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  5. Climate Control Policies
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Climate Control Policies

Paper Session

Sunday, Jan. 3, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Dean Spears, University of Texas-Austin

Exporting Carbon: United States Coal Demand, International Leakage, and Implications for Climate Policy

Joshua Blonz
,
Federal Reserve Board
Louis Preonas
,
University of Maryland

Abstract

U.S. carbon emissions have declined over the past decade. Economists attribute much of this decline to the "Shale Boom," which drove U.S. natural gas prices to historic lows and crowded coal out of the electricity mix. However, the Boom’s impact on global carbon emissions is less clear. Faced with shrinking domestic demand, many U.S. coal mines have shifted towards the international market. U.S. coal exports have tripled since 2002, and coal "leakage" has the potential to undermine domestic carbon reductions.

This paper estimates the extent to which declining U.S. coal demand has caused increases in U.S. coal exports. Separating domestic vs. foreign demand shocks is a major identification challenge, and previous studies have relied on time series identification or structural trade models. We are the first to use restricted-access data that report mine-level coal sales separately for the domestic vs. export markets. These data allow us to identify a coal export elasticity using both cross-sectional and time series variation in how downstream shocks to power plants’ coal demand impact upstream coal mines. Our preliminary results show that reductions in domestic demand cause U.S. coal mines to decrease total production and increase exports. These effects are largely driven by export growth from Appalachian coal mines.

Our results highlight a critical problem in climate policy design. If policymakers do not properly account for coal leakage, they may fail to achieve their desired mitigation targets. By estimating a coal leakage elasticity, we provide insight on how to design second-best mechanisms to mitigate leakage. Even in the absence of climate policy, understanding the role of coal exports is increasingly important as coal generators continue to retire, global energy demand continues to rise, and U.S. coal export terminals continue to operate with excess capacity.

The Co-Pollution Impacts of Climate Policy: Evidence from the EU Emissions Trading Scheme

Laure B. De Preux
,
Imperial College London
Dana Kassem
,
University of Mannheim
Ulrich J. Wagner
,
University of Mannheim

Abstract

Carbon dioxide (CO2) emissions are known to cause global climate change but no damage to the local environment. However, because CO2 is often jointly produced with other substances that pollute the environment, CO2 abatement may generate ancillary benefits, especially for human health. Previous research suggests that these co-benefits can offset a substantial share of the economic costs of mitigation policies. This paper lays the groundwork for testing this hypothesis in the context of the European Emissions Trading Scheme (EU ETS) for CO2. We compile a new dataset on discharges of more than 90 different pollutants into air, water and soil, at more than 6,000 ETS regulated installations in 29 European countries. We track installation-level changes in emissions of major air pollutants between 2001 and 2013. We compare those to changes at more than 23,000 unregulated installations and explore causal attribution against several plausible counterfactuals. We derive stylized facts for policy-induced redistribution of pollution emissions and explore how atmospheric pollution transport has shifted population exposure to such air pollution across EU citizens. Based on our findings, we discuss the implications for efficiency and equity of CO2 trading in the EU ETS arising from extensive, yet unpriced, trading of co-pollutants.

The Global Consumer Incidence of Carbon Pricing: Evidence from Trade

Lutz Sager
,
Georgetown University

Abstract

Carbon pricing is often seen as regressive, disproportionately burdening low-income consumers. I show that higher prices following a carbon tax would be mildly regressive in industrialized countries, mildly progressive in developing countries, and steeply regressive across countries. Refunding revenues with national carbon dividends would reverse all three findings. Carbon taxes plus dividends would be globally progressive, even without international transfers.

To estimate the global consumer incidence of carbon pricing, I combine structural models of demand and supply. On the demand side, I estimate a global demand system using data on bilateral trade of final goods. The model features non-homothetic consumers who differ both between and within countries. On the supply side, I model substitution of intermediate inputs along global value chains.

I simulate three carbon pricing scenarios. The first is a global uniform carbon price as prescribed by economic theory on efficiency grounds. I show that the consumer cost due to higher prices, in absence of revenue recycling, would be highly regressive at the global scale. Importantly, I find that differences between countries are much more important than those within countries.

Just like in country-level studies, I find that revenue use matters. Carbon dividends render the global uniform carbon price progressive—disproportionately benefiting low income consumers—both at the global scale and within most countries. No transfers between countries are needed to obtain this result.

In my other two scenarios, I zoom in on EU carbon pricing policy. First I estimate the cost distribution of the EU ETS across the 500 million EU consumers. This again is regressive and mostly driven by consumers' country of residence, with particularly high costs to Eastern Europeans. Finally, I simulate the cost distribution from a hypothetical border carbon adjustment to complement an EU-wide carbon price, which generates modest costs that are roughly proportional.

Efficient Forestation in the Brazilian Amazon: Evidence from a Dynamic Model

Rafael Araujo
,
Getulio Vargas Foundation (FGV)
Francisco Costa
,
University of Delaware and FBV EPGE
Marcelo Sant'Anna
,
Getulio Vargas Foundation (FGV)

Abstract

This paper estimates the Brazilian Amazon’s efficient forestation level. We propose a dynamic discrete choice model of land use and estimate it using a remote sensing panel with land use and stock of carbon of 5.7 billion pixels, at 30 meters resolution, between 2008 and 2017. We estimate that a business as usual scenario will generate an inefficient loss of 1,075,000 km2 of forest cover in the long run, an area almost two times the size of France, implying the release of 44 billion tons of CO2. We quantify the potential of carbon and cattle production taxes to mitigate inefficient deforestation. We find that relatively small carbon taxes can mitigate a substantial part of the inefficient forest loss and emissions, while only very large taxes on cattle production would achieve a similar effect.

Policy Interaction and the Transition to Clean Technology

Josselin Roman
,
University Paris Dauphine
Ghassane Benmir
,
London School of Economics and Grantham Research Institute

Abstract

Using a stochastic general equilibrium model with financial frictions and a
two-sector production economy (i.e. green and dirty sectors), we assess different types
of fiscal, monetary, and macroprudential policies aimed at reducing carbon dioxide
(CO2) emissions. We show that CO2 emissions and CO2 mitigation policies induce
two inefficiencies: risk premium and welfare distortions, respectively. We first find
that a substantial carbon tax is needed in the Euro Area to be aligned with the Paris
Agreement, but that it leads to a significant welfare loss. To dampen this effect and
prevent potential shocks to emissions from distorting the functioning of monetary
policy through a rise in risk premia, we explore monetary and macroprudential tools.
We find that sectoral time-varying macroprudential weights on loans favorable to
the green sector boost green capital and output, reducing the effect of the carbon
tax on welfare. With respect to quantitative easing (QE), we find that a carbon tax
improves the benefits of both green and dirty asset purchases. We also find that
macroprudential policy is needed to provide an incentive to central banks to engage
in green QE. Regarding the impact of the environmental externality, we show that a
QE rule would allow authorities to drastically reduce the effect of emissions on risk
premia. This work aims to provide central banks and similar institutions with the
tools to contribute to climate change mitigation, and demonstrates the importance of
including these institutions in the push to reduce global emission levels.
JEL Classifications
  • Q5 - Environmental Economics