sum of the discount rate minus the rate of exogenous technical progress and if resource productivity is sufficiently high. In addition, intial levels of environmental quality (a composite of pollution and natural resources) and man-made capital influence the possibilities for sustainable economic development. If the resource stock itself affects utility, or if irreversibilities occur, optimal consumption and extraction are lowered. Ecological economics states that: substitution possibilities are restricted, full recycling of waste is impossible, and the limited influx of solar energy poses an additional constraint on the level of production that can be sustained. Since the functions of the environment (production factor, consumer good and waste sink) are intertwined, this life support function poses a restriction on economic growth as well. In ecological economics development is viewed as an evolutionary process with continuous feedbacks between a changing economy and environment. Welfare is not merely the sum of discounted individual preferences but requires environmental compatibility and the explicit (collective) formulation of policies regarding the conservation of species, ecosystems and natural resources.

Emission Trading in Europe with an Exchange Rate

This paper explores the analytical and empirical properties of a new method for emission trading according to a fixed exchange rate. The exchange rate is based on the ratios of the marginal costs of abatement in the optimal solution in order to account for the impact of the location of emission sources on the deposition. It is shown that, generally, this system will not achieve the optimal solution and does not guarantee that environmental deposition constraints are not violated, although total abatement costs are always reduced. A routine was developed to mimic trading as a bilateral, sequential process, subject to an exchange rate. In the example used, results for SO2 emissions in Europe show that, starting from a uniform reduction, exchange-rate trading achieves higher cost savings than one-to-one trading, without achieving the cost minimum. Sulfur deposition targets are not violated since the initial emission allocation overfulfilled targets at many places. The results are sensitive to: pre-trade emission levels, the transaction costs, the availability of information on potential cost savings and assumptions made on the behavior of trading partners.

Economic instruments for air pollution control

Economic theory and empirical models suggest that economic instruments should help us to meet environmental goals at a lower cost. Practical experience, however, shows that the cost savings of emission trading are smaller than expected and charges usually have had small incentive impacts. This book gives the first comprehensive review of economic theory, simulation models, and practical experience of using economic instruments. It also focuses on air pollution control. Because of its unique blend of theoretical and empirical research, the book provides interesting reading for both economists and those interested in environmental policy. Part I examines theoretical aspects and simulation modeling within a national context. Part II surveys practical experience in a variety of countries. Part III explores international issues, such as joint implementation.

Cost-effective sulphur emission reduction under uncertainty

The problem of reducing SO2 emissions in Europe is considered. The costs of reduction are assumed to be uncertain and are modeled by a set of possible scenarios. A mean-variance model of the problem is formulated and a specialized computational procedure is developed. The approach is applied to the trans-boundary air pollution model with real-world data.

Carbon Trading with Imperfectly Observable Emissions

The Kyoto Protocol foresees emission trading but does not yet specify verification of (uncertain) emissions. This paper analyses a setting in which parties can meet their emission targets by reducing emissions, by investing in monitoring (reducing uncertainty of emissions) or by (bilaterally) trading permits. We derive the optimality conditions and carry out various numerical simulations. Our applications suggest that including uncertainty could increase compliance costs for the USA, Japan and the European Union. Central Europe and the Former Soviet Union might be able to gain from trading due to higher permit prices. Emissions trading could also lower aggregate uncertainty on emissions.

Multiequilibrium Game of Timing and Competition of Gas Pipeline Projects

The paper addresses the issue of the optimal investments in innovations with strong long-term aftereffects. As an example, investments in the construction of gas pipelines are considered. The most sensitive part of an investment project is the choice of the commercialization time (stopping time), i.e., the time of finalizing the construction of the pipeline. If several projects compete on the market, the choices of the commercialization times determine the future structure of the market and thus become especially important. Rational decisions in this respect can be associated with Nash equilibria in a game between the projects. In this game, the total benefits gained during the pipelines life periods act as payoffs and the commercialization times as strategies. The goal of this paper is to characterize multiequilibria in the game of timing. The case of two players is studied in detail. A key point in the analysis is the observation that, for all players, the best response commercialization times concentrate at two instants that are fixed in advance. This reduces decisionmaking to choosing between two fixed investment policies (fast and slow) with the prescribed commercialization times. A description of a simple algorithm that finds all the Nash equilibria composed of fast and slow scenarios concludes the paper.

On the quality of compliance mechanisms in the Kyoto Protocol

Abstract In this paper we evaluate the compliance mechanisms in the Kyoto Protocol as agreed at the seventh Conference of Parties to the United Nations Framework Convention on Climate Change (UNFCCC) in Marrakech. We differ from the literature since we concentrate on the complete set of compliance rules agreed in Marrakech and, as a new element, we systematically discuss these compliance incentives in conjunction with the implicit compliance incentives: reputation protection, emission trading and banking. We conclude that effectiveness and efficiency go hand in hand for all explicit and implicit compliance incentives except one—emission trading. Trading improves efficiency but this can also occur at the cost of increasing non-compliance.

Costs of a ceiling on Kyoto flexibility

This paper examines the potential costs of a ceiling on the use of flexibility mechanisms in the Kyoto Protocol using POLES, a partial equilibrium model of the world energy system. The results suggest that if emission trading were restricted to Annex I countries, halving the traded volume would increase costs by 11 billion

Cost-effective strategies for reducing nitrogen deposition in Europe

/year. If emission trading were to operate at a global level, reducing the trade to half the perfect market volume would increase annual costs by 12 billion

Creating markets for air pollution control in Europe and the USA

/year. Global carbon emissions might however be 1% lower. The sensitivity of the results is discussed