Wolf Heinrich Reuter

Optimal mitigation strategies with negative emission technologies and carbon sinks under uncertainty

In recent years a body of literature has arisen on the topic of how to compose the optimal portfolio of mitigation options. The focus has been mainly on options involving shifts from high- to low- or even negative-carbon technologies. Natural sinks play an important role in any attempt to stabilize atmospheric CO2 and usually enter as a constant term in the overall carbon budget. In this paper, we introduce natural sinks to the carbon management problem and analyze the implications for negative emission technology deployment and the overall mitigation strategy. Amongst other sensitivity analyses, we also investigate the impact of uncertainty in the carbon sink, which we find to raise the importance of negative emissions in the mitigation portfolio significantly lowering the cost of the policy mix.

Permits vs. offsets under investment uncertainty

This paper investigates interaction effects between permit and offset schemes, using the framework on Reducing Emissions from Deforestation and Forest Degradation (REDD+) as a test bed for evaluating the cost and benefit of including low-cost offsets in mandatory emission trading schemes. We use a real options model of firm-level investment decisions under stochastic prices to compare alternative emission trading and permit-offset linkage schemes. By isolating the critical design factors that drive energy investments, we seek to identify policy regimes that balance the different concerns in the polarized debate for and against the inclusion of offsets. Our findings indicate that a moderate offset quota is sufficient to contain investment crowding-out effects, while it still has a positive effect on profit distributions. In contrast, the classical permit price collar will not effectively change investment behavior, precisely because in a framework with multiple compliance instruments the volatility of cheaper offsets is the driving force for investment. Under these conditions, a price collar for offsets emerges as a largely overlooked policy option to foster investment incentives. A combination of offset quota and offset price collar leads to investment patterns that are almost identical to a regime without access to offsets.

Establishing an infrastructure for remote access to microdata at Eurostat

Eurostat is pursuing the establishment of an infrastructure for remote access for researchers in order to satisfy the growing demand for microdata. Some European countries already implemented such solutions. This paper compares the systems which can be categorized in (1) terminal server, (2) distance network and (3) job submission systems. They differ in IT infrastructure, workstation control, user management and authentication, file systems and disclosure control activities. The second part of the paper describes the efforts and outlook as well as options and challenges for Eurostat when building such a system.

Determinants of fiscal rules

ABSTRACT This article empirically assesses determinants of countries’ fiscal rules suggested by the political science, sociology and economics literature. We find several of these variables to be related to the stringency of fiscal rules, providing indirect evidence for the relevance of governments’ deficit bias. These determinants may also serve as instruments in models with (endogenous) fiscal rules as explanatory variable.

Integrated Management of Land Use Systems under Systemic Risks and Security Targets: A Stochastic Global Biosphere Management Model

Interdependencies among land use systems resemble a complex network connected through demand–supply relationships. Disruption of this network may catalyse systemic risks affecting food, energy, water and environmental security (FEWES) worldwide. We describe the conceptual development, expansion and practical application of a stochastic version of the Global Biosphere Management Model (GLOBIOM), used to assess competition for land use between agriculture, bioenergy and forestry at regional and global scales. In the stochastic version of the model, systemic risks of various kinds are explicitly covered and can be analysed and mitigated in all their interactions. While traditional deterministic scenario analysis produces sets of scenario-dependent outcomes, stochastic GLOBIOM explicitly derives robust outcomes that leave the systems better-off, independently of which scenario applies. Stochastic GLOBIOM is formulated as a stochastic optimisation model that is critical for evaluating portfolios of robust interdependent decisions: ex-ante strategic decisions (production allocation, storage capacities) and ex-post adaptive (demand, trading, storage control) decisions. As an example, the model is applied to the question of optimal storage facilities, as buffers for production shortfalls, to meet regional and global FEWES requirements when extreme events occur. Expected shortfalls and storage capacities have a close relationship with Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) risk measures. A Value of Stochastic Solutions is calculated to illustrate the benefits of the stochastic over the deterministic model approach.

