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Global impact assessment of unilateral climate policies is commonly based on multi-sector, multi-region computable general equilibrium (CGE) models that are calibrated to consistent accounts of production, consumption, and bilateral trade flows. However, global economic databases such as GTAP treat energy-intensive and trade-exposed industries rather in aggregate, thereby missing potentially important details on the heterogeneity of these sectors. In this paper, we elaborate on the availability of data resources and methodological issues in disaggregating energy-intensive and tradeexposed sectors that receive larger attention in the public policy debate on unilateral emission regulation: non-ferrous metals, iron and steel and non-metallic minerals. Our sensitivity analysis revolves around three types of unobserved heterogeneity at the sub-sectoral level: trade elasticities, energy consumption and technology specifications. Drawing on the example of border tax adjustments, we find that for all given technology specifications and variation in energy shares, the biggest differences emerge from variations in Armington elasticities. Even moderate changes in Armington elasticities can alter the magnitude and the sign of the effects at the sectoral level. The implications of sub-sectoral disaggregation are not as pronounced for macroeconomic indicators and leakage as for sectoral indicators.

Ambitious unilateral EU environmental policy has raised concerns about adverse competitiveness implications for European energy-intensive and export-oriented sectors. We analyze the economic and environmental implications of two different measures to address these concerns in the EU Emission Trading Scheme (EU ETS): border tax adjustments (BTA) and the Clean Development Mechanism (CDM). Numerical simulations with a computable general equilibrium model of the global economy demonstrate that alternative BTA regimes are suitable to alleviate adverse competiveness implications of unilateral European climate policy on energy-intensive and export-oriented industries. The regulatory protection of these industries via subsidies for EU exporters and tariffs for non-EU importers goes, however, at the expense of sectors which are excluded from the EU ETS. We show that the choice of alternative benchmarks (i.e. carbon intensities) for the level of BTA substantially affects these competitiveness implications. The simulations further indicate that limited access to low-cost emission abatement via the CDM in the EU ETS alleviates adverse competitiveness impacts to a comparable extent as the most ambitious BTA scheme. Increasing “where-flexibility” of emission abatement thus represents an attractive market-based alternative to the application of border tax adjustments in unilateral climate policy.

In the absence of an international agreement on climate policy, unilateral carbon abatement creates two problems: It tends to have a detrimental effect on domestic competitiveness, and it leads to an increase in carbon emissions abroad (leakage). This paper analyses two policies that have recently been proposed to mitigate these problems: Border tax adjustments (BTA) and integrated emission trading (IET). The former policy levies a quantity-based, the latter an emission based duty on imports from non-abating countries. In a stylised two-country model we demonstrate that the policies address both problems. However, BTA protects domestic competitiveness more effectively, while IET achieves a greater reduction in foreign emissions. A computational general equilibrium analysis of the unilateral abatement policy adopted by the European Union confirms our theoretical insights for the sectors covered by the offsetting measures. However, the implications for the competitiveness of noncovered sectors are negative. These two effects constitute the central trade-off in the implementation of both policies.

This paper studies implications of uncertainty about the arrival date of a competitive CO2 backstop technology for the design of cost-effective CO2 emission trading schemes. For this purpose, we develop a dynamic general equilibrium model that captures empirical links between CO2 emissions associated with energy use, the rate and direction of technical change and the economy. We specify CO2 capture and storage (CCS) as the backstop technology whose competitiveness is anticipated or not. We find that the discounted welfare loss associated with the environmental target is lower if CCS is not anticipated and that CO2 shadow prices are then relatively high in the years before CCS is competitive. By not simply postponing the implementation of an emission reduction strategy until CCS is competitive, one relies more on economy-wide technical change and its welfare-enhancing technology externalities, thus allowing for a higher steady state. Dieses Papier untersucht die Implikationen von Unsicherheit bezüglich der Verfügbarkeit einer kompetitiven Technologie zur Kohlenstoffabscheidung und ?speicherung auf die Ausgestaltung kosteneffektiver CO2 Emissionshandelssysteme. Zu diesem Zweck wird ein dynamisches rechenbares allgemeines Gleichgewichtsmodell entwickelt, welches den empirischen Zusammenhang zwischen CO2 Emissionen, Rate und Richtung des technischen Wandels und wirtschaftlichen Aktivitäten berücksichtigt. Kohlenstoffabscheidung und ?speicherung wird als sogenannte Backstop-Technologie modelliert, deren Wirtschaftlichkeit antizipiert wird oder eben nicht. Die Simulationsergebnisse zeigen, dass die diskontierten Wohlfahrtsverluste der Klimapolitik niedriger sind, wenn die Technologie zur Kohlenstoffabscheidung und ?speicherung nicht antizipiert wird. In diesem Fall sind die Preise für CO2 Emissionszertifikate vor der unerwarteten Einführung der Backstop-Technologie relativ hoch. Es wird nicht einfach auf die Wirtschaftlichkeit der Kohlenstoffabscheidung und ? speicherung gewartet. Vielmehr wird ohne die Berücksichtigung von Kohlenstoffabscheidung und ? speicherung ein strikterer Politikpfad zur Erreichung der klimapolitischen Ziele implementiert, der die Internalisierung von technologischen Externalitäten und somit ein höheres Wohlfahrtsniveau ermöglicht. Die Umweltpolitik sollte gegeben der großen technologischen Unsicherheiten vorsichtig sein, Vermeidungsanstrengungen zu verschieben und auf eine Wunderwaffe zu Lösung des Klimaproblems im Energiesektor zu warten.

