Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
General Equilibrium Perspective On Carbon Pricing
Terry Roe
University of Minnesota
July 2011
Terry Roe
Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
Point of departure
My assignment GE, does not imply a dismissal of other
approaches
Narrow to structural models: utility rests on
Forecasts of a relatively large number of endogenous variables
Explanation of cause and e¤ect
Both often done poorly, & trade-o¤s between detail and cause
and e¤ect explanation
Outline
Terry Roe
Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
Problem setting
Climate change: dynamic, probabilistic
The prob. densities of growing season temperature & precipitation
trends (Lobell, Schlenker and Costa-Robert, 2011)
How to feed 3 billion people (LDC-IBRD estimate)
World is in early stages of globalization (ain’t seen nothing
yet)
Global-transnational phenomena
Goal/challenge
Terry Roe
Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
Structure
Why model growth, don’t we have enough to do?
Implications....cannot avoid, this is what economies do!
Challenges
Terry Roe
Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
Structure
Some literature
The ADAGE model (Martin T. Ross 2007) and its derivatives
including EPA models (empirical)
Nordhaus & Yang (1996) AER
Bovenberg and Goulder (2001) Optimal Environmental
Taxation and the Presence of Other Taxes
Gehlhar et al (2010) AER (USDA/ERS) "quasi" dynamic but
detail structure
Analytical: climate change (temperature and precipitation) is a
“dynamic-stochastic process,”
Temel and Tsur (2011) on the dynamics of competing energy
sources, Automatica; Karp and Tsur (2011) Time perspective
and climate change JEEM
Terry Roe
Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
Structure
Empirical-stochastic (a challenge for GE)
Leading paper by Robert Litterman & Kent Daniel (2011); They
address:
What is the appropriate price of carbon emissions?;What
should the emissions price forward curve look like? What is
the cost of not pricing emissions appropriately?
Key innovation: treat intra-temporal risk di¤erent than
inter-temporal risk preferences, a la the Epstein-Zin utility
function; from Litterman and Daniel:
Terry Roe
Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
Structure
Structure
Identify major GHG emission sectors
Identify sectors most greatly a¤ected (agriculture/water)
T.Roe/AP 8701
ENVIRONMENTAL LINKAGES AND ECONOMIC POLICIES IN AN ECONOMY-WIDE CONTEXT
Inward Oriented Policies Include
Direct Intervention in Ag.
Indirect Interventions
Transport subsidies
Storage subsidies
Milling subsidies
Mandated farm-retail prices
Credit & other input sub.
Foreign trade interventions
-taxes & quotas on ag exp.
-traiffs & sub on substitute
crops in consuumption
(wheat for rice)
-dual exchange rates on ag
State enterprise in ag
Effects On An Economy Include
Urban Industrial Sector
General Economic Effects
Decrease returns to resources in exp.sector
Push resources into non-traded gds sector
Decrease participation in world markets
Increase vulnerability to economic shocks
Lower level of GDP and rate (spill-over)
Bias flow of investment to urban sector
Affect HH; poopulation and savings
Induce rent seeking & slow inst develop.
Capital flight, infl. Fiscal def, for. Debt
Health, Morbidity, Mortality
Embodied Effects
-Unsanitary water & food
-Food residues
-Local air polution
-Sold and hazardous waste
Disembodied
-Suspended particulate matter
-Atomosphericchanges
-Regional solid and hazard. waste
Capital market controls
Over-valued exchange rates
Inflation
Import quotas, tariffs - rest of econ.
Energy subsidies
Urban bias in public investment
-Education
-Infrastructure
Foreign exchange rationing
Capital intensive plants/industries
Concentrated industries
-High unit cost, small scale
economies
-Oligopsonistic behavior harm to ag
-Monopolistic behavior in goods
market
(Over time, space & form)
-Antiquated technology
Large urban-rural wage differentials
Effects on Environment & Wellbeing Include
Amenities
Loss of scenic areas, such as forests,
Loss of wild life and other biodiversity
Terry Roe
Rural-Agricultural Sector
Depress value of sector sp. Res.
Lock HH in ag, low land/labor
Increase res. Degradation (farm
at extensive margin)
Depress capital deepening
Slow adoption of new techn.
Land tenure problems
Depress returns to education
Natural Resource Degradation
Decrease incentives to husband
natural resources (land, forest)
High levels of Cox, Nox, SOx; high
emmission to GDP ratios
Over extract and under price primary
resources (metals, fossil fuels)
Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
Validation (Our Brazil model)
Question seldom arises in CGE world
Kehoe “Ex-post performance evaluations of CGE essential if
policy makers are to have con…dence in the results produced by
them.” Dynamic: more natural to query …t to data over time
Terry Roe
Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
Validation (Brazil)
Terry Roe
Introduction
Problem setting
Features of GE analysis
Validation
Concluding remarks
Concluding remarks
Terry Roe