the economic multiplier of environmental life support can capital substitute for a degraded environment abstract this paper analyzes the effects of environmental degradation on the long run growth path of an economy it seeks to answer the following question does the effect of environmental degradation on economic activity increase or decrease over time to answer this question i use a neoclassical growth model to calculate an environmental life support multiplier this multiplier compares the short and long run effects of environmental degradation on economic activity the value of the multiplier indicates that the effect of a reduction in environmental life support on economic activity increases by a factor of 2 3 over time such results indicate that it is not possible to substitute capital for environmental life support and maintain material well being

the bond old bond spread abstract i document the profits on a trade that is long the old 30 year treasury bond and short the new 30 year treasury bond and is rolled over every auction cycle from june 1995 to november 1999 despite the systematic convergence of the spread over the auction cycle the average profits are close to zero the difference in repo market financing rates between the two bonds is a significant cost of carry in this trade i show that variation in the bond old bond spread is driven by the treasury supply of 30 year bonds as well as aggregate factors affecting investors preference for liquid assets

linking permit markets multilaterally we formally study the determinants magnitude and distribution of efficiency gains generated in multilateral linkages between permit markets we provide two novel decomposition results for these gains characterize individual preferences over linking groups and show that our results are largely unaltered with strategic domestic emissions cap selection or when banking and borrowing are allowed using the paris agreement pledges and power sector emissions data of five countries which all use or considered using both emissions trading and linking we quantify the efficiency gains we find that the computed gains can be sizable and are split roughly equally between effort and risk sharing

bankable permits for the control of environmental pollution abstract intertemporal trading of emission permits banking is often identified as one of three promising market mechanisms for controlling pollution along with averaging and trading surprisingly the efficiency properties of permit banking systems have not been investigated using a simple optimal control model this paper investigates firms incentives for banking or borrowing emission permits and compares the emission and output streams firms would choose with the socially optimal solution we find that in many cases firms will suboptimally choose excessive damage and output levels in early periods and correspondingly too few in later periods if given the opportunity to freely move emissions between time periods we propose a simple alternative trading scheme we term modified banking that counters this problem and should be no more difficult for an environmental authority to implement than a straigth banking system

a dynamic analysis of the marketable permits approach to global warming policy a comparison of spatial and temporal flexibility abstract this paper presents a generalized dynamic model of greenhouse gas emissions trading under constraints on the volume of transactions an empirical version of the model is used to evaluate potentially cost saving flexibility mechanisms joint implementation and clean development mechanism and potentially cost adding restrictions supplementarity of the kyoto protocol the results indicate the greatest gains would stem from extending permit trading spatially among industrialized nations although sizable gains would also emanate from the inclusion of developing countries gains from intertemporal trading banking and borrowing are meager restrictions on the volume of permit purchases have by far the most costly effect when developing countries are incorporated into trading sensitivity tests with respect to differential discount rates across countries and technological change indicate the results are robust

will markets direct investments under the kyoto protocol lessons from the activities implemented jointly pilots under the kyoto protocol countries can meet treaty obligations by investing in projects that reduce or sequester greenhouse gases elsewhere prior to ratification treaty participants agreed to launch country based pilot projects referred to collectively as activities implemented jointly aij to test novel aspects of the project related provisions relying on a ten year history of projects we investigate the determinants of aij investment our findings suggest that review agency preferences related to national political objectives and possibly deeper cultural ties influenced project selection and limited the number of aij projects bilateral ties also appear to have affected investment decisions directly possibly because of related transaction costs the results suggest an investment process different from the assumptions that underlie well known estimates of cost savings related to the protocol s flexibility mechanisms we conclude that if approaches developed under the aij programs to approve projects are retained the scale of investment under kyoto s flexibility provisions and their cost savings will be less than what is generally anticipated and the pattern of investment less driven by abatement costs

a biophysical analysis of the energy real gdp ratio implications for substitution and technical change abstract this paper quantifies the factors that caused the energy real gdp ratio to change during the post war period in france the federal republic of germany japan and the united kingdom econometric results indicate that changes in the types of fuel used changes in the energy consumed by the household sector changes in the types of goods and services produced and changes in energy prices account for most of the variation in this ratio price elasticities estimated from these results are lower than those estimated by neoclassical economists and indicate that the system boundaries used by neoclassical economists overestimate the amount of energy saved by substitution analysis of the error term from the regression results indicates that energy saving technical change has had little effect on the amount of energy used to support economic activity

