Claudia Kemfert

1
International Climate Coalitions and Trade
Assessment of cooperation incentives by issue
linkage

• Claudia Kemfert
• S.P.E.E.D. Scientific Pool of Environmental
  Economic Disciplines
• University of Oldenburg
• http//www.uni-oldenburg.de/kemfert/Speedeng.htm
• IEW /EMF Meeting, Stanford, 20. June 2002

2
International Climate Coalitions and Trade
Assessment of cooperation incentives by issue
linkage

• Structure
• Introduction
• International Climate Control Coalitions
• Climate Change Negotiations towards a less carbon
  intensive technology world
• The Kyoto Protocol
• Alternatives to Kyoto
• Incentives for the USA to come into Climate
  Coalitions
• Economic Impact Assessment / Model
  Characteristics
• Model results / Evaluation
• Conclusions

3
Climate Change Negotiations

• 1997 Kyoto Protocol Quantitative emissions
  reduction targets for Annex I regions
• Following negotiations flexible mechanisms
  additional to domestic action emissions trading,
  Joint implementation, Clean Development
  Mechanisms
• 2001 Bush climate change needs to be taken
  seriously but Kyoto is unfair to America
• Bush, 13. March 2001 As you know, I oppose the
  Kyoto protocol because it exempts 80 of the
  world gt voluntary cuts
• 14. 2.2002 reduction of GHG intensity by 18
  percent by the year 2012

4
Economics of Kyoto without US

• Supply of permits several million tons
• Demand decline without US permit price
  decreasesgt compliance costs of other nations
  with binding emissions targets decrease
• Russias revenue from selling emissions permits
  decreasesgt strategic action

5
Economics of Kyoto without US

• Incentives for the US to come back Issue
  Linkage
• Improved technological options increase of
  energy efficiency
• Trade sanctions
• Further scenarios
• BAU Russia strategic actions, US no target,
  further Annex I Kyoto target
• US Energy Intensity target
• NAFTA Coalition USA, Canada, Mexico
• Trade sanctions against USA no coal trade
• Inclusion of developing countries

6
Game Theoretic Approach of Issue Linkage

• Free riding position of USA (prisoners dilemma)
  economic payoffs of free riding are higher than
  joining a coalition
• Issue linkage incentives for free riders to join
  a coalition
• Issue linkage with public good as environment and
  other issues like international security and
  finance
• Redistribution mechanism among signatories
  countries pay off countries whose net costs are
  higher than net costs
• Side transfers /side Payments as technology and
  capital transfer (CarraroSiniscalco, Hoel, Tol,
  Lise et al.)
• Trade sanctions against free rider (Barett)
• Linking environmental negotiations with increased
  expenditures in RD (CarraroSiniscalco 1997,
  1995 and Katsoulacos (1997))

7
Game Theoretic Approach of Issue Linkage
Climate Change prisoners dilemma With
Committing (C) and defecting nations (D)

• Payoff matrix
• Player
• USA (1)
• EU (2)
• Japan (3)
• REC (4)
• Others Default (no reduction)

8
Game Theoretic Approach of Issue Linkage

• Two stage game 1. Coalition game to join a CC
  coalition or not 2. Open loop Nash game to
  determine policy variables
• Issue linkage Cooperation on Climate Control
  (CC) and
• RD investments that trigger technological
  innovations (energy efficiencies)
• Trade sanctions against non cooperating nations

9
The Model WIAGEM I

• Economic Impact assessment by World General
  equilibrium model WIAGEM climate integration
• Intertemporal /dynamic MRT model
• 25 world regions aggregated to 14 trading
  regions, 14 sectors
• Induced technological change energy efficiency
  increases due to RD expenditures
• 50 years time period, solving in 5 years time
  steps
• five energy sectors coal, natural gas, crude
  oil, petroleum and coal products and electricity
• 3 GHG carbon dioxide (CO2), methane (CH4) and
  nitrous dioxide (N2O)
• OPEC can influence oil price

10
The Model WIAGEM II

• Economic Impact Assessment of Climate Change
• Protection Costs due to Sea level rise
• Impacts on agriculture, forestry, water resources
  and energy consumption
• Impacts on ecosystems and mortality due to vector
  borne diseases, and cardiovascular and
  respiratory disorders Evaluation by Tol (2001)

