Gregor Schwerhoff

The economics of leadership in climate change mitigation

Which kind of reaction can a nation or group of nations expect when leading by example in climate policy? This synthesis article describes possible positive reaction mechanisms from different fields of economics, some of which have scarcely been linked to climate economics previously. One effect may be behavioural, a reaction motivated by fairness, reciprocity, or norms. Second, other nations may interpret the leaders action as a signal on his preference or the value of the objective and adjust their own policy based on the new information. Third, the leader may provide a service to other nations, which decreases their costs and risks. The followers could benefit by learning successful policies, adopting technologies, and obtaining information on the cost of environmental policy. All of these mechanisms have in common that the leader sets an example with the intention of motivating others to contribute to the public good. Policy relevance A large body of both theoretical and empirical evidence shows that leading by example in climate change mitigation by a small group of nations has important potential for motivating other nations to follow. Modern economics has identified a range of mechanisms to explain why simple free-riding is unlikely to dominate the reaction to leadership. One such mechanism is described by behavioural economics. Humans often behave as conditional cooperators, meaning that they are willing to do their bit once a leader has done his. A second mechanism is the transmission of a credible signal that the leader considers climate change mitigation to be important. Finally, the leader gains knowledge, which spills over to other countries and thus moves their cost–benefit ratio in favour of mitigation. This evidence implies that leadership provides a promising alternative to stimulate the global cooperation that will eventually be needed to stabilize the climate.

Technological Change in Resource Extraction and Endogenous Growth

We add an extractive sector to an endogenous growth model of expanding varieties and directed technological change. Extractive firms reduce the stock of non-renewable resources through extraction, but also increase the stock through R&D investment in extraction technology. Our model replicates long-term trends in non-renewable resource markets, namely stable prices and exponentially increasing extraction, for which we present data from 1792 to 2009. The model suggests that the development of new extraction technologies neutralizes the increasing demand for non-renewable resources in industrializing countries like China in the long term.

Optimal Environmental Taxation with Capital Mobility

Climate policy exemptions for energy-intensive sectors are often justified with distributional concerns. One concern is that households employed in energy-intensive sectors might be affected disproportionally because of (international) capital mobility. By assuming that workers cannot move freely between sectors, we can reproduce this concern: uniform climate policy causes more inequality between the sectors when capital is mobile than when it is not. However, we find that affected households can be relieved more effectively with sector-specific labour taxes than with sector-specific climate policy. The reason for this finding is that households benefit more directly from sector-specific labour tax cuts than from climate policy exemptions. Keeping climate policy uniform across sectors has the added benefit of creating incentives for long-term decarbonisation. In addition, we find that the differential effect of capital mobility depends on the governments degree of inequality aversion – redistribution is more expensive when capital is mobile.

Developing Africa’s energy mix

ABSTRACT Africa is growing rapidly both in terms of population size and economically. It is also becoming increasingly clear that fossil fuels impose a high price on society through local environmental pollution and Africa’s particular vulnerability to climate change. At the same time, Africa has an excellent renewable energy potential and prices for renewable energy are reaching the price range of fossil fuels. Comparing results from state-of-the-art Integrated Assessment Models we find different options for achieving a sustainable energy supply in Africa. They have in common, however, that strong economic development is considered compatible with the 2°C climate target. Taking both challenges and appropriate solutions into account, some models find that a complete switch to renewable energy in electricity production is possible in the medium term. The continental analysis identifies important synergy effects, in particular the exchange of electricity between neighbouring countries. The optimal energy mix varies considerably between African countries, but there is sufficient renewable energy for each country. The intermittency and higher capital intensity of renewable energy are important challenges, but proven solutions are available for them. In addition, we analyse the political economy of a sustainable energy transition in Africa. Key policy insights An almost complete shift towards renewable energy (RE) is considered feasible and affordable in Africa. By 2050, electricity generation could be sourced largely from solar, wind and hydro power. Prices for RE in Africa are now within the price range of fossil fuels, partly due to the excellent RE potential. The optimal energy mix varies strongly between countries, but RE is sufficiently available everywhere. Addressing intermittency is possible, but requires investments and cooperation on the grid.