international diversification of investments in climate change mitigation abstract numerous studies have shown that international emissions trading can significantly lower the costs of greenhouse gas ghg abatement economic models however ignore the substantial economic and political risks associated with investments in developing countries where according to these models a large share of global ghg abatement takes place we use a mean variance approach to compute international portfolios of carbon abatement activities that balance low abatement costs and investment risks expected returns are derived from marginal abatement cost curves the volatility of the growth rate of regional carbon dioxide emissions is used as an indicator of investment risk we find first that well diversified portfolios can significantly reduce investment risks second the least risk portfolio is distinct from the cost efficient allocation based on equalization of marginal abatement costs and much more costly to implement this indicates that existing models which neglect investment risks overestimate the cost savings due to international emissions trading

the market for tradable ghg permits under the kyoto protocol a survey of model studies abstract this paper gathers results from 25 models of the market for tradable greenhouse gas ghg emission permits under the kyoto protocol due to diverging projections of emissions growth and different modeling approaches the model results differ substantially the average market volume is approximately 17 and 33 billion usd under global trading and annex b trading respectively including non carbon ghg lowers compliance costs and permit prices in the absence of the us permit demand roughly equals hot air from the former soviet union these countries can increase their revenues from selling permits by restricting supply which raises the permit price

valuing ecosystem services a shadow price for net primary production abstract we analyze the contribution of ecosystem services to gdp and use this contribution to calculate an empirical price for ecosystem services net primary production is used as a proxy for ecosystem services and along with capital and labor is used to estimate a cobb douglas production function from an international panel a positive output elasticity for net primary production probably measures both marketed and nonmarketed contributions of ecosystems services the production function is used to calculate the marginal product of net primary production which is the shadow price for ecosystem services the shadow price generally is greatest for developed nations which have larger technical scalars and use less net primary production per unit output the rate of technical substitution indicates that the quantity of capital needed to replace a unit of net primary production tends to increase with economic development and this rate of replacement may ultimately constrain economic growth

a search based theory of the on the run phenomenon we propose a model in which assets with identical cash flows can trade at different prices infinitely lived agents can establish long positions in a search spot market or short positions by first borrowing an asset in a search repo market we show that short sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed that asset enjoys greater liquidity a higher lending fee specialness and trades at a premium consistent with no arbitrage we derive closed form solutions for small frictions and provide a calibration generating realistic on the run premia

the monetary compensation mechanism an alternative to the clean development mechanism abstract one of the key challenges in resolving global warming problem is how to induce developing countries to reduce emissions the cdm was proposed in the kyoto protocol as a means of obtaining the cooperation of developing countries in controlling greenhouse gases but it has some intrinsic problems and has generated considerable controversy this paper presents an alternative mechanism the monetary compensation mechanism mcm i study the characteristics of this mechanism with a dynamic principal agent model by solving the model numerically i obtain the optimal solution for a scenario based on 1990 data the monetary compensation rate under the mcm is comparable to the price of cers in the cdm but the mcm has several advantages over the cdm

on the life cycle metaphor where ecology and economics diverge abstract there is an attractive analogy between nature and industry based on the similarity of natural functions and certain industrial activities for instance animals ingest eat and digest food finally there are metabolic wastes firms are analogous to organisms in several respects insofar as they consume material resources process digest them and produce output products and excrete wastes firms like organisms also compete with each other for resources curiously enough one of the apparent differences between natural and man made systems is actually not one like the industrial system the natural system does not recycle everything however there are at least four real and important differences between the biosphere ecology and the technosphere economy first there is no primary producer in the economic system analogous to what photosynthesizers play in the biosphere inputs to the economy are mostly natural resources capital services and labor second in the economic system output is a heterogeneous mix of manufactured products and services labor in economics is an input but not an output the economic system recycles much less than the ecological system but utilizes a far greater suite of elements in the biosphere there are no products as such growth is tantamount to accumulation of embodied solar exergy in the form of cellulose sugars lipids and proteins the biosphere produces only wastes and more of itself plus dead matter third in the biosphere there are no markets there is no medium of exchange like money and there is nothing analogous to paid labor exchanges are involuntary i e by predation parasitism or theft fourth evolution in nature is driven by differentiation by random mutations of the genome and darwinian selection based on reproductive success in economics differentiation is based on discovery invention and innovation by intelligent economic agents and selection is based on competition at the individual or firm level either way the economic system is not closely analogous to an ecosystem attempts to use ecological concepts in an economic context are often misleading and unjustified the paper discusses the implications of the eco eco mismatch for resource accounting and life cycle analysis