11
Model Characteristics Regions

Regions

ASIA

India and other Asia (Republic of Korea,
Indonesia, Malaysia, Philippines,
Singapore, Thailand, China, Hong Kong, Taiwan)

CHN

China

CAN

Canada

EU15

European Union

JPN

Japan

LSA

Latin America (Argentina, Brazil, Chile, Rest of
Latin America)

MIDE

Middle East and North Africa

REC

Russia , Eastern and Central European Countries

ROW

Other countries

SSA

Sub Saharan Africa

USA MEX

United States of America Mexico



Table
1
World regions
12
Model Characteristics
13
Model Characteristics Sectors
14
Model Characteristics

• Representative Agent Max. lifetime Utility
• Market Actors reacts as price taker (only OPEC
  can influence oil price)
• CES production Utility functions
• Carbon free Backstop Technology as upper energy
  price bound
• Induced technological change energy efficiency
  increase due to RD expenditures
• Choice between consumption and savings determined
  by intertemporal substitution elasticity
• Capital international mobile, labour immobile
  (only within regions)
• Lump sum revenue redistribution by permit trading
  to emissions reducing country
• Armington Trade

15
Model results

• Meeting emission reduction targets is costly for
  those regions facing real emissions reductions,
  i.e. Europe, USA and Japan
• Induced technological change leads to emissions
  reduction options that can be reached with less
  production drawbacks
• Investment in RD and in technological innovation
  gives a comparative advantage
• Technological spill over effects lead also to
  improved terms of trade effects

16
Model results
17
Model results
18
Sectoral Effects of Climate Control with ITC
(CDM Scenario)
19
Implementation of less carbon intensive
technologies
20
Model results

• All countries with binding emissions targets can
  profit from emissions trading with Russia
• Unilateral emissions reduction is only beneficial
  if permit trading is not allowed
• Cooperative behavior makes all players better off
  if emission permit trading is allowed
• Russia as a main seller of permits wants to
  cooperate with as many potential buying countries
  as possible
• The USA and EU always prefer joining a coalition
  with Russia if permit trading is allowed
• For the USA it is beneficial to join a small
  coalition with Japan and Russia because of
  reduced compliance costs resulting from lower
  permit demand and a decreased permit price

21
Model results

• USA has an incentive to cooperate on
  technological improvements
• The USA as a free rider on technological
  innovations could also benefit from spill over
  effects resulting from technological improvements
  in cooperating countries
• The USA would prefer to join a coalition with
  Japan and Russia instead of a coalition with both
  Europe and Japan who face binding emissions
  reduction targets
• Trade barriers give no significant incentives to
  join a coalition (Punishment against themselves)
• Exemption partial coalition between Japan,
  Europe and Russia on climate control and trade
  barriers against the USA (however not profitable)

22
Model results
Stability Internal no country in the coalition
has an incentive to leave the cartel External
no country outside the coalition has an incentive
to join the cartel Profitable if all members of
the stable coalition are better off inside the
cartel than outside
23
Model results
24
Conclusion

• Incentives exist for a climate control coalition
  coupled with issue linkage of technological
  innovations
• A full cooperation on climate control and
  technological improvements benefit all nations in
  comparison to a unilateral strategy
• There is an incentive for the USA to join either
  a full coalition or a smaller coalition on
  climate control and technological improvements
  with Europe, Japan and Russia
• If Russia as the main seller of permits joins the
  coalition, issue linkage becomes most profitable
• Trade barriers against non-cooperating nations
  are only beneficial if Europe, Japan and Russia
  create a coalition
• There exist incentives for non- cooperating
  countries to join a coalition by including issue
  linkage however, these coalitions are not stable

25
Induced Technological Change
? parameterizes the efficiency of research and
development. This share is endogenously
determined by production changes. Capital is used
for production with a capital price and a
utility price of , and is depreciated by
rate ?
-pRDt
Price of capital in period t Price of capital
services in period t Price of regional
protection costs pRDt Price of
regional RD investments Kt Activity level of
capital in period t
26
Induced Technological Change
Investments are produced by Leontief
technology Value share investment of
good j It Activity level of investments in
period t P Time period RD investments follow
the same determination