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Decoupling Reconsidered Lucas Bretschger Keynote Address EAERE 2019 Manchester
Decoupling Reconsidered
Lucas Bretschger
Keynote Address
EAERE 2019 Manchester
CO2 Emissions
Source: CDIAC; Le Quéré et al 2018; Global Carbon Budget 2018
CO2 and GDP
British Columbia
Source: Jackson et al 2018; Global Carbon Budget 2018
Sweden
• World• UK• Sweden• British Columbia
UK
Source: CCC analysis 2019 Source: BC Government
Future Development
IPCC (2018)
Christensen, Gillingham, Nordhaus (2018)
Significant decoupling needed!• ambitious• too ambitious/impossible?
UN (2017)
«Decomposition» Logic
GDP – Energy Use: «Over time, long run growth in living standards is strongly associated with rising energy use, especially in developing countries» (Becker, Murphy, Topel 2011)
Resource Use – Population size: «The Earth can support only a limited number of people in a sustainable manner .. Humanity has a clear choice: between more people with poorer lifestyles and fewer people with a better quality of life» (Population Matters 2019)
Energy substitutes for energy: « Nuclear power makes a significant contribution to reducing greenhouse gas emissions worldwide while fulfilling at the same time the increasing energy demands of a growing world population and supporting global sustainable development » (IAEA 2018).
Really?What about:
• Prices• Law of demand• Input substitution• Sectoral change• Capital accumulation• Risk and Uncertainty• Gains from diversification• Demographic transition• Endogenous Growth• Technology• … • Economics?
Which economics?• Carbon prices: Level, profile,
country differences• Model specification: beyond
static partial equilibrium • Accurate calibration• Other environmental policies• Equity and fairness• Public communication
Economic dynamics
Investment incentives Input substitution Sectoral change
Risk and uncertainty
Environmental shocks Arrival and shock size Policy uncertainty
Input conditions
Resource depletion Climate damages Endogenous population
Further issues
Non-market effects Role of marginalism «Meaningful» life
Disruptive development
Role of Expectations Transition periods Fourth industrial
revolution
Policies
Efficiency and Equity (Inclusive) institutions Stranded Assets
Building Blocks
This Talk
• Theory of main economic mechanisms driving substitution processes
• Use and extend a basic class of dynamic models
• Show how to make «Shared Socioeconomic Pathways» endogenous
• Discussion of policy effects
Updated view on decoupling
Capital Natural Resources Other Inputs
• Physical, Human • Knowledge, health• Public and energy
infrastructure
• Fossil fuels(> emissions)
• Metals, minerals• Renewable Resources
• Labour• Land• Public services
Elasticity of substitution
Input Characterization
OutputDecoupling: Less resources, less pollution
Output
Resources
Constant output
Capital
Capital
Output
Resources
growing output
no substitution
degrowing output
OutputLess resources, which output?
Capital K
Resources RTime t
Time t
45 °
Capital accumulation
Resource depletion
SpeedConstant output
Capital Sector
Resources RTime t
Time t
45 °
Depletion speed
dK
Determining dK
Capital K
K(t) in growingeconomy
K(t) withconstant output
Constant output
Final Output
Capital Accumulation
Resource Depletion
Two-sector Approach
Households
Final Output
Capital Accumulation
Resource Depletion
Households
Y – outputK – capitalI – investmentR – resourcesC – consumption
Two-sector Approach
Final Output
Capital Accumulation
Resource Depletion
Households
Y – outputK – capitalI – investmentR – resourcesC – consumption
Two-sector Approach
Final Output
Capital Accumulation
Resource Depletion
Households
Y – outputK – capitalI – investmentR – resourcesC – consumption
Two-sector Approach
Final Output
Capital Accumulation
Resource Depletion
HouseholdsHouseholds
Y – outputK – capitalI – investmentR – resourcesC – consumption
Two-sector Approach
Resources RTime t
Time t
45 °
Capital K
Endogenous growthwith resource scarcity;positive when
Resources RTime t
Time t
45 °
Capital K
Time tR(t)
Y(t)Decoupling
Index
100
Poor Input Substitution
Faster capital accumulation needed, can be achieved by sectoral reallocation
45 °
Resources RTime t
Time t
Poor input substitution can support decoupling!
Capital K
Climate Change
• Stock pollution caused by resource use
• Damages to productivity or to capital? Both!