an exploration of alternative measures of natural resource scarcity the case of petroleum resources in the u s abstract the concern about natural resource scarcity has traditionally focused on changes in the cost quality and availability of energy and material inputs to the production process ecological economists are increasingly concerned with an additional aspect of scarcity the growing scarcity of environmental services that sustain human economic existence the analysis here explores economic and biophysical indicators of natural resource scarcity the indices are quantified for the extraction of petroleum resources in the u s the economic indicators are the market price of crude oil and natural gas the unit capital plus labor cost of extraction and the average total cost of extraction dollars per btu extracted the biophysical index is the energy return on investment eroi all indices show a trend of decreasing and then increasing scarcity of petroleum at the wellhead the economic and biophysical cost indices indicate that the 1960s marked the transition from a decreasing to an increasing cost resource base the market price of oil is influenced by nonscarcity forces to the extent that it does not reflect that turning point the increase in the energy cost of petroleum extraction is in stark contrast to the changes in the energy cost of producing other goods and services in the u s economy which generally declined in the last 20 years the increase in the energy cost of extraction has important economic implications from 1954 to 1987 the fraction of total industrial output in the u s generated in the petroleum extraction sector declined almost 40 despite the declining share of its output the petroleum industry s share of direct energy use fossil fuels and electricity generally increased in that period the result is a clear increase in the amount of energy diverted from other potential uses to secure an additional unit of output in the petroleum sector none of the indicators reflect to any degree substantial nonmarketed environmental cost of petroleum extraction the biophysical perspective however emphasizes the coupling between physical scarcity and the demands that extraction places on renewable resources and ecosystem services the extraction of one barrel of oil equivalent for example requires 250 gallons of fresh water and emits more than 60 pounds of co2 and these costs are increasing

a liquidity risk index as a regulatory tool for systemically important banks an empirical assessment across two financial crises we provide an assessment of the imf suggestion based on severo 2012 to use an index of systemic liquidity risk slri that could help to estimate a pigouvian tax on large banks for the externality on the international banking system out of their risk exposure to this end we compute a parsimonious and fully documented slri and investigate its statistical significance in explaining level and variability of stock returns for a group of large international banks during the subprime financial and the eurozone sovereign debt crises the empirical investigation consistently fails to detect within and across the two crises a core group among the systemically important banks listed by the financial stability board and thus supports a sceptical assessment of the proposal

natural versus manufactured capital win lose or win win a case study of the finnish pulp and paper industry abstract the effect of investments on environmental variables has been discussed through the win win rhetoric specifically in micro level analysis on the macro level the win win rhetoric has been replaced by the arguments for and against the substitutability of natural and manufactured capital here these two concepts belonging to different levels of analysis are linked by looking at the environmental and economic effects of chosen investment strategies in a traditionally capital intensive industry over time the paper shows that rather than generalise the existence of win win situations or the substitutability of capital these positions are determined by purely situational factors as a result in the assessment of substitutability the specific operating context of the industry needs to be taken into account this implies also that environmental policy needs to be designed to be adaptive and responsive to those situational factors to create beneficial outcomes for the economy and for the environment

oligopolies in pollution permit markets a dynamic game approach abstract we reconsider the pollution permit concept in a setting extended to include dynamics spatially diversified firms and an oligopoly in product markets the firms can manage their pollution emissions or stocks by 1 buying pollution permits and emitting pollution 2 shipping pollutants to other nodes and paying such shipping costs or 3 paying environmental costs to mitigate or recycle pollution firms manage these controls strategically to maximize net profits while facing non cooperative rivals within this setting we show that the non cooperative competition among firms may be represented as a differential variational inequality dvi framework furthermore we propose decision rules on permit purchase establish necessary conditions and prove the existence of solution in the formalism of the dvi we also show that the dvi can be equivalently converted to a nonlinear complementarity problem ncp and show this problem despite high dimensions is efficiently solvable using off the shelf software gams with the path solver we illustrate this method s feasibility with a computationally intensive numerical example

