The Economics of Climate Change Policies: Macroeconomic Effects, Structural Adjustments and Technological Change

172 Pages·2009·11.41 MB·English

by  Rainer Walz

Sustainability and Innovation
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Rainer Walz • Joachim Schleich
The Economics of
Climate Change Policies
Macroeconomic Effects, Structural
Adjustments and Technological Change
Physica-Verlag
A Springer Company
PD Dr. Rainer Walz
Prof. Dr. Joachim Schleich
Fraunhofer Institute for Systems
and Innovations Research (ISI)
Breslauer Straße 48
76139 Karlsruhe
Germany
[email protected]
[email protected]
ISBN 978-3-7908-2077-5 e-ISBN 978-3-7908-2078-2
Sustainability and Innovation ISSN 1860-1030
Library of Congress Control Number: 2008932311
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Contents
1 Introduction ................................................................................................... 1
2 Effects of Climate Policy on the Economy:
A Theoretical Perspective ............................................................................ 5
2.1 Macroeconomic Objectives .................................................................. 5
2.2 Price and Cost Effects ........................................................................... 6
2.2.1 Effects of Changes in Prices and Costs .................................... 6
2.2.2 Existence of No-Regret Potentials ............................................ 8
2.2.3 Existence of a Double Dividend ............................................... 13
2.3 Innovation Effects ................................................................................. 15
2.3.1 Policy-Induced Technical Change ............................................ 15
2.3.2 Productivity Effect of Investments
in Climate Protection ................................................................ 16
2.3.3 First Mover Advantage ............................................................. 18
2.4 Demand Effects .................................................................................... 25
2.4.1 Structural Changes .................................................................... 25
2.4.2 Income Multiplier and Accelerator Effects .............................. 28
2.5 Combined Effects of the Impulses ........................................................ 29
3 Empirical Results of the Macroeconomic Impacts ................................... 33
3.1 Modelling Approaches .......................................................................... 33
3.2 Macroeconomic Effects ........................................................................ 39
3.2.1 Review of the Results from Top-Down Approaches ................ 39
3.2.2 Results Using a Combined Bottom-Up/Top-Down
Approach ................................................................................... 43
3.2.3 Comparison and Interpretation ................................................. 47
4 Structural Adjustments ............................................................................... 53
4.1 Scope of Analysis ................................................................................. 53
4.2 Sectoral Changes .................................................................................. 54
4.3 Changes in Regional Employment ....................................................... 61
4.3.1 Scope of Analysis and Methodological Approach ................... 61
v

