Tim Mennel

The role of the government in adaptation to climate change

Given the scarcity of resources, an economic approach is necessary in order to determine an optimal strategy of adaptation to climate change. In this paper we develop an economic framework for the study of adaptation which allows distinguishing between decentralised adaptation by private agents, on the one hand, and centralised adaptation measures by the government, on the other hand. The paper is in two parts: in the first we present the neoclassical view of adaptation policy, which is based on the paradigm of market failure. In the second part we deal with challenges and complements of the neoclassical view arising from the introduction of equity principles, security of supply concerns, and a polycentric approach to the provision of public goods. The analysis is illustrated with examples of adaptation measures in Germany.

Climate Policy and the Problem of Competitiveness: Border Tax Adjustments or Integrated Emission Trading?

In the absence of an international agreement on climate policy, unilateral carbon abatement creates two problems: It tends to have a detrimental effect on domestic competitiveness, and it leads to an increase in carbon emissions abroad (leakage). This paper analyses two policies that have recently been proposed to mitigate these problems: Border tax adjustments (BTA) and integrated emission trading (IET). The former policy levies a quantity-based, the latter an emission based duty on imports from non-abating countries. In a stylised two-country model we demonstrate that the policies address both problems. However, BTA protects domestic competitiveness more effectively, while IET achieves a greater reduction in foreign emissions. A computational general equilibrium analysis of the unilateral abatement policy adopted by the European Union confirms our theoretical insights for the sectors covered by the offsetting measures. However, the implications for the competitiveness of noncovered sectors are negative. These two effects constitute the central trade-off in the implementation of both policies.

What Does Europe Pay for Clean Energy? – Review of Macroeconomic Simulation Studies

This paper analyses the macroeconomic costs of environmental regulation in European energy markets on the basis of existing macroeconomic simulation studies. The analysis comprises the European emssion trading scheme, energy taxes, measures in the transport sector, and the promotion of renewable energy sources. We find that these instruments affect the European economy, in particular the energy intensive industries and the industries that produce internationally tradeable goods. From a macroeconomic point of view, however, the costs of environmental regulation appear to be modest. The underlying environmental targets and the efficient design of regulation are key determinants for the cost burden.

The Economics of Adaptation to Climate Change - The Case of Germany

Given the ubiquitous scarcity of resources an economic approach is necessary in order to determine an optimal strategy of adaptation to climate change. In this paper we develop an economic framework for the study of adaptation which allows us to distinguish between decentralized adaptation by private agents on the one hand and centralized adaptation measures by public authorities on the other. The approach is based on the paradigm of market failure and is complemented by two further grounds of government action, equity concerns and security of supply. We identify open research questions in the nascent field of adaptation to climate change requiring further empirical investigation. The economic framework is applied to adaptation in Germany by analyzing impacts and adaptation options for climate-sensitive fields such as agriculture, energy, water, and public health.

Sensitivity Analysis in Economic Simulations - A Systematic Approach

Sensitivity analysis studies how the variation in the numerical output of a model can be quantitatively apportioned to different sources of variation in basic input parameters. Thus, it serves to examine the robustness of numerical results with respect to input parameters, which is a prerequisite for deriving economic conclusions from them. In practice, modellers apply different methods, often chosen ad hoc, to do sensitivity analysis. This paper pursues a systematic approach. It formalizes deterministic and stochastic methods used for sensitivity analysis. Moreover, it presents the numerical algorithms to apply the methods, in particular, an improved version of a Gauss-Quadrature algorithm, applicable to one as well as multidimensional sensitivity analysis. The advantages and disadvantages of different methods and algorithms are discussed as well as their applicability.

Comparing Feed‐In Tariffs and Renewable Obligation Certificates ‐ The Case of Repowering Wind Farms

Abstract This paper compares support mechanisms for renewable energy with respect to their ex-ante effectiveness in promoting the adoption of innovative technologies. We analyse two stylized policy instruments in the context of wind repowering: quotas and feed-in tariffs (FITs). Quota systems, like the British Renewable Obligation Certificates (ROCs), are based on mandatory targets. FITs, like the German Erneuerbare-Energien-Gesetz tariffs, guarantee a certain, fixed price for’green’ electricity. This paper focuses on one aspect of the difference between the two instruments: the allocation of uncertainty. While under ROCs both electricity price and capital cost risks are borne by the wind farm owner, under FITs only capital cost risks remain with the owner. Our approach relies on a dynamic programming model, calibrated on German data. Our general result is that a risk-neutral plant owner is by far more likely to adopt a new technology under price certainty as provided by FITs. While an increase in capital cost volatility does not affect the likelihood to repower under both schemes, a small positive variation in electricity price volatility increases the propensity to adopt the new technology under ROCs. However, this latter effect is negligible, and does not undermine the robustness of the general result.