On this page you can find abstracts of working papers from the Grantham Research Institute, together with links to the papers themselves as they become available.
These working papers are intended to stimulate discussion within the research community and among users of research, and their content may have been submitted for publication in academic journals. They have been reviewed by at least one internal referee before publication. The views expressed in these papers are those of the authors and do not necessarily represent those of the Grantham Research Institute.
For working papers produced by researchers at the Centre for Climate Change Economics and Policy, see here|.
Working Paper 1|
The economics of the CDM levy: Revenue potential, tax incidence and distortionary effects
Samuel Fankhauser, Nat Martin and Stephen Prichard
May 2009
Abstract: A levy on the Clean Development Mechanism and other carbon trading schemes is a potential source of finance for climate change adaptation. An adaptation levy of 2 percent is currently imposed on all CDM transactions which could raise around $500 million between now and 2012. This paper analyses the scope for raising further adaptation finance from the CDM, the economic costs (deadweight loss) of such a measure and the incidence of the levy, that is, the economic burden the levy would impose on the buyers and sellers of credits. We find that a levy of 2 percent could raise up to $2 billion a year in 2020 if there are no restrictions on demand. This could rise to $10 billion for a 10 percent tax. Restrictions on credit demand (called supplementarity limits, the requirement that most emission abatement should happen domestically) curtail trade volumes and consequently tax revenues. They also alter the economic impact of the CDM levy. Without supplementarity restrictions sellers (developing countries) bear two-thirds of the cost of the tax. If there are supplementarity limits they can pass on the tax burden to buyers (developed countries) more or less in full. Without supplementarity restrictions the distortionary effect of the levy (its deadweight loss) rises sharply with the tax rate. With them the deadweight loss is close to zero.
Working Paper 2|
The Clean Development Mechanism: too flexible to produce sustainable development benefits?
Charlene Watson and Samuel Fankhauser
June 2009
Abstract: The Clean Development Mechanism (CDM) of the Kyoto Protocol has a dual objective: to encourage low-cost emission reduction and to promote sustainable development in the host countries of CDM projects. The CDM has by and large delivered on the first objective but arguably not on the second. This paper assesses quantitatively the form and prevalence of co-benefits in CDM projects. Adopting a broad definition of sustainable development, the project design documents of 409 projects (10% of the October 2008 project pipeline) were searched for keyword indicators of contributions to economic growth, physical, social and natural capital. Economic growth co-benefits, in the form of employment, constitute the main project co-benefit, with 82% of projects claiming to contribute to employment. Under a stricter sustainable development definition, projects contribute principally to social capital, primarily training (67%), with physical and natural capital gains less prominent. End-of-pipe projects are found to have lower co-benefits than renewable energy or forestry projects in particular. Contrary to common belief, small-scale projects do not appear to provide higher co-benefits than large-scale projects.
Working Paper 3|
Carbon markets in space and time
Sam Fankhauser and Cameron Hepburn
July 2009
Abstract: This paper analyses the design of carbon markets in time (intertemporally) and space (geographically) from first principles, starting initially with a relatively clean slate and asking what an optimal global carbon market would look like by around 2030. Our focus is on firm-level trading systems, although much of what we say would also apply to government-level trading (e.g., AAU trading under the Kyoto Protocol). We examine the “first principles” of design to maximise flexibility and to minimise costs, consider temporal design including banking and borrowing and other mechanisms to provide greater carbon price predictability and credibility over time, and consider spatial elements, examining the key design issues in linking national and regional carbon markets together to create a global carbon market.
Working Paper 4
Economic policy when models disagree
Pauline Barrieu and Bernard Sinclair Desgagné
July 2009
Abstract: This paper proposes a general way to craft public policy when there is no consensual account of the situation of interest. The design builds on an extension and dual representation of the traditional theory of economic policy. It does not require a representative policymaker’s utility function (as in the literature on ambiguity), a reference model (as in robust control theory) or some prior probability distribution over the set of supplied scenarios (as in the Bayesian model-averaging approach). The obtained policies are shown to be robust and simple in a precise and intuitive sense.
