WP 2019.23 Ecological compensation: how much and where?

Pascal Gastineau – Pascal Mossay – Emmanuelle Taugourdeau

We propose a spatial framework to study ecological compensation. The policy-maker implements a No Net Loss policy that meets the No Worse-Off principle as well as a location constraint on the offset. This determines both the location and the level of compensation that minimize the total cost of restoration. We describe the additional ecological cost induced by the No Worse-Off principle and how the spatial distribution of individuals, the environment and land costs affect the compensation location. The location constraint is shown to introduce a trade-off between the compensation cost and inequality.

WP 2019.22 On Climate Agreements with Asymmetric Countries: Theory and Experimental Results

Charles F. Mason

I model International climate agreements among asymmetric countries, each of whom must select a profile of CO2 emissions over time. Predictions from this model imply larger reductions by “large” countries, but larger proportional reductions by “small” countries. I then analyze experimental data that sheds light on this issue. In contrast to the theoretical predictions, I find that smaller countries do not reduce emissions proportionately to their Nash level, and so the burden falls mostly on larger countries. Moreover, combined emissions are indistinguishable from the one-shot Nash emissions. This pessimistic outcome extends the commonly-found result in the literature that negotiations in similar repeated games (but with symmetric players) generally do not offer much hope for meaningful agreements, unless the effects are modest. One possible explanation for this pattern of results is inequality aversion.

WP 2019.21 Altruistic Foreign Aid and Climate Change Mitigation

Antoine Bommier – Amélie Goerger – Arnaud Goussebaïle – Jean-Philippe Nicolaï

This paper emphasizes the value of jointly addressing environmental and development objectives. We consider one altruistic developed country and several heterogeneous developing countries. We demonstrate that the lack of coordination between countries in tackling climate change finds a simple solution if developing countries can expect to receive development aid transfers from the developed country. The timing of the decision is central to the mechanism: development aid transfers should be determined after pollution abatement levels. The main restriction of our result is that it only holds if the developed country is altruistic enough to make positive development aid transfers to developing countries. Nevertheless, even from a purely selfish point of view, it may be profitable for the developed country to be more altruistic, leading to higher welfare for all countries.

WP 2019.20 Hedonic estimation of the green value of residential housing

Catherine Baumont – Masha Maslianskaia-Pautrel – Pierre Voyé

Managing the energy demand in the residential sector could be achieved by the promotion of energy efficiency buildings. We assume that households adopting a green behavior are willing to pay a greater price to access to “green” housing. This added value is called the “green value”. This paper studies the impact of the energy efficiency rating of a house, as certified by the Diagnostic de Performance Energétique (DPE), on housing prices. In order to do this, the hedonic price method has been applied to the real estate market – apartments and houses – in the urban area of Dijon from January 2013 to December 2014. The results indicate that the impact of DPE is mostly observed for the least performing classes. This negative impact depends on the type of the market: it is smaller for the apartment market. We also show that proximity to green amenities – outside the cities – has a positive effect only for house market.

WP 2019.19 Improving Farm Environmental Performance through Technical Assistance: Empirical Evidence on Pesticide Use

Margaux Lapierre – Alexandre Sauquet – Julie Subervie

In 2008, the French government announced an important shift in agricultural policy, calling for halving the use of pesticides in the next ten years. Since then, it has spent 40 million euros a year on implementing the so-called Ecophyto plan. In this paper, we evaluate the success of this program, focusing on its flagship scheme, which has provided technical assistance to 3,000 volunteer pilot farms since 2011. To do so, we use panel data collected from a representative sample of vineyards: the agricultural systems known as the largest users of pesticides. We use a slate of quasi-experimental approaches to estimate the impact of participation in the program on pesticide use and crop yields on enrolled vineyards. We find that participants have achieved reductions in pesticide use that ranges from 8 to 22 percent, thanks to the program. We moreover find that the reduction in the use of chemicals was accompanied by an increase in the use of biocontrol products. Finally, we find that this change of practices resulted in a reduction in yields for a fraction of enrolled farms while others seems to have maintained yields. Although below the expectations of the French government, these results seem rather encouraging, as they suggest that technical assistance alone can be effective in reducing significantly pesticide use in the agricultural sector.

WP 2019.18 Limit pricing, climate policies, and imperfect substitution

Published in Resource and Energy Economics (2019), 58, 101118.