Accounting for institutional quality in global forest modeling

Abstract The current state of the art in modeling forest cover change is to combine a detailed representation of biophysical processes with economic decision-making principles. Yet, there is an increasing consensus that the quality of political institutions is another relevant component in determining forest cover change patterns. In this paper, the Global Forest Model is used to analyze whether including an index, measuring the capacity of political institutions to guarantee sustainable natural resource management, allows to improve the precision of the modeled forest cover trend. The analysis shows that incorporating the index indeed allows reducing the gap between the estimated and observed forest cover trends for the 2000 to 2010 calibration period.

Fiscal Rules, Fiscal Space, and the Procyclicality of Fiscal Policy

We analyze the interaction of fiscal rules and fiscal space. We find strong evidence for fiscal rules being associated with higher fiscal space for the EU27 countries for the period 1990-2014. Furthermore, the analysis shows that countries with more fiscal space tend to have higher discretionary expenditures, but that this effect is significantly reduced if fiscal rules are in place. Moreover, we find support for the hypothesis that the procyclicality of fiscal policy is significantly higher in an environment of ample fiscal space and that fiscal rules can help lowering this procyclicality.

Fiscal rules, fiscal space and procyclical fiscal policy

In this paper we analyse the interaction of fiscal rules and fiscal space. We find strong evidence for fiscal rules being associated with higher fiscal space. Furthermore, the analysis shows that countries with more fiscal space tend to have higher discretionary expenditures, but that this effect is significantly reduced if fiscal rules are in place. A similar effect can be observed for the procyclicality of fiscal policy, which is significantly higher in an environment of ample fiscal space, while this difference is reduced with fiscal rules. Regarding the different types of fiscal rules, we find the strongest results for expenditure rules and to a lesser extent for balanced budget rules, but none for debt rules. JEL Classification: E61, E62, H60

Escaping the climate policy uncertainty trap: options contracts for REDD+

ABSTRACT Climate policy uncertainty significantly hinders investments in low-carbon technologies, and the global community is behind schedule to curb carbon emissions. Strong actions will be necessary to limit the increase in global temperatures, and continued delays create risks of escalating climate change damages and future policy costs. These risks are system-wide, long-term and large-scale and thus hard to diversify across firms. Because of its unique scale, cost structure and near-term availability, Reducing Emissions from Deforestation and forest Degradation in developing countries (REDD+) has significant potential to help manage climate policy risks and facilitate the transition to lower greenhouse gas emissions. ‘Call’ options contracts in the form of the right but not the obligation to buy high-quality emissions reduction credits from jurisdictional REDD+ programmes at a predetermined price per ton of CO2 could help unlock this potential despite the current lack of carbon markets that accept REDD+ for compliance. This approach could provide a globally important cost-containment mechanism and insurance for firms against higher future carbon prices, while channelling finance to avoid deforestation until policy uncertainties decline and carbon markets scale up. Key policy insights Climate policy uncertainty discourages abatement investments, exposing firms to an escalating systemic risk of future rapid increases in emission control expenditures. This situation poses a risk of an abatement ‘short squeeze,’ paralleling the case in financial markets when prices jump sharply as investors rush to square accounts on an investment they have sold ‘short’, one they have bet against and promised to repay later in anticipation of falling prices. There is likely to be a willingness to pay for mechanisms that hedge the risks of abruptly rising carbon prices, in particular for ‘call’ options, the right but not the obligation to buy high-quality emissions reduction credits at a predetermined price, due to the significantly lower upfront capital expenditure compared to other hedging alternatives. Establishing rules as soon as possible for compliance market acceptance of high-quality emissions reductions credits from REDD+ would facilitate REDD+ transactions, including via options-based contracts, which could help fill the gap of uncertain climate policies in the short and medium term.