on the stochastic properties of carbon futures prices pricing carbon is a central concern in environmental economics due to the worldwide importance of emissions trading schemes to regulate pollution this paper documents the presence of small and large jumps in the stochastic process of the co 2 futures price the large jumps have a discrete origin i e they can arise from various demand factors or institutional decisions on the tradable permits market contrary to the existing literature we show that the stochastic process of carbon futures prices does not contain a continuous component brownian motion the results are derived by using high frequency data in the activity signature function framework todorov and tauchen in j econom 154 125 138 2010 todorov and tauchen in j bus econ stat 29 356 371 2011 the implication is that the carbon futures price should be modeled as an appropriately sampled centered levy or poisson process the pure jump behavior of the carbon price might be explained by the lower volume of trades on this allowance market compared to other highly liquid financial markets

optimal control of pollution accumulation with long run average welfare this paper considers the problem of pollution accumulation in order to maximize the long run average welfare functional in environmental economics we approach the problem by solving the associated hamilton jacobi bellman equation in the classical sense via the viscosity solution method the optimal policy is shown to exist in a feedback from and the maximum value is also obtained independently of the initial level of pollution an equilibrium of the optimal stock of pollution is discussed

toward consilience between biology and economics the contribution of ecological economics abstract during its ten year history ecological economics has made a real difference in the way economists look at the natural world and in the way biologists look at the economy in this survey article we examine the contributions to the journal in terms of e o wilson s concept of consilience that is his argument that the methods and assumptions of any field of study should be consistent with the known and accepted facts in other disciplines in particular we examine the contributions of ecological economics to reconciling the economic theory of the consumer and producer with biophysical reality

anticipated environmental policy and transitional dynamics in an endogenous growth model this paper makes a new attempt toinvestigate how an anticipatedenvironmental policy governs the transitionaldynamics of an economy when pollutionexternality is taken into account themodeling strategy we use is an ak technologyendogenous growth framework with an endogenousleisure labor choice it is found that unlikeinelastic labor supply framework a rise inpublic abatement expenditure will stimulate thebalanced economic growth rate it is alsofound that public abatement technology plays animportant role in determining the transitionaladjustment of the economic growth rate inresponse to a pre announced environmentalpolicy

a model of intertemporal emission trading banking and borrowing abstract this paper provides a general treatment of emission trading banking and borrowing in an intertemporal continuous time model using optimal control theory the decentralized behavior of firms is shown to lead to the least cost solution attainable under joint cost minimization explicit solutions for the time paths of emissions and permit prices are derived when firms are allowed to both bank and borrow and when firms are only allowed to bank emission permits the policy implications of emission banking and borrowing are discussed

greenhouse gas emissions trading among pacific rim countries an analysis of policies to bring developing countries to the bargaining table this paper examines the aggregate net costs and individual country cost savings of greenhouse gas emissions trading among pacific rim countries we propose emission permit allocation rules designed to entice developing countries to participate absence of developing country involvement has served as an excuse for the lack by participation by the united states in the first compliance period of the kyoto protocol and may serve as a disincentive to even more countries in subsequent periods our analysis specifies permit allocation rules that could result in no net costs and even cost savings to developing countries for their involvement in the emissions trading market while at the same time providing extensive benefits to industrialized countries through access to lower cost mitigation alternatives

international equity and differentiation in global warming policy ne of the major obstacles to reaching a comprehensive agreement on global warming is the setting of greenhouse gas emission reduction targets for individual countries long standing tensions between industrialized and developing countries have raised the issue of equity in burden sharing moreover individual industrialized nations have pleaded special circumstances and have sought differentiation in their obligations this paper analyzes alternative rules for distributing tradable carbon dioxide emissions permits a non linear programming model which distinguishes between allocation based and outcome based rules is used to analyze the relative welfare outcomes the model is applied to the world body of nations and yields several important policy implications