This paper studies the cost effectiveness of climate policy if there are technology externalities. For this purpose, we develop a forward-looking CGE model that captures empirical links between CO2 emissions associated with energy use, directed technical change and the economy. We find the cost-effective climate policy to include a combination of R&D subsidies and CO2 emission constraints, although R&D subsidies raise the shadow value of the CO2 constraint (i.e. CO2 price) because of a strong rebound effect from stimulating innovation. Furthermore, we find that CO2 constraints differentiated toward CO2-intensive sectors are more cost effective than constraints that generate uniform CO2 prices among sectors. Differentiated CO2 prices, through technical change and concomitant technology externalities, encourage growth in the non-CO2 intensive sectors and discourage growth in CO2-intensive sectors. Thus, it is cost effective to let the latter bear relatively more of the abatement burden. This result is robust to whether emission constraints, R&D subsidies or combinations of both are used to reduce CO2 emissions.

The objective of our analysis is to find out whether an increase in working time without pay compensation can be considered an adequate policy to reduce unemployment. From the perspective of economic theory the outcome is in general ambiguous: On the one hand, as the increase in working time raises labour productivity per employee, conditional demand for labour will increase (substitution effect) and conditional demand for intermediate inputs will decline. Since, on the other hand, workers do have a longer working time anyway, no positive effect on the number of persons employed can be expected. However, output of the manufacturing industry, and thus unconditional demand for labour, capital and intermediate goods, will increase (output effect). In order to sell the additional output, firms have to lower prices. Depending on the price elasticities, revenues and hence profits will change. We quantify the employment effects of an economy-wide increase in weekly normal hours in Germany on the basis of a CGE model using an input-output framework for all sectors of the economy. Our simulation results support the argument of the opponents of longer working time that not more jobs will be created. However, when we recycled the higher tax revenues from GDP growth to lower the contribution to social security, then we have been able to support the claim of the proponents that more jobs will be created.

This paper studies energy bias in technical change. For this purpose, we develop a computable general equilibrium model that builds on endogenous growth models. The model explicitly captures links between energy, the rate and direction of technical change, and the economy. We derive the equilibrium determinants of biased technical change and show the importance of feedback in technical change, substitution possibilities between final goods, and general-equilibrium effects for the equilibrium bias. If the feedback effect is strong, or the substitution elasticity large, or both, our model tends to a corner solution in which only technologies are developed that are appropriate for production of non-energy intensive goods.

We present a decomposition approach for integrated assessment modeling of climate policy based on a linear approximation of the climate system. Our objective is to demonstrate the usefulness of decomposition for integrated assessment models posed in a complementarity format. First, the complementarity formulation cum decomposition permits a precise representation of post-terminal damages thereby substantially reducing the model horizon required to produce an accurate approximation of the infinite-horizon equilibrium. Second, and central to the economic assessment of climate policies, the complementarity approach provides a means of incorporating second-best effects that are not easily represented in an optimization model.

This paper advocates computable general equilibrium models as a methodological tool that is particularly suitable for measuring the impacts of policy interference on the three dimensions of sustainable development, i.e. environmental quality, economic performance (gross efficiency) and equity. These dimensions are inherently intertwined and subject to trade-offs. Computable general equilibrium models can incorporate various important sustainable development indicators in a single consistent framework and allow for a systematic quantitative trade-off analysis.

We investigate the importance of "what"-flexibility on top of "where"- and "when"-flexibility for alternative emission control schemes that prescribe long-term temperature targets and eventually impose additional constraints on the rate of temperature change. We find that "what"-flexibility substantially reduces the compliance costs under alternative emission control schemes. When comparing policies that simply involve long-term temperature targets against more stringent strategies that include additional constraints on the rate of temperature increase, it turns out that the latter involve huge additional costs. These costs may be interpreted as additional insurance payments if damages should not only dependent on absolute temperature change but also on the rate of temperature change.

