Table Of ContentGLOBAL ENVIRONMENTAL ECONOMICS
GLOBAL ENVIRONMENTAL
ECONOMICS
by
w.
HANS GOTTINGER
International Institute for Environmental
Economics and Management (IIEEM)
and Nagasaki University
SPRINGER-SCIENCE+BUSINESS MEDIA, B.V.
A C.I.P. Catalogue record for this book is available from the Library of Congress.
ISBN 978-1-4613-7482-4 ISBN 978-1-4615-5435-6 (eBook)
DOI 10.1007/978-1-4615-5435-6
Printed an acid-free paper
AH Rights Reserved
© 1998 Springer SciencetBusiness Media Dordrecht
Originally published by Kluwer Academic Publishers, Boston in 1998
Softcover reprint of the hardcover 1s t edition 1998
No part of the material protected by this copyright notice may be reproduced Of
utilized in any fonn or by any means, electronic Of mechanical,
including photocopying, recording or by any infonnation storage and
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CONTENTS
Preface ix
Introduction xiii
Chapter 1: Issues of Global Environmental Economics
1.1 The Scope of the Problem 1
1.2 World Fossil Fuel Use 5
1.3 Technological Patterns 9
1.4 Uncertainty Analysis 12
1.5 Design of an International Regime 13
1.6 Adaptation 16
References 18
Chapter 2: Economic Models of Optimal Energy Use Under Environmental
Constraints
2.1 Introduction 20
2.2 Some Economic Studies on the C~ Problem 22
2.3 Preliminary Defmitions and the General Model 26
2.4 A Simplified Model 28
2.4.1 Necessary Conditions 29
2.4.2 Sufficient Conditions 31
2.4.3 Definition and Optimality of Equilibrium 32
2.4.4 Illustration by a Phase Plane Diagram 33
2.5 A Discrete Type Impact of C~ Emissions 37
2.6 Further Specification of the Model 42
2.7 An Extended Cobb-Douglas Model 45
2.8 Discussion and Perspective 48
2.9 A Taxonomy of Technical Change 51
2.10 Impacts of Technological Change in C~ Emission Control 55
2.11 Exponential Technical Progress in a Benchmark Model 64
2.12 International Co-operation 66
2.13 Conclusions and Perspectives 73
Appendix A 74
Appendix B 77
References 78
Chapter 3: Uncertainty in Economic Models of Optimal Energy Use
3.1 Introduction 81
3.2 Structural Uncertainty in a Simple Aggregate EEE Model 83
3.3 Example in a Specified Model 87
3.4 Impact of Uncertainty Treatment and Parameter Changes 90
3.5 Numerical Calculations 92
3.6 Impact of Uncertainty Treatment and Model Changes 94
3.7 Conclusions 99
References 100
Chapter 4: Long-Run Investment and Technical Progress: Dynamic and Vintage
Type Models
4.1 Introduction 102
4.2 First-Order Necessary Conditions 105
4.3 Long-Run Equilibrium 107
4.4 Simplification of Model for Computational Purposes III
4.5 Classification of Equilibria 112
4.5.1 Stationary Equilibrium 112
4.5.2 Balanced Growth Equilibrium 112
4.5.3 Optimality of Equilibrium 113
4.6 Characterization of Equilibrium 116
4.7 Numerical Examples 120
4.8 More on Endogenous Technical Progress 124
4.9 A Vintage Model 126
4.10 The Analysis of Necessary Conditions 129
4.11 Neutral Technical Progress 132
vi
4.12 Induced Price Changes 134
4.13 Consideration of Model Workability 136
4.14 Specific Model Characteristics 138
4.15 Conclusions 140
References 141
Chapter 5: Energy - Economy - Environmental Models with Special Reference to
CO Emission Control
2
5.1 Introduction 143
5.2 Review of Energy - Economy - Environmental (EEE) Models 144
5.3 Treatment of New Energy Technologies 149
5.4 Economic Models of Pollution and Control 151
5.5 International Issues 154
5.6 Technology Issues 158
5.7 Issues of Uncertainty 161
5.8 Philosophy of EEE Modelling 165
5.9 Policy Analysis of EEE Models 167
5.10 Classification of EEE Models 170
5.11 Lessons Learned from Modelling Exercises 172
References 174
Chapter 6: A Simple Endogenous Model of Economic Activity and Climate Change
6.1 Introduction 178
6.2 Economic and Natural Environment 181
6.3 Competitive Equilibrium 184
6.4 Properties of the Law of Motion of Temperature 189
6.5 Equilibrium Time Path of Global Temperature: Case 1 195
6.6 Equilibrium Time Path of Global Temperature: Case 2 197
6.7 Chaotic Climate Dynamics 201
6.8 Concluding Remarks 204
Appendix 206
References 213
vii
Chapter 1: Global Environmental Economics and Economic Growth
7.1 Introduction 215
7.2 Cumulative Pollutants and the Rate of Economic Growth 217
7.3 Economic Growth in an Unregulated Economy 223
7.4 Economic Growth in a Degrading Economy 231
7.5 Economic Growth in the Spaceship Economy 237
7.6 Dynamic Equilibrium in the Spaceship Economy 248
7.7 An Evaluation of the Model and some Conclusions 254
7.8 Some Long-Term Implications of the Model 256
References 258
Chapter 8: Optimal Economic Growth when CO Constraints are Critical
2
8.1 Introduction 259
8.2 Formulation of the Problem 260
8.3 Derivation of the Necessary Conditions 264
8.4 Analysis of the Necessary Conditions 265
8.5 Conclusion 277
References 279
Chapter 9: Uncertainty. Value of Information and Greenhouse Gas Emissions
9.1 Introduction 280
9.2 An Illustrative Example - Evaluating a Climate Research and Monitoring
Programme 282
9.3 The Value of Information in a Stochastic Dynamic Programme 293
9.4 Optimal Policies in a Stochastic Dynamic Programme 301
9.5 Resource Costs and Critical Probabilities 307
9.6 Conclusions 314
References 317
Epilogue 319
Index 325
viii
Preface
The movement of carbon from sources to final disposition is known as the carbon cycle. The
largest reservoir of carbon is in carbonate sediments such as limestone and chalk. Other
