Frontiers of Climate Change Economics

Environ Resource Econ DOI 10.1007/s10640-017-0171-2 INTRODUCTION Frontiers of Climate Change Economics Gerard van der Meijden1,2 · Frederick van der Ploeg2,3,4,5,7 · Cees Withagen1,6,7 © Springer Science+Business Media B.V. 2017 Abstract The economics of climate change is an active field of research. The contributions to a Special Issue are put in context of the literature, and it is suggested that second-best issues such as carbon leakage and the Green Paradox need to be complemented with a political economy analysis of why certain instruments are politically infeasible and with intra- and intergenerational analyses of the impact of climate policy. A case is also made for more empirical work on the gradual and catastrophic damages of global warming. Keywords Climate change · Green paradox · Carbon leakage · Political economy · Distribution · Tipping points · Climate damage estimates We gratefully acknowledge financial support from FP7-IDEAS-ERC Grant No. 269788. We also thank the Tinbergen Institute for the organisation of the 11th Tinbergen Institute Conference “Combating Climate Change: The Political Economy of Green Paradoxes”, Amsterdam, 21–22 April 2016, at which all of the papers in this Special Issue were originally presented. B Cees Withagen Gerard van der Meijden Frederick van der Ploeg 1 Department of Spatial Economics, Vrije Universiteit Amsterdam, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands 2 Tinbergen Institute, Amsterdam, The Netherlands 3 Department of Economics, University of Oxford, Manor Road Building, Manor Road, Oxford OX1 3UQ, UK 4 St. Petersburg State University, 7/9 Universitetskaya nab., St. Petersburg, Russia 199034 5 CEPR, Washington, DC, USA 6 IPAG Business School Paris, Paris, France 7 CESifo, Munich, Germany 123 G. van der Meijden et al. JEL Classification Q51 · Q52 · Q54 · Q58 1 Introduction Important contributors to climate change are the greenhouse gas emissions by mankind at home, in factories, in the office, on the road and in the air. Greenhouse gases mix immediately once in the atmosphere, so that it does not matter whether emissions take place in China, India, Africa, Europe or the Americas. Global warming can therefore be characterised as a global externality. A key concept in the economics of climate change is the social cost of carbon (SCC). The SCC is the present value of all current and future damages to aggregate economic production caused by the global warming induced by emitting one ton of carbon today. There is a whole industry of trying to assess these damages and also a literature on what kind of ethical and risk considerations drive the rate used to discount these damages. The main point is, however, that if the global warming externality is the only market failure on the planet (and it clearly is not), the policy makers of the world should ensure that carbon is priced uniformly throughout the planet at a level equal to the SCC (Chichilnisky and Heal 1994). This carbon price can be realised through a uniform global carbon tax or through a worldwide system of trade carbon permits as this is the most efficient way of curbing emissions. van der Ploeg and Withagen (2014) and Golosov et al. (2014) show how the optimal SCC is calculated in general equilibrium and is the key driver of phasing out fossil fuel and phasing in renewable energy. Such a worldwide system of pricing carbon can only be sustained if rich countries in the world compensate the poor countries with lump-sum transfers. Since after decades of climate summits such a system of global carbon pricing and lump-sum transfers is still not in place, one has to consider second-best arrangements where only part of the world prices carbon, or at different rates (cf. Chichilnisky and Heal 1994; D’Autume et al. 2016). This leads to the inevitable problem of international carbon leakage. Even those countries that try to price carbon, have to face the political realities that policy makers tend to commit to future climate policies and to procrastinate. They also tend to prefer the carrot of a renewable energy subsidy to the stick of an effective and credible carbon price. This leads to Green Paradox effects. Both leakage and Green Paradox effects render climate policy less effective than they would have been otherwise. In this Special Issue to mark the completion of an Advanced Instigator Grant of the European Research Council, Kverndokk et al. (2017), Gronwald et al. (2017) and Mulatu (2017) deal with and add new insights into these two key reasons for frustration of first-best climate policies. These papers are discussed and put in context in Sect. 2. Another reason why climate policy is frustrated in practical policy making is, for example, that carbon prices often hit the poorest people of society hardest and thus politicians have little appetite to implement carbon pricing. Section 3 discusses two papers in the Special Issue that deal with politics of climate policy. Carattini et al. (2017) study voting on energy taxes which helps to understand public resistance to environmental policy measures. Dao et al. (2017) deal with the intricate issues of how to tackle intergenerational distributional consequences of climate policies. Section 4 discusses in some detail the emerging literature on tipping points and catastrophes including the contribution by Tsur and Zemel (2017) to the Special Issue. Section 5 discusses the estimation of damages from climate change including the contribution of Howard and Sterner (2017). Section 6 concludes with a brief agenda for future research. 123 Frontiers of Climate Change Economics 2 Carbon Leakage and the Green Paradox Climate policies may suffer from interregional and intertemporal carbon leakage. Interregional carbon leakage occurs if only a subset of regions in the world introduces climate policies. There are two channels through which this effect operates. First, polluting firms may relocate to regions with less stringent climate policies. Second, climate policies reduce fossil demand in policy-active regions, leading to a lower price for fossil fuels on the world market. As a result, demand and emissions in the policy inactive regions go up. Estimates of the size of this carbon leakage effect vary from 5 to over 30% of the reduction in policy active regions (Burniaux and Martins 2012; Böhringer et al. 2017), but there are also extreme examples of negative leakage rates (Elliott and Fullerton 2014) and a leakage rate of 130% (Babiker 2005). Intertemporal leakage occurs if, due to the implementation of ‘gradually greening’ policies’ (such as announced future carbon taxes or subsidies for renewable energy) owners of fossil fuels increase their current supply in anticipation of a reduction in future demand. Because this front-loading of fossil supply causes an acceleration of climate change, intertemporal carbon leakage is also known as the Green Paradox (cf. Sinclair 1994; Sinn 2008, 2012; van (...truncated)