No climate damage Climate damage
Final Output
Resource DepletionStock Pollution
Modeling Climate Change
Capital AccumulationHouseholds
Final Output
Resource DepletionStock Pollution
Households Capital Accumulation
P – pollution stockD – depreciation rate
Modeling Climate Change
Final Output
Resource Depletion
Capital AccumulationHouseholds
Stock Pollution
Modeling Climate Change
P – pollution stockD – depreciation rate
Capital K
45 °
Resources RTime t
Time t
Climate ChangeClimate damages
S0
Endogenous growth with climate change; positive when
45 °
Supply Side Climate Policy
Limit So
Resources RTime t
Time t
S0’
Static and dynamic effectss = 1:
Capital K
Endogenous growth with climate policy
Emission Taxes
Shifting extractionprofile; insufficient
45 °
Resources RTime t
Time t
S0
Capital K
Resources RTime t
Time t
45 °
«Backstop» Technology
S0
Capital K
Backstop is not (yet) available in general, but in different sectors, we are (could be) close to complete resource phase-out
Complete decoupling
Resources RTime t
Time t
45 °
Climate Shocks
Poisson process
Capital K
Optimal investments and optimal policy takes the risks adequately into account
Resources RTime t
Time t
45 °
Poisson and Wiener process
Climate ShocksCapital K
Optimal investments and optimal policy takes the risks adequately into account
Capital K
Resources RCapital Return q
Disruptive Development
Expectations may be decisive; they generate momentum and moderate the costs of policies;distinctive role of subsidiesvs. taxes
Stable equilibria
Capital AccumulationHouseholds
Final Output
Adding Labour
Final Output
Households
Adding Labour
Capital Accumulation
45 °
Knowledge Capital K
Resources RTime T
Time T
«Ultimate Resource»
Labour
45 °
With labour and resources
Population increase
Resource drag
Resources RTime T
Time T
Capital AccumulationCapital K
Final Output
Resource depletion
Intermediate Output
Capital accumulationResearch sector
Households
Adding Innovation,Fertility
Resource depletion
Intermediate Output
Capital accumulationResearch sector
Households
Final Output
x – intermediate goodsN – number of varieties
Final Output
Resource depletion
Capital accumulationResearch sector
HouseholdsIntermediate Output
x – intermediate goodsN – number of varieties
Final Output
Resource depletion
Intermediate Output
Research sector
Households
Capital accumulation
Final Output
Resource depletion
Intermediate Output
Capital accumulation
Households
H – skilled labour
Final Output
Resource depletion
Intermediate Output
Capital accumulationResearch sector
Households
b – birth flowB – household productivity
Pollution stock
Knowledge diffusionHousehold
productivity
Non-market effects
Knowledge diffusionHousehold
productivity
Non-Market Effects
Pollution stock P
m – resource share
b – average birth flowB – household productivity
q – knowledge elasticity
Long-run innovation rate
Long-run consumption per capita growth rate
Innovation and Consumption Growth
Population growth is included;growth is driven by innovations;drag of decreasing resource use is given by the last term
Pushing technological frontier Decoupling
Decoupling in Numbers
• Calibrating parameters allows replicating current growth rate of world GDP using this growth equation
• Per capita consumption growth rate may become insignificantly lower as a consequence of stringent climate policy
• Policy effects have to be compared to development without a policy
• Additional issues• “backstop” technologies
• momentum effects
• consideration of risk and uncertainty
• Heterogeneous countries and policies more effects
Different World RegionsNorth / South
Incomes and pollution impacts differ significantly
Knowledge Diffusion
Different World Regions
Knowledge diffusion lowers the costs of global climate policy significantly
Capital K
Resources R
dK
- dR
Different substitution elasticity/ abatement cost
Unequalabatement
Carbon Pricing
Different output/income level
Capital K
Resources R
Here: Equalabatement
Carbon Pricing
Investment = - consumptionUtility
ConsumptionAbatement
Rich
Poor
O
O’
Equal abatement,unequal utility loss
Carbon Pricing
Abatement
Capital K
Resources R
Abatementcost
Utility loss
Rich
Poor
Fair and Efficient Policy
O
O’
Equitable policy takes care of income differences:- Transfers- Different pricing
Equitable Carbon Budgets and NDCs in 2030
Comparison of equitable carbon budgets with NDC targetsAssumptions: 1000 Gt available for 2000-50, emissions 1990-2014 50% weight, calculation of equitable emissions between 2014 and 2050 (average per capita per country per annum), comparison of equitable emissions with NDC in 2030
http://www.ccalc.ethz.ch/
red deficit
blue surplus
Sweden
Switzerland
CO2 Tax Rates
Tax rates jump atirregular dates with different size: Policy uncertainty
Households
Emissions industry
Emissions services
Industry
CO2 tax (€ per ton)
CO2 tax (CHF per ton)
What we werethinking …
What reallyhappens …
• Research delivers optimal policy design • Political sector adopts ideal policy
• Research studies problems and proposes policies• Public is alert, policy undertakes first steps• New technologies are developed• Old industries and lobbies start campaigns (assets)• Policy, public opinion, and technology react• Policy may change in a stochastic manner
Role of Policy
Institutions matter: of course
We’ve always done it this
way before
We’ve never done it that
way before
Pigou taxes Stochastic taxes
Lessons on Decoupling
• Resource scarcity, pollution, and environmental policies are compatible with economic growth
• Dynamic effects of climate policy tend to be ignored, misinterpreted, or underrated
• Important issues make the case for decoupling stronger • Poor input substitution fosters sectoral change
• Environmental risks affect capital accumulation
• «Overlap» regions allow for a role of expectations
• Green expectations and international knowledge diffusion lower the costs of climate policy
• Stringent carbon policies affect growth only moderately
• Policies can be designed in an efficient yet equitable way
• Policies need to be workable
• Stochastic policies may accelerate decoupling
Significant decoupling needed!• ambitious• too ambitious/impossible?