Working Paper 5|
Strategic appraisal of environmental risks: a contrast between the UK’s Stern Review on the Economics of Climate Change and its Committee on Radioactive Waste Management
Simon Dietz and Alec Morton
July 2009
Abstract: In this paper we compare two strategic policy reviews undertaken for the UK Government on environmental issues: radioactive waste management and climate change. These reviews took very different forms, both in terms of analytic approach and deliberation strategy. The Stern Review on the Economics of Climate Change was largely an exercise in expert modelling, building, within a cost-benefit framework, an argument for immediate reductions in carbon emissions. The Committee on Radioactive Waste Management, on the other hand, followed a much more explicitly deliberative and participative process, using a Multi-Criteria Decision Analysis model to bring together scientific evidence and stakeholder and public values. We first ask whether the choice of approach flowed from the underpinning science, the scale of the problem, or the history and policy context of the reviews. We conclude that the differences in approach above all reflect differences in history and policy context, although these are partly due to the scale of the problem. Since we do not find the underpinning science explains the differences in approach, we go on to ask whether the differences are justified. While both reviews are in our view “fit for purpose”, we consider that they would both have been stronger had they been less different: Stern’s grappling with ethical issues would have been strengthened by a greater degree of public and stakeholder engagement, and CoRWM’s handling of issues of uncertainty would have been strengthened by the explicitly probabilistic framework of Stern.
Working Paper 6|
The impacts of the Climate Change Levy on business: evidence from microdata
Ralf Martin, Laure B. de Preux and Ulrich J. Wagner
August 2009
Abstract: We estimate the impacts of an energy tax – the Climate Change Levy (CCL) – on the manufacturing sector using panel data from the UK production census. Our identification strategy builds on the comparison of trends in outcomes between plants subject to the CCL and plants that were granted an 80% discount on the levy after joining a so-called Climate Change Agreement (CCA). Since the CCAs stipulate specific targets for energy usage or carbon emissions, this comparison yields a lower bound on the impact of the discount. To address a likely selection endogeneity in CCA participation, we adopt an IV approach that exploits exogenous variation in pollution discharges that determined eligibility for CCA participation. We find robust evidence that CCA participation had a strong positive impact on growth in both energy intensity and energy expenditures. An analysis of fuel choices at the plant level reveals that this effect is mainly driven by stronger growth in electricity use and translates into a positive impact on CO2 emissions. We do not find any statistically significant impacts of the tax on employment, gross output or total factor productivity. We conclude that, had the CCL been implemented at full rate for all businesses, further cuts in energy use of substantial magnitude could have been achieved without jeopardizing economic performance.
Working Paper 7|
The costs of adaptation
Samuel Fankhauser
September 2009
Abstract: Policy interest in the cost of adaptation is growing, but compared to the mitigation cost literature adaptation cost research is still in its infancy. Global adaptation cost estimates range from $4 billion a year to well over $100 billion by 2015-2030. The wide range is symptomatic of the poor state of knowledge. Important knowledge gaps remain both in terms of scope (whether all relevant impacts and countries are covered) and depth (whether, for a given impact all relevant adaptation options have been considered). The omissions introduce biases in both directions, but it is likely adaptation costs have been underestimated so far. Adaptation is only one part of the overall response to (and therefore the costs of) climate change. The total burden of climate change consists of three elements: the costs of mitigation (reducing the extent of climate change), the costs of adaptation (reducing the impact of change) and the residual impacts that can be neither mitigated nor adapted way. However, the annual adaptation cost estimates reviewed here cannot be directly compared with the other two cost elements. Making that comparison would require an integrated model that takes into account the total impact of greenhouse gases over their lifetime in the atmosphere.
Working Paper 8|
How do domestic attributes affect international spillovers of CO2-efficiency?
Richard Perkins and Eric Neumayer
September 2009
Abstract: Although there is evidence that CO2-efficiency enhancing innovations in one country diffuse into other countries to contribute to the goals of climate change mitigation, very little is known about the conditions under which such international spillovers are most likely to take place. Our contribution in the present article seeks to address this gap by examining whether the strength of cross-border CO2-efficiency interdependence working through import ties and inward foreign direct investment (FDI) stocks is greater in (a) countries with lower existing levels of domestic CO2-efficiency and (b) countries with greater social capabilities in terms of a better educated workforce and a less risky institutional environment for investment. We find that less CO2-efficient countries and countries with a more investment-friendly institutional environment experience stronger FDI-weighted CO2-efficiency spillovers, whereas a higher level of human capital increases domestic receptivity to import-weighted international spillovers.
Working Paper 9
High impact, low probability? An empirical analysis of risk in the economics of climate change
Simon Dietz
September 2009
Abstract: To what extent does economic analysis of climate change depend on low-probability, high-impact events? This question has received a great deal of attention lately, with the contention increasingly made that climate damage could be so large that societal willingness to pay to avoid extreme outcomes should overwhelm other seemingly important assumptions, notably on time preference. This paper provides an empirical examination of some key theoretical points, using a probabilistic integrated assessment model. New, fat-tailed distributions are inputted for key parameters representing climate sensitivity and economic costs. It is found that welfare estimates do strongly depend on tail risks, but for a set of plausible assumptions time preference can still matter.