Thierry Bréchet, Carmen Camacho, and Vladimir M. Veliov
This chapter extends the use of integrated assessment models (IAMs) by defining rational policies based on predictive control and adaptive behavior. After a review of the main IAMs, the concept of Model Predictive Nash Equilibrium (MPNE) is introduced within a general model involving heterogeneous economic agents operating in (and interfering with) a common environment. This concept captures the fact that agents do not have a perfect foresight for several ingredients of the economy and the environment. The canonical IAM (DICE) is used as a benchmark. The concept of MPNE is then enhanced with adaptive learning about the environmental dynamics and the damages caused by global warming. The approach is illustrated by some numerical experiments in a two-region setting.
Michael K. Wohlgenant
The scope and value of the equilibrium displacement models (EDM) methodology in consumer demand and welfare analysis is extensive. This article reviews the basic elements of the model. It discusses different applications of the models in the literature that show the utility of the approach. The major forms of the EDM and implications for consumer demand and welfare are highlighted. An important question when using the EDM to generate results for changes in prices, quantities, and surplus values is how sensitive are the results to alternative plausible values of the partial elasticities of the demand/supply equations. It then turns at last to issues related to statistical precision and approximation errors. It concludes with the discussion of modifications and extensions that are likely to be made.
Dawn Cassandra Parker
This chapter reviews agent-based models of land use change (ABM/LUCC), a new class of computational simulation models that directly represent the decisions and interactions of economic agents at the scale of real-world land management, over a spatially explicit and dynamic virtual landscape. The chapter provides practical guidance and context for land economists who wish to understand, evaluate, and construct ABM/LUCC. It explains their structure in relation to standard economic models and demonstrates how this structure facilitates investigation of novel economic questions, especially those that involve spatial and agent-level heterogeneity in combination. It outlines the novel issues that need to be considered for ABM/LUCC, including but not limited to land market issues such as nonequilibrium dynamics, price expectations, and bounded rationality. It discusses experimental design and analysis challenges unique to ABM models, highlights complementarities between ABM/LUCC and other methods, and outlines important future research directions for this field.
Angelo Antoci, Simone Borghesi, and Mauro Sodini
The present chapter paper investigates the functioning of an emission trading system and its impact on the diffusion of environmentally friendly technological innovation in the presence of firms' strategic behaviors and sanctions to non compliant firms. For this purpose, we study an evolutionary game model with random matching, namely, a context in which firms interact through pairwise random matchings and have to decide whether to adopt a new clean technology or keep using the old technology that requires pollution permits to operate. We investigate the technological dynamics emerging from the model and show that by properly modifying the penalty on non compliant firms, it is possible to shift from one dynamic regime to another, increase permits trade, and promote the diffusion of innovative technologies
William Brock, Gustav Engström, and Anastasios Xepapadeas
This chapter explores optimal mitigation policies through the lens of a latitude-dependent energy balance climate model, featuring an endoge-nously driven polar ice cap. We associate the movement of the polar ice cap with the idea of a damage reservoir being a finite source of climate related damage affecting the economy only to the extent that there still exists some ice left to melt. We capture this idea by coupling the climate model with an economic growth model. When combined with two sources of damages, conventional and reservoir type damages, this generates mul-tiple steady states and Skiba points, which induce U-shaped mitigation policies. This is also shown in a modified version of the well known DICE model by William Nordhaus.
Alain Haurie, Frédéric Babonneau, Neil Edwards, Phil Holden, Amit Kanudia, Maryse Labriet, Barbara Pizzileo, and Marc Vielle
This chapter deals with the problem of fair sharing of a safety cumulative emissions budget up to 2050. Using climate models one may infer the temperature change due to different possible emission pathways provided by world techno-economic models. The negotiations can concentrate then on the fair sharing of the resulting budget. We use two different integrated assessment models. The first is based on TIAM-WORLD, a detailed bottom-up energy model, coupled with the climate model PLASIM-ENTS. Here the supply of quotas on the emissions trading market is decided by a benevolent planner who tries to achieve a fair sharing. In the second approach based on GEMINI-E3, a computable general equilibrium model also coupled with PLASIM-ENTS, the supply of quotas is decided strategically by the regions involved in the negotiations. In conclusion the article compares the results and infers some “robust” recommendations concerning the forthcoming negotiations at the next conferences of the parties.
Wolfgang Karl Härdle, Brenda López Cabrera, and Matthias Ritter
Forecasting based pricing of weather derivatives (WDs) is a new approach in valuation of contingent claims on nontradable underlyings. Standard techniques are based on historical weather data, so that forward-looking information such as meteorological forecasts or the implied market price of risk (MPR) are often not incorporated. We adopt a risk neutral approach that allows the incorporation of meteorological forecasts in the framework of WD pricing. Weather risk premiums (RPs) are implied from either the information MPR gain or the meteorological forecasts. RP size is interesting for investors and issuers of weather contracts to take advantages of geographic diversification, hedging effects and price determinations. Incorporating either the MPR or forecasts outperforms the standard pricing techniques.
Global Warming and R&D-Based Growth in a Trade Model between Environmentally Sensitive and Environmentally Neglectful Countries
Francisco Cabo, Guiomar Martín-Herrán, and María Pilar Martínez-García
The chapter analyzes a bipolar world in which one region disregards global warming, while the other acknowledges the two-sided link between production and the emissions and concentration of pollutants in the atmosphere. Productive activities are negatively affected by global warming, provoke emissions, and make use of intermediate inputs and forest products as inputs. The environmentally unconcerned forest region trades forest products in exchange for technology developed in the environmentally concerned technology leading region. Trade is the transmission channel for economic growth. Trade also serves to transmit the willingness to reduce emissions from the environmentally concerned region to the unconcerned region, so turning around the carbon leakage problem. Furthermore, a global reduction in emissions does not necessarily lead to a reduction in the speed of growth.
Franz Wirl and Yuri Yegorov
This chapter investigates the prospects of renewable energy from an economic point of view and presents a few economic models that address specific issues. Although the transition to renewable energy is inevitable given the threats the world faces otherwise, the path is not so simple and definitely cannot be driven by only market forces. The upshot is that the prospects of substantial and cheap availability of renewable energy are very unlikely on economic grounds unless a number of issues, in particular regarding substantial technical breakthroughs and binding agreements on global warming mitigation, are simultaneously satisfied. Otherwise crucial players will counteract or undermine the apparent profitability. However, there is no alternative to renewable energy. Ultimately, renewable energy must prove its use in the market, and energy poverty in the Third World provides a huge and profitable playground for this.
Richard S. J. Tol
After initially and unavoidably raising welfare, more pronounced climate change would by the end of the 21st century lead to a net annual loss, equivalent to the loss of a few percent of income. The uncertainty is large, and the distribution uneven. The uncertainty about the marginal impact is large too, and compounded by disagreement on how to aggregate impacts over time, across people, and over possible states of the world. For common values, the 2010 Pigou tax is 34 dollar per tonne of carbon, rising at 2.1% per year. This would reduce emissions, but not by nearly as much as the declared policy goals.