Who gains from technological advancement? The role of policy design when cost development for key abatement technologies is uncertain

Abstract

A simple model is used to illustrate the effects of a reduction in (marginal) abatement cost in a two-country setting. It can be shown that a country experiencing a cost reduction can actually be worse off. This holds true for a variety of quantity and price-based emission policies. Under price-based policies, a country with lower abatement costs might engage in additional abatement effort for which it is not compensated. Under a quantity-based policy with a given allocation, a seller of permits can also be negatively affected by a lower carbon price. We also argue that abatement cost shocks to renewable energy and carbon capture and storage (CCS) are different in terms of their effects on international energy markets. A shock to renewable energy benefits energy importers because the value of fossil fuels is reduced. The opposite holds for a shock to CCS which benefits energy exporters. The channels identified in the theoretical model can be confirmed in a more complex global computable general equilibrium model. Some regions are indeed worse off from a shock that lowers their abatement costs.

Appendices

Appendix 1: Derivation of some equations

Making use of Eqs. (6) and (8), it follows that

$$\begin{aligned} \eta _{C_{1}\phi }= & \frac{\partial C_1}{\partial \phi } \frac{\phi }{C_1} \nonumber \\= & \left( - \frac{1}{3} \frac{\beta }{\phi } a_1^3 + \frac{1}{3} \frac{\partial a_1^3}{\phi } \right) \frac{\phi }{\frac{1}{3} \frac{\beta }{\phi } a_1^3} \nonumber \\= \,& \eta _{a_1^3 \phi } -1 \end{aligned}$$

(20)

with

$$\begin{aligned} \eta _{a_1^3 \phi } = \frac{\partial a_1^3}{\partial \phi } \frac{\phi }{a_1^3}. \end{aligned}$$

(21)

This leads to

$$\begin{aligned} \frac{\partial C_1}{\partial \phi } = \frac{C_1}{\phi }\eta _{C_{1}\phi } = \frac{C_1}{\phi }\left( \eta _{a_1^3 \phi } -1 \right) \end{aligned}$$

(22)

and thus to condition (9).

Analogously, for globally constant emissions equation (11) can be re-written as

$$\begin{aligned} \eta _{C_{1}\phi }&= \frac{\partial C_1}{\partial \phi } \frac{\phi }{C_1} \nonumber \\&= \left( - \frac{1}{3} \frac{\partial \lambda }{\partial \phi } a_1 + \frac{1}{3} \lambda \frac{\partial a_1}{\phi } \right) \frac{\phi }{\frac{1}{3} \frac{\beta }{\phi } a_1^3} \nonumber \\&= \frac{\partial \lambda }{\partial \phi } \frac{\phi }{\lambda } + \frac{\partial a_1}{\partial \phi } \frac{\phi }{a_1} \nonumber \\&= \eta _{\lambda \phi } + \eta _{a_1 \phi } \end{aligned}$$

(23)

which leads to condition (12).

For the emission trading system, the elasticity of cost $C_i$ for $\phi$ can be calculated from Eqs. (14) and (15)

$$\begin{aligned} \eta _{C_{i}\phi }= & \frac{\partial C_i}{\partial \phi } \frac{\phi }{C_i} \nonumber \\= & \left[ \frac{1}{3}\frac{\partial \lambda }{\partial \phi } a_i + \frac{1}{3}\lambda \frac{\partial a_i}{\partial \phi } + \frac{\partial \lambda }{\partial \phi } \left( \hat{a}_i - a_i \right) - \lambda \frac{\partial a_i}{\partial \phi } \right] \frac{\phi }{\frac{1}{3}\lambda a_i + \lambda \left( \hat{a}_i - a_i \right) } \nonumber \\= & {} \left[ \left( \frac{1}{3} a_i + \left( \hat{a}_i - a_i \right) \right) \frac{\partial \lambda }{\partial \phi } + \left( \frac{1}{3} \lambda -\lambda \right) \frac{\partial a_i}{\partial \phi } \right] \frac{\phi }{\frac{1}{3}\lambda a_i + \lambda \left( \hat{a}_i - a_i \right) } \nonumber \\= & \frac{\frac{1}{3} a_i + \left( \hat{a}_i - a_i \right) }{\frac{1}{3} a_i + \left( \hat{a}_i - a_i \right) } \frac{\partial \lambda }{\partial \phi } \frac{\phi }{\lambda } + \frac{\left( \frac{1}{3} \lambda -\lambda \right) }{ \frac{1}{3} \lambda + \frac{\lambda \hat{a}_i}{a_i} - \lambda } \frac{\partial a_i}{\partial \phi } \frac{\phi }{a_i} \nonumber \\= & \eta _{C_i\lambda } \eta _{\lambda \phi } + \eta _{C_i a_i} \eta _{a_i \phi } \end{aligned}$$

(24)

with

$$\begin{aligned} \eta _{C_i\lambda } = 1 \end{aligned}$$

(25)

and

$$\begin{aligned} \eta _{C_i a_i} = \frac{ \frac{1}{3}\lambda a_i - \lambda a_i }{ \frac{1}{3}\lambda a_i + \lambda \left( \hat{a}_i - a_i \right) } \end{aligned}$$

(26)

which leads to condition (16).

Appendix 2: Regions and sectors in the DART model

Countries and regions
WEU	Western Europe	CPA	China, Hong-Kong
EEU	Eastern Europe	IND	India
USA	United States of America	LAM	Latin America
JPN	Japan	PAS	Pacific Asia
CAN	Canada	MEA	Middle East and Norther Africa
ANZ	Australia, New Zealand	AFR	Sub-Saharan Africa
FSU	Former Soviet Union

Production sectors/commodities
Energy sectors		Non-energy sectors
COL	Coal	AGR	Agricultural production
CRU	Crude oil	ETS	Energy intensive production
GAS	Natural gas	OTH	Other manufactures and services
OIL	Refined oil products	CRP	Chemical products
ELY	Electricity	MOB	Mobility
		OLI	Other light industries
		OHI	Other heavy industries
		SVCS	Services

Renewable and advanced electricity technologies
WIN	Wind	SOL	Solar
HYD	Hydro	SBIO	Solid biomass
GASCCS	Advanced gas with CCS	COLCCS	Advanced coal with CCS

Appendix 3: Variables used in regression analysis

Variable name	Description
Change in renewables	Change in the share of solar and wind in the electricity mix in percentage points (relative to the scenario without a shock)
Change in CCS	Change in the share of CCS in the electricity mix in percentage points (relative to the scenario without a shock)
Pre-shock level of renewables	Share of solar and wind in the electricity mix in percent in the scenario without a shock
Pre-shock level of CCS	Share of CCS in the electricity mix in percent in the scenario without a shock
Pre-shock net fossil fuel exports	Value of net fossil fuel export without shock relative to GDP
Pre-shock net coal exports	Value of net coal export without shock relative to GDP
Pre-shock net gas exports	Value of net natural gas export without shock relative to GDP
Pre-shock net oil exports	Value of net export of crude oil and oil products without shock relative to GDP
Change in emissions	Change in emissions in percent (relative to the scenario without a shock)
Pre-shock surplus	Value of emission allowances sold on the international carbon market relative to GDP in the scenario without a shock