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Governments are catching up with economic theory and practice by increasingly integrating ecosystem service values into national planning processes, including benefit-cost analyses of public policies. Such analyses require information not only about today’s benefits from ecosystem services but also on how benefits change over time. We address a key limitation of existing policy guidance, which assumes that benefits from ecosystem services remain unchanged. We provide a practical rule that is grounded in economic theory and evidence-based as a guideline for how benefits change over time: They rise as societies get richer and even more so when ecosystem services are declining. Our proposal will correct a substantial downward bias in currently used estimates of future ecosystem service values. This will help governments to reflect the importance of ecosystems more accurately in benefit-cost analyses and policy decisions they inform.

info:eu-repo/semantics/published

Data for reproducing Figures of the manuscript Trends in tropical forest loss and the social value of emission reductions by Thomas Knoke et al. Full data sets and spreadsheets are available via 10.5281/zenodo.8016364, Data for reproducing Figures of the manuscript Trends in tropical forest loss and the social value of emission reductions by Thomas Knoke et al. Full data sets and spreadsheets are available via 10.5281/zenodo.8016364

Lemoine and Rudik (2017) argues that it is efficient to delay reducing carbon emissions, due to supposed inertia in the climate system's response to emissions. This conclusion rests upon misunderstanding the relevant earth system modeling: there is no substantial lag between CO2 emissions and warming. Applying a representation of the earth system that captures the range of responses seen in complex earth system models invalidates the original article's implications for climate policy. The least-cost policy path that limits warming to 2°C implies that the carbon price starts high and increases at the interest rate. It cannot rely on climate inertia to delay reducing and allow greater cumulative emissions.

Having its roots in the financial system, the world economic downturn at stake since 2008 has revealed the importance of capital requirements for banks. Reinhart and Rogoff (2009) have shown that financial crises have substantial economic impact, reducing the GDP of 10% or more, with a non- neglecting part being permanent. This highlights the importance of a stable financial market for the entire economy. As a consequence, the new Basel III agreements have substantially increased capital requirement, which has generated important debates on the cost of raising capital for banks. In particular, banking associations have argued that this new regulation would increase funding costs for banks and therefore increase the cost of bank-credits. However these arguments generally focus on short-term feedbacks, whereas in order to define an adequate legislation and prevent new crises, a long-term perspective is essential. Using a large worldwide database of 98 banks over a period of 25 years, we have tested the Modigliani and Miller theorem, which states the neutrality of capital structure on the value of the bank - and hence on the weighted average cost of capital.1 Our main results reveal that financial market tends to underprice leverage risk compared to M&M predictions. Leveraging increases market value of banks making rational the shareholders’ decision of opting for very high leverage.2 We also show that the gain of leverage is much higher during the crisis period (after 2007) than during the preceding more stable period (1990-2006). This gain is also higher for systemically important banks, which are very likely to be bailed out by the government in case of distress. We argue that the underpriced transfer of risk from banks’ shareholders to governments is the most convincing theoretical argument explaining this departure from M&M theorem. The three other possible explanations - tax advantages, agency costs between managers and shareholders, and role of completing financ

Integrated assessment models (IAMs) provide key inputs to decision-makers on economically efficient climate policies, and technical change is one of the key assumptions in any IAM that estimates mitigation costs. We conduct a systematic survey of how technical change is currently represented in the main IAMs and find that a diversity of approaches continues to exist. This makes it important to conduct an up-to-date assessment of what difference technical change makes to IAM results. Here we attempt such an assessment, using an analytical IAM with a reduced-form representation of technical change, which we can calibrate on the relationship between abatement costs and the timing of abatement in 109 IAM scenarios from two major databases. We first show in theory how a range of technical-change mechanisms can be adequately captured in a reduced-form model, in which the key difference is whether technical change is a function of time, i.e., exogenous, or cumulative past emissions abatement, i.e., endogenous. We then derive analytical and quantitative results on the effect of technical change on optimal climate policy, for both cost-benefit and cost-effectiveness policy problems. Under cost-benefit analysis, technical change has a quantitatively large, negative effect on long-run emissions and temperatures. The effect on carbon prices differs markedly depending on whether technical change is exogenous or endogenous, and whether clean technology deployment is incentivised by carbon prices or a dedicated deployment subsidy. Under cost-effectiveness analysis, technical change has a small effect on transient emissions and temperatures, but it has a large, negative effect on carbon prices almost irrespective of the policy instruments available. We make several practical recommendations for how IAMs can better incorporate TC, particularly when facing computational constraints.

Carbon markets have emerged in recent decades as one of the most important tools for curbing industrial greenhouse gas emissions, but they present a number of novel enforcement challenges as compared to more conventional pollution regulations—new regulators with narrow authority, lack of legal precedent, and more. To shed light on the practical issues involved in policing carbon markets, we present the first comprehensive analysis of the EU Emissions Trading System, a single program that was policed by 31 different national regulators. We find generally high rates of compliance coupled with low rates of enforcement, a pattern that is known in the literature as ‘Harrington’s paradox.’ Variation in the probability and severity of fines explain just one tenth of the variation in compliance rates. Meanwhile, other enforcement strategies that have been pointed to as resolutions to Harrington’s paradox in other applications, such as ‘naming and shaming,’ appear to have had little discernible effect.

Two approaches are predominant in climate models: cost-benefit and cost-effectiveness analysis. On the one hand, cost-benefit analysis maximises welfare, finding a trade-off between climate damages and emission abatement costs. On the other hand, cost-effectiveness analysis minimises abatement costs, omits damages but adds a climate constraint, such as a radiative forcing constraint, a temperature constraint or a cumulative emissions constraint. These constraints can be applied from today onwards or only from 2100 onwards, allowing to overshoot the target before 2100. We analyse the impacts of these different constraints on optimal carbon prices, emissions and welfare. To do so, we fit a model with abatement costs, capital repurposing costs (stranded assets) and technological change on IPCC and NGFS scenarios. The welfare-maximizing scenario reaching 1.5°C in 2100 has almost no net negative emissions at the end of the century (-2GtCO2/y). A constraint on cumulative emissions has the best welfare properties, followed by a temperature constraint with overshoot. A forcing constraint with overshoot has insufficient early abatement, leading to a substantial welfare loss of $29 Trillion, spread out over the century. As to the paths reaching 2°C, all cost-effectiveness analysis abate too late, but the welfare impact of this dynamic inefficiency is milder. Again, a forcing constraint with overshoot scores worst.