Documents Venmans, Frank 4 results

"We exploit recent advances in climate science to derive a surprisingly simple model of efficient climate policy. The model yields closed-form solutions for optimal peak warming, optimal emissions along the transition to peak warming and optimal carbon prices, with and without a temperature constraint that is consistent with the UN Paris Agreement. We draw five conclusions. First, optimal peak warming has an elasticity of one or more with respect to several parameters that are highly uncertain. This implies optimal peak warming is itself highly uncertain. Second, even if optimal peak warming is high, optimal transient warming over the coming centuries is not. The transition is slow, because of the stock-flow nature of CO2-induced warming. Third, the optimal carbon price grows faster than output this century and the possibly unexpected reason for this is the saturation of carbon sinks, a well-known physical property of the climate system hitherto absent from economic models. Fourth, the optimal carbon price under a binding temperature constraint comprises the social cost of carbon, plus a Hotelling premium. If we take account of damages, then we should abate emissions more quickly than if we simply meet the temperature constraint at the lowest abatement cost. Fifth, when the objective is to minimise abatement costs alone, the optimal carbon price follows the simple Hotelling rule, not various kinds of augmented Hotelling rule, as in previous work. Again this comes from taking into account the effects of saturating carbon sinks, as well as not over-estimating thermal inertia in the climate system."

"This paper investigates the joint impact of the European Union Emissions Trading System (EU ETS), Europe's main climate change policy, on carbon emissions and economic performance of regulated companies. The impact on emissions is analysed using installation-level carbon emissions from national Polluting Emissions Registries from France, Netherlands, Norway and the United Kingdom complemented with data from the European Pollutant Release and Transfer Register (E-PRTR). The impact on firm performance is analysed using firm-level data for all countries covered by the EU ETS. A matching methodology exploiting installation-level inclusion criteria combined with difference-in-differences is used to estimate the policy's causal impact on installations' emissions and on firms' revenue, assets, profits and employment. We find that the EU ETS has induced carbon emission reductions in the order of -10% between 2005 and 2012, but had no negative impact on the economic performance of regulated firms. These results demonstrate that concerns that the EU ETS would come at a cost in terms of competitiveness have been vastly overplayed. In fact, we even find that the EU ETS led to an increase in regulated firms' revenues and fixed assets. We explore various explanations for these findings."

"We show that several of the most important economic models of climate change produce climate dynamics inconsistent with the current crop of models in climate science. First, most economic models exhibit far too long a delay between an impulse of CO2 emissions and warm¬ing. Second, few economic models incorporate positive feedbacks in the carbon cycle, whereby carbon sinks remove less CO2 from the atmosphere, the more CO2 they have already removed cumulatively, and the higher is temperature. These inconsistencies affect economic prescriptions to abate CO2 emissions. Controlling for how the economy is represented, different climate mod¬els result in significantly different optimal CO2 emissions. A long delay between emissions and warming leads to optimal carbon prices that are too low and too much sensitivity of optimal carbon prices to the discount rate. Omitting positive carbon cycle feedbacks also leads to optimal carbon prices that are too low. We conclude it is important for policy purposes to bring economic models in line with the state of the art in climate science."

"When using climate models to calculate optimal greenhouse gas emission scenarios, there are two common approaches: cost-benefit analysis and cost-effectiveness analysis. Cost-benefit analysis minimises the cost of emission reductions and the anticipated costs of damage caused by climate change over the coming centuries; at the same time, the model maximises human welfare. Cost-effectiveness analysis minimises only the cost of emission reductions but adds a constraint: to stay below a given temperature target, such as 1.5 or 2°C. Alternatively, instead of a temperature constraint, the models can use a constraint on the atmospheric CO2 concentration or cumulative emissions. Constraints are often applied only after the year 2100, allowing the model to ‘overshoot' the target before 2100. For the same temperature outcome in 2100, emissions reductions in cost-effectiveness models tend to happen later than in cost-benefit analysis. This paper evaluates the welfare cost of this delay, using several types of cost-effectiveness constraints and comparing results from cost-benefit and cost-effectiveness models.

In their (welfare-maximising) benchmark cost-benefit model, the authors find that a 1.5°C target in 2100 requires very rapid emission reduction in the coming decades. There are almost no net negative emissions at the end of the century (i.e. relying on negative emissions in the future is never optimal because abatement happens too late to avoid near-term damages). Turning to cost-effectiveness models, the authors find that a constraint on cumulative emissions produces the second-best welfare outcomes, and a temperature constraint that allows temperature to overshoot the 1.5°C target before 2100 is third-best. By contrast, a constraint on CO2 concentration (with overshoot allowed) results in insufficient early abatement, leading to a substantial welfare loss of US$29 trillion, spread out over the century. Repeating these analyses with a 2°C target, all cost-effectiveness models lead to emissions abatement that happens too late to be optimal, but the welfare impact of this inefficiency is milder. Again, a CO2 concentration constraint with target overshoot produces the worst results, compared with the welfare-maximising cost-benefit benchmark."