Contents vii
7.2.4 Investment Priorities ............................................................... 111
7.2.5 Uncertainty About Future Energy Costs ................................ 112
7.2.6 Landlord/Tenant Dilemma (Split Incentives) ......................... 112
7.3 Determinants ....................................................................................... 113
7.3.1 Energy Consumption .............................................................. 113
7.3.2 Size ......................................................................................... 113
7.3.3 Energy Audits ......................................................................... 113
7.3.4 Sub-Sector Dummies .............................................................. 114
7.4 Results ................................................................................................ 115
7.5 Conclusions ........................................................................................ 117
8 Innovation Effects of Regulation – Case Study for Wind Energy ......... 119
8.1 Introduction and Methodology ........................................................... 119
8.2 Regulation in the Wind Energy Sector ............................................... 122
8.2.1 Overview of Instruments ........................................................ 122
8.2.2 Regulation in Germany........................................................... 124
8.2.3 Regulation in the US .............................................................. 126
8.3 Development and Diffusion of Wind Turbines ................................... 128
8.3.1 Development of Technology .................................................. 128
8.3.2 Diffusion of Technology ......................................................... 131
8.4 Comparative Analysis of the Influence of Regulation
on Innovation ...................................................................................... 133
8.4.1 Experimentation Phase in the 1980s ...................................... 133
8.4.2 Rapid Market Growth in the 1990s ........................................ 134
8.4.3 Future Outlook ....................................................................... 138
8.5 Questions for Further Research .......................................................... 140
9 Summary and Conclusions........................................................................ 143
Appendix: Model Description of ISIS ............................................................ 153
Literature .......................................................................................................... 155
Chapter 1
Introduction
In its latest Assessment Report, the Intergovernmental Panel on Climate Change
(IPCC, 2007) projects that without further action the global average surface tem-
perature would rise by a further 1.8–4.0°C until the end of this century. But even if
the rise in temperature could be limited to the lower end of this range, irreversible
and possibly catastrophic changes are likely to occur. Consequently, the protection
of the earth’s atmosphere requires substantial efforts to reduce CO and other green-
2
house gas emissions – especially in countries with very high per capita emissions.
To limit the imminent rise in temperature, in the Kyoto-Protocol, the European
Union has committed itself to reducing the emissions of greenhouse gases by 8%
up to 2008–2012 compared to 1990 levels. Within the EU burden sharing agree-
ment, some countries have to achieve even higher emissions reductions. Germany
was assigned a reduction target of 21%. The entry into force of the Kyoto Protocol
in February 2005 marks a first step towards meting global climate targets, but more
ambitious action to reduce greenhouse gas emissions is needed after 2012, when
the Kyoto targets expire. Under German presidency, the EU has committed itself to
unilaterally reduce its greenhouse gas emissions until 2020 by 20%. In case a Post-
Kyoto agreement can be reached, the EU reduction target would be 30% (CEU,
2007). Such reduction targets would be on a path towards meeting the 70–80%
emission reductions considered necessary by 2050 for industrialised countries to
meet long term global climate targets, taking into account economic growth in
many populous developing countries. To meet these targets governments have
started to implement climate policies which include economic instruments such as
energy or emission taxes, or CO-emission trading schemes, subsidies for the inven-
2
tion, adoption and diffusion of low- or no-carbon technologies such as renewable
energy sources, efficiency standards or labelling systems for appliances, or infor-
mational measures such as demonstration programmes. These policies change the
incentives structure of economic agents towards more climate-friendly processes
and products. They also alter the profitability of new climate-friendly technologies,
leading to additional research and development efforts towards such technologies,
eventually resulting in a less carbon-intensive production and consumption struc-
ture of the entire economy.
In particular, the anticipated economic effects of these policies play an important
role in shaping the political debate over climate protection policies, which has been
R. Walz and J. Schleich. The Economics of Climate Change Policies. 1
Sustainability and Innovation,
© Springer-Verlag Berlin Heidelberg 2009
2 1 Introduction
refuelled by the findings of the “Stern” report in 2006 (Stern, 2007). Accordingly,
without further action, the overall costs of climate change will be equivalent to los-
ing at least 5% of global gross domestic product each year, while the costs of reduc-
ing greenhouse gas emissions to avoid the worst impacts of climate change could
be limited to about 1% of global GDP per year. However, these findings as well as
the implications for climate policy are highly disputed (Tol, 2006; Nordhaus, 2007;
Heal, 2008). Similarly, recent efforts to assess the macroeconomic implications of
climate policies, for example on employment or gross domestic product, have not
produced a clear picture. Conflicting model results have contributed to the evolve-
ment of an intensive debate on the costs of climate protection. “The Economics of
Climate Change Policies: Macroeconomic Effects, Structural Adjustments and
Technological Change” portrays this debate, analyses the reasons behind different
modelling results, and highlights the weaknesses of existing studies. Furthermore,
it presents its own empirical results which contribute to closing the gap with regard
to structural effects and offers new insights into the modelling of technological
change.
Chapter 2 of the book analyses the economic mechanisms which are responsible
for the macroeconomic effects of climate protection policies. Three different classes
of mechanisms with various subgroups can be distinguished: effects on costs (sup-
ply side), effects on aggregate demand, and technological effects (productivity,
technological competitiveness). A sound theoretical explanation is given for why
different results can emerge, depending on which mechanisms are taken into
account. This theoretical chapter concludes with a hypothesis about the likely pat-
tern of economic impacts of climate protection policies.
Based on this framework, the different approaches and results of modelling
economy-energy interactions are evaluated in Chap. 3 for the case of Germany. It
is demonstrated that different modelling approaches emphasise different segments
of the numerous economic mechanisms. The most important empirical studies in
Germany are analysed, and differences between the results are explained. Based on
this analysis, conclusions are drawn about the likely macroeconomic impacts of
climate change policies.
Chapter 4 deals with the structural adjustments of climate change policies. The
pattern of sectoral changes in the industry structure are analysed for two policy
scenarios which differ with regard to the policy instruments assumed. Furthermore,
both the effects on changes in the qualitative job characteristics and qualification
requirements as well as the on regional adjustments in employment are analysed.
Taking into account innovation effects is one of the key weaknesses of model-
ling economic effects. Thus, Chap. 5 addresses the issue of technological change in
more detail. Various approaches to explain the generation and diffusion of new
technological solutions are compared, and the state-of-the-art of existing empirical
studies is summarised. In the following three chapters, case studies are performed
to explore the empirical relevance of the various theoretical approaches for the
determinants of technological change in the context of energy use. Chapter 6
includes two empirical case studies form the industry sector in Germany using
econometric techniques to explore the determinants of technological change in the