carbon pricing and system linking lessons from the new zealand emissions trading scheme abstract textbook theory of linking carbon systems suggests linking reduces marginal abatement costs contrasting theoretical work and policy analyses suggests that linking or at least unfettered linking may not always be beneficial the new zealand emissions trading scheme nz ets is unique in that until 2013 it allowed unlimited use of kyoto allowances nz ets thus provides an ideal context to explore the effect of linking and linking restrictions on carbon pricing of small systems using data on importation and exportation of allowances we provide the first empirical analysis of the determinants of allowance prices in the early phase of the nz ets our results indicate that imports of offsets rather than fundamentals have been the major price determinant moreover the pricing of new zealand units nzus can be placed into three distinct periods delineated by two structural breaks in the first period the system is largely autarkic in the second period as international offset prices drop below the nzu price the system becomes a price taker in the final period following policy interventions the system regains some independence the case of the nz ets shows that small trading systems need to impose or have the option to impose quantitative import restriction so as to reap the benefits lower abatement cost but not the drawbacks importation of distortions and market integrity issues of linking

tradable permits and unrealized gains from trade with the advent of tradable permit programs for bad outputs e g so2 emissions concerns arose over whether the theoretical gains from trade would be realized we will employ a methodology that calculates the potential gains accruing to coal fired electric power plants from implementing a tradable permit program the magnitude of the potential gains in a plant s kilowatt hour output from a tradable permit program relative to its observed production provides insights into the existence of intertemporal allocative inefficiencies and spatial allocative inefficiencies after the implementation of a tradable permit program

the welfare effects of allowance banking in emissions trading programs permitting allowance banking in emissions trading programs can reduce expected compliance costs by giving capped firms flexibility to adjust the time path of abatement and to hedge against future uncertainty recent literature suggests that this compliance cost dividend is significant fell and morgenstern environ resour econ 47 275 297 2010 allowance banking may yield an environmental dividend a if the growth rate of marginal damages from emissions is less than the discount rate and b if emissions are lower in the short run as firms bank permits for use in later periods a discrete stochastic dynamic programming model is considered to simulate the two dividends of allowance banking in the context of the most recent federal united states greenhouse gas cap and trade legislation simulation results show that under a range of parameter values the environmental dividend has the same order of magnitude as the compliance cost dividend under the central set of parameters allowance banking increases expected present value of benefits by about 350 million dollars per year of the program the environmental dividend however is completely eliminated if capped firms can borrow permits from future periods without limit

testing the theory of emissions trading experimental evidence on alternative mechanisms for global carbon trading abstract simulation models and theory prove that emission trading converges to market equilibrium this paper sets out to test these results using experimental economics three experiments are conducted for the six largest carbon emitting industrialized regions two experiments use auctions the first a single bid auction and the second a walrasian auction the third relies on bilateral sequential trading the paper finds that in line with the standard theory both auctions and bilateral sequential trading capture a significant part 88 to 99 of the potential cost savings of emission trading as expected from trade theory all experiments show that the market price converges although not fully to the market equilibrium price in contrast to the theory the results also suggest that not every country might gain from trading in both the bilateral trading experiment and the walrasian auction one country actually is worse off with trade in particular bilateral sequential trading leads to a distribution of gains significantly different from the competitive market outcome this is due to speculative behavior imperfect foresight and market power

carbon trading across sources and periods constrained by the marrakesh accords abstract we examine the potential effects on permit prices and abatement costs of four compliance rules governing emissions trade across sources and periods in the kyoto protocol the banking rule that allows excess permits to be used later the restoration rate rule that penalizes borrowing the commitment period reserve rule that limits sales and finally the suspension rule that restricts borrowing and sales our framework is a two period model where parties may be out of compliance in the kyoto period but are assumed to comply at a later time under varying assumptions about market power and us participation we find that the rules may have pronounced effects on individual costs but overall efficiency is not severely affected

risk neutral models for emission allowance prices and option valuation the existence of mandatory emission trading schemes in europe and the united states and the increased liquidity of trading on futures contracts on co2 emissions allowances led naturally to the next step in the development of these markets these futures contracts are now used as underliers for a vibrant derivative market in this paper we give a rigorous analysis of a simple risk neutral reduced form model for allowance futures prices demonstrate its calibration to historical data and show how to price european call options written on these contracts this paper was accepted by haitao li guest editor finance