Policies for Decoupling
Bretschger, Lucas (2019): Malthus in the Light of Climate Change, Economics Working Paper Series 19/320, ETH Zurich.
Borissov, Kirill and Lucas Bretschger (2018): Optimal Carbon Policies in a Dynamic Heterogenous World, Economics Working Paper Series 18/297, ETH Zurich.
Bretschger, Lucas and Susanne Soretz (2018): Stranded Assets: How Policy Uncertainty affects Capital, Growth, and the Environment, Economics Working Paper Series 18/288, ETH Zurich.
Bretschger, Lucas and Christos Karydas (2019): Economics of Climate Change: Introducing the Basic Climate Economic (BCE) Model, Environment and Development Economics, forthcoming.
Borissov, Kirill, Alexandra Brausmann and Lucas Bretschger (2019): Carbon Pricing, Technology Transition, and Skill-Based Development, European Economic Review, forthcoming.
Bretschger, Lucas and Aimilia Pattakou (2019): As Bad as it Gets: How Climate Damage Functions Affect Growth and the Social Cost of Carbon, Environmental and Resource Economics, 72 (1): 5–26.
Brausmann, Alexandra and Lucas Bretschger (2018): Economic Development on a Finite Planet with Stochastic Soil Degradation, European Economic Review 108: 1-19.
Bretschger, Lucas and Alexandra Vinogradova (2018): Best Policy Response to Environmental Shocks: Building a Stochastic Framework, Journal of Environmental Economics and Management, in Press.
Bretschger, Lucas and Christos Karydas (2018): Optimum Growth and Carbon Policies with Lags in the Climate System, Environmental and Resource Economics, 70(4): 807-834.
Bretschger, Lucas and Andreas Schaefer (2017): Dirty history versus clean expectations: Can energy policies provide momentum for growth? European Economic Review, 99: 170-190.
Bretschger, Lucas, Filippo Lechthaler, Sebastian Rausch, and Lin Zhang (2017): Knowledge Diffusion, Endogenous Growth, and the Costs of Global Climate Policy, European EconomicReview, 93: 47–72.
Bretschger, Lucas (2015): Energy Prices, Growth, and the Channels in Between: Theory and Evidence, Resource and Energy Economics, 39: 29–52.
Bretschger, Lucas and Nujin Suphaphiphat (2014): Effective Climate Policies in a Dynamic North-South Model, European Economic Review, 69: 59-77.
Bretschger, Lucas (2013): Population Growth and Natural Resource Scarcity: Long-Run Development under Seemingly Unfavourable Conditions, Scandinavian Journal of Economics, 115/3: 722–755.
Bretschger, Lucas and Sjak Smulders (2012): Sustainability and Substitution of Exhaustible Natural Resources; How Resource Prices Affect Long-Term R&D-Investments, Journal ofEconomic Dynamics and Control, 36 (4): 536–549.
Bretschger, Lucas and Simone Valente (2012): Endogenous Growth, Asymmetric Trade and Resource Dependence, Journal of Environmental Economics and Management, 64/3: 301-311.
Bretschger, Lucas and Simone Valente (2011): Climate Change and Uneven Development , Scandinavian Journal of Economics, 113 (4): 825-845.
Bretschger, Lucas, Roger Ramer and Florentine Schwark (2011): Growth Effects of Carbon Policies: Applying a Fully Dynamic CGE model with Heterogeneous Capital, Resource and Energy Economics, 33 (4): 963-980.
Bretschger, Lucas (1998): How to Substitute in Order to Sustain: Knowledge Driven Growth Under Environmental Restrictions, Environment and Development Economics, 3(4): 425-442
References