Gerard van der Meijden – Cees Withagen

The effects of climate policies are often studied under perfect competition and constant marginal extraction costs. In this paper, we allow for monopolistic fossil fuel supply and more general cost functions, which, in the presence of perfectly substitutable renewables, gives rise to limit-pricing behavior. Four phases of supply may exist in equilibrium: sole supply of fossil fuels below the limit price, sole supply of fossil fuels at the limit price, simultaneous supply of fossil fuels and renewables at the limit price, and sole supply of renewables at the limit price. The consequences of climate policies for initial extraction depend on the initial phase: in case of sole supply of fossil fuels at the limit price, a renewables subsidy increases initial extraction, whereas a carbon tax leaves initial extraction unaffected. With simultaneous supply at the limit price or with sole supply of fossil fuels below the limit price, a renewables subsidy and a carbon tax lower initial extraction. Both policy instruments decrease cumulative extraction. If fossil fuels and renewables are imperfect but good substitutes, the monopolist will exhibit ‘limit-pricing resembling’behavior, by keeping the effective price of fossil close to that of renewables for considerable time.

WP 2019.17 Linking Permit Markets Multilaterally

Forthcoming in Journal of Environmental Economics and Management.

Baran Doda – Simon Quemin – Luca Taschini

We formally study the determinants, magnitude and distribution of efficiency gains generated in multilateral linkages between permit markets. We provide two novel decomposition results for these gains, characterize individual preferences over linking groups and show that our results are largely unaltered with strategic domestic emissions cap selection or when banking and borrowing are allowed. Using the Paris Agreement pledges and power sector emissions data of five countries which all use or considered using both emissions trading and linking, we quantify the efficiency gains. We find that the computed gains can be sizable and are split roughly equally between effort and risk sharing.

WP 2019.16 The Social Cost of Carbon and the Ramsey Rule

Cees Withagen

The objective of this paper is to critically assess the use of simple rules for the social cost of carbon (SCC) that employ a rudimentary form of the Ramsey Rule. Two interrelated caveats apply. First, if climate change poses a serious problem, it is hard to justify an exogenous constant growth rate of consumption and GDP, as is done in several contributions by prominent scholars. Second, to derive the optimal SCC one needs full knowledge of the entire future, in spite of the use of popular ways to try to get around this. Moreover, it is shown that some simple rules suffer from inconsistencies in their derivation.

WP 2019.15 French Attitudes over Climate Change and Climate Policies

Published in Ecological Economics (2020), 169, 106496.

Thomas Douenne – Adrien Fabre

This paper aims to assess the prospects for French climate policies after the Yellow Vest scrisis halted the planned increase in the carbon tax. From a large representative survey, we elicit knowledge, perceptions and values over climate change, we examine opinions relative to carbon taxation, and we assess support for other climate policies. Specific attention is given to the link between perceptions of climate change and attitudes towards policies. The paper also studies in detail the determinants of attitudes in terms of political and socio-demographic variables. Among many results, we find limited knowledge but high concern for climate change. We also document a large rejection of the carbon tax but majority support for stricter norms and green investments, and reveal the rationales behind these preferences. Our study entails policy recommendations, such as an information campaign on climate change. Indeed, we find that climate awareness increases support for climate policies but no evidence for the formation of opinions through partisan cues as in the US, suggesting that better access to science could foster support for climate policies.

WP 2019.14 Energy Conversion Rate Improvements, Pollution Abatement Efforts and Energy Mix: The Transition toward the Green Economy under a Pollution Stock Constraint

Jean-Pierre Amigues – Michel Moreaux

To prevent climate change, three options are currently considered: improve the energy conversion efficiency of primary energy sources, develop carbon free alternatives to polluting fossil fuels and abate potential emissions before they are released inside the atmosphere. We study the optimal mix and timing of these three mitigation options in a stylized dynamic model. Useful energy can come from two sources: a non-renewable fossil fuel resource and a carbon free renewable resource. The conversion efficiency rate of fossil energy into useful energy is open to choice but higher conversion rates are also more costly. The economy can abate some fraction of its potential emissions and a higher abatement rate incurs higher costs. The society objective is to maintain below some mandated level, or carbon cap, the atmospheric carbon concentration. In the empirically relevant case where the economy is actually constrained by the cap, at least temporarily, we show that the optimal path is a sequence of four regimes: a ‘pre-ceiling’ regime before the economy is actually constrained by the cap, a ‘ceiling’ regime at the cap, a ‘post-ceiling’ regime below the cap and a final regime of exclusive exploitation of renewable resources. If the abatement option has ever to be used, it should be started before the beginning of the ceiling regime, first at an increasing rate and at a decreasing rate once the cap constraint binds. The efficiency performance from any source steadily improves with the exception of a time phase under the ceiling regime when it is constant. Renewables take progressively a larger share of the energy mix but their exploitation may be delayed significantly. Absolute levels of carbon emissions drop down continuously but follow a non monotonic pattern in per useful energy unit relative terms.