Intra-Household Allocation of Parental Leave

We introduce childcare sharing in a collective model of household behavior to investigate which factors make spouses increase or decrease their share of parental leave. The concern about future consumption motivates parents to invest in their human capital and to limit their leave duration. Using relative income and the age difference between spouses as distribution factors, we cannot reject Pareto efficiency in childcare sharing. Higher relative incomes and larger age differences shift the conditional leave allocation towards the relatively poorer and younger partner, respectively. Households with higher total income purchase more professional childcare.

Enabling Low-Carbon Development in Poor Countries

The challenges associated with achieving sustainable development goals and stabilizing the world’s climate cannot be solved without significant efforts by developing and newly-emerging countries. With respect to climate change mitigation, the main challenge for developing countries lies in avoiding future emissions and lock-ins into emission-intensive technologies, rather than reducing today’s emissions. While first best policy instruments like carbon prices could prevent increasing carbonization, those policies are often rejected by developing countries out of a concern for negative repercussions on development and long-term growth. In addition, policy environments in developing countries impose particular challenges for regulatory policy aiming to incentivize climate change mitigation and sustainable development. This chapter first discusses how climate policy could potentially interact with sustainable development and economic growth. It focuses, in particular, on the role of industrial sector development. The chapter then continues by discussing how effective policy could be designed, specifically taking developing country circumstances into account.

LEADERSHIP IN CLIMATE CHANGE MITIGATION: CONSEQUENCES AND INCENTIVES

Initiatives in favor of unilateral action on climate change are frequently challenged by concerns over free riding. Nevertheless, we observe an increasing number of unilateral efforts at different administrative levels and in different parts of the world. Previous academic literature described various individual mechanisms where emissions abroad may increase or decrease as a reaction to unilateral emission reductions. In this paper, we collect a comprehensive set of both positive and negative reactions and analyze them in stylized models. This allows us to identify the most important characteristics that determine the potential of a leader to boost mitigation efforts abroad. We find that this potential depends on (i) a strong ability to generate knowledge through leadership, (ii) a high degree of credibility in the international community, and (iii) a similar economic structure to the most important emitters. While most effects are difficult to quantify, this comprehensive assessment suggests that leakage effects resulting from unilateral mitigation may well be outweighed by positive reactions.

Agricultural Productivity and Forest Conservation: Evidence from the Brazilian Amazon

A mix of public policy and market interventions in the mid-2000s led to historic reductions in deforestation in the Brazilian Amazon. The collateral impact of these forest conservation policies on agricultural production is still poorly understood, though evidence is sorely needed given the economic importance of agriculture in Brazil and many other forest-rich countries. We construct a ten-year panel dataset for agriculture and deforestation in the Brazilian Amazon (2004-2014), and use two complementary difference-in-difference strategies to estimate the causal effect of one of Brazil’s flagship anti-deforestation strategies, the priority list (Municípios Prioritários), on agricultural production and productivity in three sectors: beef, dairy, and crop production. We find no evidence for trade-offs between agriculture and forest conservation. Rather, reductions in deforestation in priority municipalities were paired with increases in cattle production and productivity (cattle/hectare), consistent with a model where policy-induced decreases in the value of clearing new land cause credit-constrained farmers to shift investments from deforestation to capital investments in farming. The policy had no effect on dairy or crop production. Our results suggest that in regions with large yield gaps and where technologies for increasing yields are readily available, efforts to constrain agricultural expansion through improved forest conservation policies may induce intensification.

Response to the comment on: ‘The economics of leadership in climate change mitigation’

The comment on my article Schwerhoff [(2016). The economics of leadership in climate change mitigation. Climate Policy, 16, 196–214] points out that leadership in climate change mitigation can trigger negative reaction mechanisms (free-riding and leakage) and that Climate Clubs are needed instead of leadership. In my response I address the concerns expressed in the comment and I advance two arguments in favour of studying and communicating positive reaction mechanisms. First, there is sound scientific evidence on the positive reaction mechanisms and the relative strength of positive and negative mechanisms is unknown. Second, countries or regions without the ability or willingness to implement sanctions may nevertheless wish to take the initiative. They deserve complete information on the effects of leadership.