Zili Yang

Dual-rate discounting in dynamic economic–environmental modeling

Abstract Discounting plays a crucial role in the economic–environmental modeling with long time horizons. The models with conventional uniform discounting run into difficulties in justifying the cost-benefit tradeoffs of some environmental policies, such as the Kyoto Protocol for greenhouse gas emission reductions. In this paper, we propose a dichotomized approach to resolve the difficulties. Specifically, we suggest that the dual-rate discounting be used in economic–environmental modeling. In such a model, private investments are guided by a conventional discount rate and the environmental investments are guided by a much lower ‘environmental’ discount rate. The dual-rate intertemporal decisions coexist in a time-consistent dynamic system. To validate the notion of dual-rate discounting, we implement it in the regional integrated model of climate and economy model (Am. Econ. Rev. 86 (1996) 741) through an iterative algorithm. The results from the model simulation confirm the desirable properties of dual-rate discounting.

The Stability and Effectiveness of Climate Coalitions: A Comparative Analysis of Multiple Integrated Assessment Models

We report results from a comparison of numerically calibrated game theoretic integrated assessment models that explore the stability and performance of international coalitions for climate change mitigation. We identify robust results concerning the incentives of different nations to commit themselves to a climate agreement and estimate the extent of greenhouse gas mitigation that can be achieved by stable agreements. We also assess the potential of transfers that redistribute the surplus of cooperation to foster the stability of climate coalitions. In contrast to much of the existing analytical game theoretical literature, we find substantial scope for self-enforcing climate coalitions in most models that close much of the abatement and welfare gap between complete absence of cooperation and full cooperation. This more positive message follows from the use of appropriate transfer schemes that are designed to counteract free riding incentives.

Negatively correlated local and global stock externalities: tax or subsidy?

Fossil fuel combustion generates both CO2 and SO2. CO2 is the most important greenhouse gas; SO2 can cause serious local pollution. But it can alleviate the potential global warming because of negative radiative forcing. Such a phenomenon can be characterized as negatively correlated local and global stock externalities. In this paper, we set up an optimal control problem of negatively correlated local and global stock externality provision. The efficiency conditions for this problem are derived. These conditions modify the Samuelson rules for optimal provision of externalities. In addition, we examine several policy related scenarios of negatively correlated local and global stock externality provisions. Finally, we discuss policy implications and limitation of the theoretical results derived in this paper. We also indicate applications of the theoretical results here to empirical research, particularly to economic analysis of multiple-gas issues in climate change.

Economic assessment of CO2 capture and disposal

Abstract A multi-sector multi-region general equilibrium model of economic growth and emissions is used to explore the conditions that will determine the market penetration of CO2 capture and disposal technology.

A Pseudo "Folk" Theorem In The Strategic Provision Of Stock Externalities

The paper discusses the relationship between the efficient provision and the Nash equilibrium of stock externalities in a dynamic setting. The following proposition has been proved: under certain conditions, the maximal gains of an agent in the economy by deviating from the Pareto optimal provision of stock externalities is less ∊, an arbitrary small positive number, when the time discount rate of the agents are sufficiently close to 0. Namely, under the same conditions, a Pareto efficient path is an ∊-Nash equilibrium where ∊ could be smaller than any predetermined level. The propositions are different from the folk theorems in repeated games because supporting of the ∊-Nash equilibrium does not require the threat of retaliations from other agents. The policy implications of the above results are also discussed here.

Necessary conditions for stabilization agreements

Article 2 of the Climate Convention calls for stabilization of atmospheric concentrations of greenhouse gases at a level that will avoid ‘danger’ to economies and ecosystems (United Nations, 1992). The parties to the Convention are now debating how this part of the agreement should be interpreted, and what numerical limit should be set. Building on earlier work by Jacoby et al. (1997b), we experiment here with the concept of ‘necessary conditions’ that would have to be met for an international agreement to have hope of achieving such a goal. The resulting analysis can serve as a guide to discussion of the policies and institutions needed to carry out this complex task, and add reality to the setting of the goal itself.

Identifying the Lindahl Equilibrium Without Transfers as a Social Optimum

The Lindahl equilibrium is an important solution concept in economies with externalities or public goods. In this paper, a ‘Negishi‐type’ theorem that connects the Lindahl equilibrium without transfers with the social optimum solution is proposed and proved. The theorem states that the solution of a social planners problem with the social welfare weights proportional to the inverse of the private shadow prices of externalities in an auxiliary Nash equilibrium is the Lindahl equilibrium without transfers. To verify the theorem constructively, an algorithm for finding the Lindahl equilibrium is developed. Its efficacy is demonstrated through a numerical example.