This study analyzes the efficiency of external transfers in international environmental agreements (IEAs) with two types of heterogeneous countries differing in abatement benefit or abatement cost parameters. We introduce a minimum participation rule concerning the number of supporters, who commit to transfer welfare to induce all the other countries to form a self-enforcing IEA. The analytical result shows that an equilibrium exists where all countries except supporters become members of the agreement under a certain condition. The simulation results suggest that the higher the heterogeneity in the abatement benefit, the larger the IEA size and the higher the relative gains of IEAs; the degree of heterogeneity in the abatement cost has little impact on the IEA size but contributes to the relative gains of IEAs.
Many sovereign wealth funds have expansive portfolios that give them the chance to influence markets through their investment choices. In this study, we analyze how oil extraction as a source of wealth influences portfolio allocation. We find that revenues from oil extraction affect the speculative motive and the hedging motives in opposite ways and create a portfolio allocation bias for oil-based funds. A numerical application of the model disentangles the motives and quantifies the bias. We find a positive bias in the portfolio allocation of an oil-based fund, which is increasing in the correlation of assets. Sensitivity analyzes show which parameters reduce the portfolio bias, turning the bias from "dirty" to "green" for large deviations from the default calibration. When a price on carbon is introduced, the intended reallocation of assets away from the oil-intensive sector is dampened by an amplification of the portfolio bias.
Border carbon adjustments (BCAs) have been suggested as a measure to reduce carbon leakage in the presence of unilateral climate policies and/or to enforce cooperative climate agreements. In an intra-industry trade model, this paper studies whether and under which conditions a sequence of escalating threats of implementing BCA-measures could be successful in enforcing a fully cooperative agreement. We start from a situation where moving from non-cooperative production-based carbon taxes to a socially optimal tax is not attractive to the environmentally less concerned country. We then test whether the threat of imposing BCA-measures, in the form of import tariffs or, additionally, supplemented by export rebates, will enforce cooperation. We show that but the weakest threat, and import tariffs with a full export rebate is the most distortionary instrument if implemented but the most effective threat to enforce cooperation. In an escalating penalty game, we determine the subgameperfect equilibrium path along which threats are deterrent and credible. We show that BCA-measures help to enforce cooperation, reduce global emissions and are welfare improv- ing if they need to be implemented. However, whenever full cooperation would generate the highest global welfare gains, BCAs fail to establish cooperation, a version of the paradox of cooperation, as proposed by Barrett (1994).
Production of a renewable substitute to fossil fuels is modeled as causing the cost of this backstop technology to fall over time in proportion to the scale of the substitute production and how long it has been in use. The unit cost of resource extraction is assumed to rise as the stock is depleted, so learning by doing will increase the reserves permanently left in the ground. The green paradox can nevertheless be present, in the sense that the resource extraction path can initially lie above what it would be in the absence of a parallel production of renewable energy. In a monopolistic market, the resource monopolist’s optimal price path is two-phased, even with inelastic demand. In the limit-pricing phase, the price is falling, due to the progressive learning by doing effect, and the extraction path is rising.
Multi-pollutant interactions can have crucial implications for the design and performance of environmental policy targeting single pollutants. This paper presents a two-region model where a global pollutant (CO2) and local pollutant (SO2) are produced jointly. The interaction between SO2 and CO2 gives rise to the global dimming effect, which relates SO2 emissions to the environmental damage caused by CO2 emissions. We analyze climate policy by comparing abatement of these pollutants in the presence and absence of the dimming effect. We then draw implications for the design of international climate agreements, which should reflect the interactive nature between pollutants. The paper also illustrates how a market-based policy in the form of emissions taxes can be embedded into climate agreements to facilitate an efficient coordination of multi-pollutant abatement across regions. Our model predicts that this involves a uniform tax on the global pollutant but differentiated (region-specific) taxes on the local pollutant.