Despite of the apparent failure of the Kyoto Protocol with respect to environmental effectiveness, it has established a broad international mechanism that might be able to provide a global reduction of greenhouse gas emissions during a second commitment period. In this paper we investigate the likely future of post-Kyoto policies. Our primary objective is to identify policy-relevant abatement scenarios and to quantify the associated economic implications across major world regions. Based on a cross-impact analysis we first evaluate an expert poll to select the most likely post-Kyoto climate policy scenarios. We then use a computable general equilibrium model to assess the economic implications of these key scenarios. We find that post-Kyoto agreements are likely to cover only small reductions in global greenhouse gas emissions with abatement duties predominantly assigned to the industrialized countries while developing countries do not make any commitments, but can sell emission abatement to the industrialized world. Equity rules to allocate abatement duties are mainly based on the sovereignty principle or ability-to-pay. Global adjustment costs arising from post-Kyoto policies are very moderate but fuel exporting countries are likely to face quite considerable costs because of adverse terms-of-trade effects on fossil fuel markets.

Computable general equilibrium (CGE) modeling has provided a number of important insights about the interplay between environmental tax policy and the pre-existing tax system. In this paper, we emphasize that a labor market policy of recycling tax revenues from an environmental tax to lower employers’ non-wage labor cost depends on how the costs of labor are modeled. We propose an approach which combines neoclassical substitutability and fixed factor proportions. Our concept implies a user cost of labor which consists of the market price of labor plus the costs of inputs associated with the employment of a worker. We present simulation results based on a CO2 tax and the recycling of its revenues to reduce the nonwage labor cost. One simulation is based on the market price of labor and the other on the user cost of labor. We found a double dividend under the first approach but not under the second one.

The economic effects of environmental taxes depend on the market structure. Under imperfect competition with free entry and exit, environmental taxes have an impact on economies of scale by changing the number and size of firms. Whether economies of scale rise or fall in a particular industry depends on induced changes in the price elasticity of demand. Because export demand is more price elastic than domestic demand, the overall price elasticity rises (falls) as the industry gains (loses) in comparative advantage. We use a computable general equilibrium model for Germany to examine the effects of a unilaterally introduced carbon tax under both perfect and imperfect competition. Our key finding is that induced structural change in favor of the less energy intensive, more labor intensive industries is more pronounced under imperfect competition than under perfect competition. At the macroeconomic level, the total costs of environmental regulation under imperfect competition can be higher or lower than those under perfect competition depending on whether aggregate gains or losses in economies of scale across imperfectly competitive sectors prevail.

The Eastern European Associates (EEA) have committed to reduce greenhouse gas emissions according to their targets set in the Kyoto Protocol. Furthermore since 1993 trade liberalization has taken place between all associated countries and the EU. There is meanwhile a large quantitative literature on the economic effects of full integration of the associated countries into the EU as well as on the Kyoto Protocol. However, there is a lack of quantitative research on the linkage of trade and the environment in the context of the EU enlargement. In this paper we analyze the interactions of different environmental policies under the Kyoto Protocol and trade liberalization in the process of eastern enlargement using a computable general equilibrium model. We find that trade liberalization provides large gains for EEAs while it holds only modest gains for EU member states. Integration does not show a significant impact on carbon abatement policies, but mitigates associated welfare losses.

This paper investigates the implications of U.S. withdrawal on environmental effectiveness, economic efficiency, and the distribution of compliance costs taking into account market power of the Former Soviet Union (FSU) on emission permit markets. While exercise of market power on behalf of FSU under U.S. compliance has no environmental impact as compared to competitive permit trade, it prevents the Kyoto Protocol from boiling down to business-as-usual after U.S. withdrawal. Non-compliance of the U.S. increases the efficiency losses from FSU market power and reduces the compliance costs of remaining OECD countries but these gains must be weighted against a dramatic loss in overall environmental effectiveness. Clearly, the big losers from U.S. withdrawal are FSU and its competitive fringe (Central and Eastern Europe) that suffer from a huge decline in permit sales revenues.

Germany has committed itself to reducing its carbon emissions by 25 percent in 2005 as compared to 1990 emission levels. To achieve this goal, the government has recently launched an environmental tax reform which entails a continuous increase in energy taxes in conjunction with a revenue-neutral cut in non-wage labor costs. This policy is supposed to yield a double dividend, reducing both, the problem of global warming and high unemployment rates. In addition to domestic actions, international treaties on climate protection allow for the supplementary use of flexible instruments to exploit cheaper emission reduction possibilities elsewhere. One concrete option for Germany would be to enter joint implementation with developing countries such as India where Germany pays emission reduction abroad rather than meeting its reduction target solely by domestic action. In this paper, we investigate whether an environmental tax reform cum joint implementation (JI) provides employment and overall efficiency gains as compared to an environmental tax reform stand-alone (ETR). We address this question in the framework of a large-scale general equilibrium model for Germany and India where Germany may undertake joint implementation with the Indian electricity sector. Our main finding is that joint implementation offsets adverse effects of carbon emission constraints on the German economy. JI significantly lowers the level of carbon taxes and thus reduces the total costs of abatement as well as negative effects on labor demand. In addition, JI triggers direct investment demand for energy efficient power plants produced in Germany. This provides positive employment effects and additional income for Germany. For India, joint implementation equips its electricity industry with scarce capital goods leading to a more efficient power production with lower electricity prices for the economy and substantial welfare gains.