significant but less stable reservoirs include fossil fuels, living and dead plants and animals,
carbonates and bicarbonates dissolved in the ocean. Huge quantities of carbon, in the form
of carbon dioxide (C0 move from the biosphere and oceans to the atmosphere and back
2),
each year. It is widely believed that before the industrial revolution these flows were closely
balanced and the atmospheric CO level was relatively stable. In more recent times, though,
2
several changes in the carbon cycle may have occurred. While it is not disputed that the
increase of CO will have an impact on warming and climatic change, uncertainty about fossil
2
energy use, land use change, the carbon cycle, and other climatic disturbances all make
prediction of the future climate uncertain. Carbon dioxide in the atmosphere affects the
radiation balance of the earth and increasing C~ concentrations are expected to cause a
warmer climate. Carbon dioxide is relatively transparent to energy as sunlight, but reflects
or traps a large portion of this energy when radiated from the earth as heat. A very
important development in climate research is the identification of other trace or greenhouse
gases (OHO) with this same heat trapping property. The prediction of future temperature is
further complicated by diverse factors. Significant feedback effects are expected to
accompany any direct effects of CO heat trapping. Warming may change cloud, snow, and
2
ice cover and alter the earth's "albedo" or brightness. Consequently, the reflection and
absorption of energy may increase or decrease. Another major concern is that a warmer earth
would result in more rapid and violent fluctuations in weather patterns resulting in mounting
damages and related possible problems include changes in the range of crop pests, greater
health problems from the spread of diseases associated with tropical climates, and disruption
of world fisheries. The concern about global climate change as a result of the build up of
excessive concentrations of greenhouse gases is a principal concern in environmental policy.
The concentration of greenhouse gases in the atmosphere is a stock pollutant, it can take
hundreds of years before they lose their properties or disappear. Following climate
projections and updates by the Intergovernmental Panel on Climate Change (IPCC) , the
expected trends in worldwide energy use are such that these could generate important climate
ix
changes. The time frame and the magnitude of damages are still highly uncertain. From the
economic point of view there are some interesting aspects with the overall problem.
Greenhouse gases are uniformly mixed stock pollutants and the problem is on a worldwide
scale.
On this background of climate change induced by the accumulation of greenhouse
gases we apply an instrumental framework of economic analysis that is conducive to provide
an integrated view of the issues. Global Environmental Economics therefore is an integrated
economic assessment of GHG emissions impacting economic growth and welfare change
along major considerations of uncertainty, technological change and cooperation. I emphasise
a theoretical treatment of the issues, using modem tools of economic theory and based on
"simple" models that yield illustrative results in terms of "what-if" questions. With this focus
the book distinguishes itself uniquely from other economic analytic approaches in the field
that have appeared in the past few years.
As such these models could serve as a selective device for much more powerful large
scale, numerically supported models or even form the core of model-based decision support
systems. After all, I concur with Robert Lucas who said that "useful policy discussions are
ultimately based on models".
In addition to providing a framework for research in global environmental economics,
being accessible to a wide array of disciplines focusing on global change, I have also
attempted to design a structured textbook on global environmental economics as a course for
advanced undergraduates and beginning graduates in economics and social science. This book
was started during my tenure at Oxford Institute for Energy Studies and Nuffield College,
Oxford, from 1990 to 1992, and, with interruptions, work was further carried on when
visiting CICERO, University of Oslo, 1993 to 1994, and the University of Nagasaki, Japan,
from 1996. I am very grateful to these institutions for providing research and [mancial
support as well as a stimulating intellectual environment. Subsequently, materials from the
book have been presented at various seminars at Oxford University and the University of
Oslo, the Stockholm Environment Institute, the University of Montreal, the University of
Lisbon, Hong Kong University of Science and Technology, Kyoto University and UN
WIDER, Helsinki. I was fortunate enough to receive valuable advice and comments from
Professors Terence Gorman and Christopher Bliss, Oxford, Bernt Stigum and Michael Hoel,
Oslo, Arnold Zellner, Chicago, Leonid Hurwicz, Minneapolis, Roy Radner, New York and
x
Hirofumi Uzawa, Tokyo, to all of them I am very much indebted and grateful. I also
appreciate the comments by some anonymous referees.
Over all those years, through many changes at draft stages, Ms Victoria Harper did
the entire manuscript without ever losing her cheerful temper. Thanks Vicki. I am also
grateful to Ms Claudia Witte for support at various stages.
September I, 1997
Hans W. Gottinger
xi