WP 2019.13 Ambitious Emissions Goal as a Strategic Preemption

Hiroaki Yamagami – Ryo Arawatari – Takeo Hori

We model a political game where a policymaker pledges a domestic emissions goal in the context of instrument choice between carbon pricing (CP) and a quota approach. We show that, although the policymaker faces an emissions goal proposed from an international environmental agreement, she may pledge a more stringent emissions than the proposed level. We define this stringent goal as an “ambitious emissions goal”. We show that the ambitious emissions goal acts as a strategy for the policymaker that preempts the industry’s lobby in a subsequent stage. We also suppose that, if CP is introduced, a rent-seeking contest for the CP revenue refund is held. Then, if the contest is socially costly enough, CP is no longer an optimal instrument. Finally, we extend the model of one country to that of two symmetric countries. A Nash equilibrium where both countries pledge the ambitious emissions goals remains.

WP 2019.12 2019 FAERE Prize
Carbon Pricing and Power Sector Decarbonisation: Evidence from the UK

Published in Journal of Environmental Economics and Management (2022), 111, 102580.

Marion Leroutier

The electricity and heat generation sector represents about 40 % of global greenhouse gas (GHG) emissions in 2016. Policy-makers have implemented a variety of instruments to decarbonise their power sector. This paper examines the UK Carbon Price Floor (CPF), a novel carbon pricing instrument implemented in the United Kingdom in 2013. After describing the potential mechanisms behind the recent UK power sector decarbonisation, I apply the synthetic control method on country-level data to estimate the impact of the CPF on per capita emissions. I discuss the importance of potential confounders and the amount of net electricity imports imputable to the policy. Depending on the specification, the abatement associated with the introduction of the CPF range from 106 to 185 millions tons of equivalent CO2 over the 2013-2017 period. This implies a reduction of between 41% and 49% of total power sector emissions by 2017. Several placebo tests suggest that these estimates capture a causal impact. This paper shows that a carbon levy on high-emitting inputs used for electricity generation can lead to successful decarbonisation.

WP 2019.11 Social Cost of Carbon under stochastic tipping points: when does risk play a role?

Nicolas Taconet – Céline Guivarch – Antonin Pottier

Carbon dioxide emissions impose a social cost on economies, owing to the damages they will cause in the future. In particular, emissions increase global temperature that may reach tipping points in the climate or economic system, triggering large economic shocks. Tipping points are uncertain by nature, they induce higher expected damages but also dispersion of possible damages, that is risk. Both dimensions increase the Social Cost of Carbon (SCC). However, the respective contributions of higher expected damages and risk have not been disentangled. We develop a simple method to compare how much expected damages explain the SCC, compared to the risk induced by a stochastic tipping point. We find that expected damages account for more than 90% of the SCC with productivity shocks lower than 10%, the high end of the range of damages commonly assumed in Integrated Assessment Models. It takes both high productivity shock and high risk aversion for risk to have a significant effect. Our results also shed light on the observation that risk aversion plays a modest role in determining the SCC (the “risk aversion puzzle”): they suggest that too low levels of damages considered in previous studies could be responsible for the low influence of risk aversion.

WP 2019.10 Can We Reconcile French People with the Carbon Tax? Disentangling Beliefs from Preferences

Published in American Economic Journal: Economic Policy (2022), 14, 81-110 untitled “Yellow vests, pessimistic beliefs, and carbon tax aversion”.

Thomas Douenne – Adrien Fabre

Using a new survey and National households’ survey data, we investigate French perception over carbon taxation. We find that French people largely reject a tax and dividend policy where revenues of the tax would be redistributed uniformly. However, their perception about the properties of the tax are biased: people overestimate the negative impact on their purchasing power, wrongly think the scheme is regressive, and do not perceive it as environmentally effective. Our econometric analysis shows that correcting these three bias would suffice to generate majority acceptance. Yet, we find that people’s beliefs are persistent and their revisions biased towards pessimism, so that only few can be convinced.

WP 2019.09 The economic value of NBS restoration measures and their benefits in a river basin context: A meta-analysis regression

Nabila Arfaoui – Amandine Gnonlonfin

The study collects original monetary estimates for Nature Based Solutions (NBS) and benefits, with restoration approach in a basin context. A database of 187 monetary estimates is constructed to perform the first meta-analysis, which will assess how individuals value the NBS restoration measures and their primary and co-benefits. Demonstrating the monetary value of these benefits should improve decision-making in promoting the adoption of NBS and lead to greater protection of ecosystems. We find that individuals value, in particular, global climate regulation, local environmental regulation, recreational activities, and habitat and biodiversity benefits. We find also that NBS measures aimed at floodplains and river streams are more highly valued. The results of this study suggest that the Willingness-to-pay (WTP) is weakly influenced by the methodological variables. We found that primary studies using the contingent valuation method report higher WTP compared to those using choice experiment method. Moreover, the payment modes (local-tax, national-tax, donation and water bill) and econometric estimation methods (parametric, semiparametric and non-parametric) have only a marginal effect. Indeed most of these variables are insignificant with the exception of local-tax, water-bill and parametric variables which are significantly negative. Survey modes (internet, face to face and mix) are never significant. Finally, the coefficients of America and Europe are significantly positive, indicating that the monetary value of river restoration is higher in countries in these areas.