measuring the trade off between economic growth and a clean environment this article surveys various aspects of the measurement of environmental quality from the view point of national accounting and welfare economics it focuses on the question whether gnp or nnp should be corrected for environmental change green or eco gnp or whether physical accounts provide sufficient information for an assessment of the trade off mentioned above we conclude that valuation of services from environmental capital cannot be avoided for such assessment but can only be made using a model based approach statistical agencies should continue to collect data on environmental quality and to value changes in environmental capital in the context of national resource accounting however official statisticians should refrain from correcting gnp or nnp for environmental change as this correction implicitly contains a political judgment and cannot be based on mere technical knowledge

optimal growth with renewable resources and pollution abstract this paper presents three models which combine the optimal dynamics of economic growth renewable resource harvesting and pollution we investigate growth pollution and renewable resources as a three state variable problem the economy has three inputs man made capital renewable resources and emissions endogenous pollution affects both the growth of the renewable resource stock and the social welfare it is shown that the existence of the steady state depends in a complicated manner and in addition to preferences on the production technology growth of the renewable resource and the rate of decay of pollution the sufficient conditions for the existence of a global saddle point are given conditions under which the market solution equals the optimal solution of the social planner and the consequences of a too low externality tax on emissions or on common property resource harvesting are discussed

constraints on dematerialisation and allocation of natural capital along a sustainable growth path abstract to study societal and biophysical constraints on sustainability we present an extension of the neoclassical growth model with two new concepts allocation of natural capital and dematerialisation we consider that anthropogenic environmental impact is correlated with the material throughput of the economy materialisation and that due to composition change and innovation this throughput can be reduced the process of dematerialisation we also consider that the allocation of natural capital to production negatively affects the endogenous dynamics of ecosystems reducing the total amount of environmental services ecosystems provide according to our model it is possible to achieve unbounded economic growth by keeping the natural system in steady state balanced growth however is only possible for special parameter values

a regional dynamic general equilibrium model of alternative climate change strategies outcomes and noncooperative equilibria this study finds that cooperative policies show much higher levels of emissions reductions than do noncooperative strategies that there are substantial differences in the levels of controls in both the cooperative and the noncooperative policies among different countries and that high income countries may be the major losers from cooperation jel h41 q4 q2 q20

the economics of climate change mitigation in developing countries abstract this paper discusses methodological lessons and empirical results of climate change mitigation assessment for developing countries with a special emphasis on economic studies national study results are discussed in relation to expected general international development trends in greenhouse gas emissions it is concluded that greenhouse gas emissions from developing countries certainly will increase in the future due to economic development needs there is however a large and relatively cheap potential for emission reductions connected to efficiency improvements in industrial production and general energy efficiency improvements in the countries the implementation of greenhouse gas mitigation strategies is interrelated with general national economic development policies the macroeconomic impact of implementing climate change mitigation strategies is assessed on the basis of two case studies for zimbabwe and venezuela and it is concluded that project implementation and economic welfare improvement in some cases can be achieved simultaneously the methodological basis for macroeconomic assessment and for the establishment of baseline scenarios are critically discussed in relation to the specific planning context of developing countries and recommendations are given on research requirements

conserving biodiversity with tradable permits under changing conservation costs and habitat restoration time lags abstract tradable permits are a common environmental policy instrument that has recently been applied also to the conservation of biodiversity biodiversity conservation differs in many respects to the classical applications of tradable permits like emissions control one particularity is that even if the permit system maintains a constant total amount of species habitat habitat turnover the destruction of a habitat and restoration elsewhere affects the ecosystem another particularity is that the restoration of habitats often takes much time leading to time lags between the initiation of restoration activities and the time when restored habitat is available for trading we use an agent based model of a tradable permit market to study the influence of heterogeneous and dynamic conservation costs and habitat restoration time lags on key variables of the market such as the costs incurred to the market participants and the amount of habitat turnover our results show that there may be trade offs between these key variables we also find that restoration time lags can lead to fluctuations in permit prices that reduce the efficiency of the permit market we conclude that temporal lags deserve a careful analysis when implementing tradable permit systems for the preservation of natural habitats and biodiversity