WP 2019.08 Can the environment be an inferior good? A theory with context-dependent substitutability and needs

Marion Dupoux – Vincent Martinet

Theoretical models often assume the environment to be a normal good, irrespective of one’s income. However, a priori, nothing prohibits an environmental good from being normal for some individuals and inferior for others. We develop a conceptual framework in which private consumption and an environmental public good act as substitutes or complements for satisfying different needs. Subsequently,the environment can switch between normal and inferior depending on one’s income and environment. If the environment is inferior for some range of in come, then the willingness to pay for environmental preservation becomes non-monotonic, thereby having implications for benefit transfers.

WP 2019.07 The Fossil Energy Interlude: Optimal Building, Maintaining and Scraping a Dedicated Capital, and the Hotelling Rule

Jean-Pierre Amigues – Michel Moreaux – Manh-Hung Nguyen

It is well known that the price and consumption paths of most nonrenewable resources, including the fossil primary energies, do not follow the paths predicted by the standard Hotelling rule (Krautkraemer,1998, Gaudet, 2007). We develop a model in which a dedicated capital together with the fossil fuel are both required to produce useful energy. Starting from a state ofthe economy in which the fossil fuel is not yet exploited, we characterize the optimal path of the double transition: The first transition from the initial renewable energy regime to a mixed or full fossil fuel regime and later the second transition from the fossil fuel regime back to a renewable energy regime when the available stock of the fossil fuel becomes more and more rare. We show that, absent any technical progress, the useful energy price must first decrease, next be constant during the phase of maximum expansion of the fossil fuel energy consumption before entering the phase of decreasing use of the fossil energy. Only this third phase of decreasing fossil fuel consumption looks like a standard Hotelling path.

WP 2019.06 Mineral Resources for Renewable Energy: Optimal Timing of Energy Production

Published in Resource and Energy Economics (2020), 59, 101131.

Adrien Fabre – Mouez Fodha – Francesco Ricci

The production of energy from renewable sources is much more intensive in minerals than that from fossil resources. The scarcity of certain minerals limits the potential for substituting renewable energy for scarce fossil resources. However, minerals can be recycled, while fossils cannot. We develop an intertemporal model to study the dynamics of the optimal energy mix in the presence of mineral intensive renewable energy and fossil energy. We analyze energy production when both mineral and fossil resources are scarce, but minerals are recyclable. We show that the greater the recycling rate of minerals, the more the energy mix should rely on renewable energy, and the sooner should investment in renewable capacity take place. We confirm these results even in the presence of other better known factors that affect the optimal schedule of resource use: growth in the productivity in the renewable sector, imperfect substitution between the two sources of energy, convex extraction costs for mineral resources and pollution from the use of fossil resources.

WP 2019.05 Disaster risks, disaster strikes and economic growth: the role of preferences

Thomas Douenne

This paper studies the role of preferences on the link between disasters and growth. An endogenous growth model with disasters is presented in which one can derive closed-form solutions with non-expected utility. The model distinguishes disaster risks and disaster strikes and highlights the numerous mechanisms through which they may affect growth. It is shown that separating aversion to risk from the elasticity of inter-temporal substitution bears critical qualitative implications that enable to better understand these mechanisms. In a calibration of the model, it is shown that for standard parameter values, the additional restriction imposed by the time-additive expected utility can also lead to substantial quantitative bias regarding optimal risk-mitigation policies and growth. The paper thus calls for a wider use of non-expected utility in the modeling of disasters, in particular with respect to environmental disasters and climate change.

WP 2019.04 Incentives, Pro-social Preferences and Discrimination

Raphaël Soubeyran

In this paper, I study how a principal can provide incentives, at minimal cost, to a group of agents who have pro-social preferences in order to induce successful coordination in the presence of network externalities. I show that agents’ pro-social preferences – specifically a preference for the sum of the agents payoffs and for the minimum payoff – lead to a decrease in the implementation cost for the principal, a decrease in the payoff of each agent, and an increase in discrimination. The model can be applied in various contexts and it delivers policy implications for designing policies that support the adoption of new technologies, for motivating a group of workers, or for inducing successful coordination of NGOs.

WP 2019.03 Prediction is difficult, even when it’s about the past: a hindcast experiment using Res-IRF, an integrated energy-economy model

Forthcoming in Energy Economics.

David Glotin – Cyril Bourgeois – Louis-Gaëtan Giraudet – Philippe Quirion

Model-based projections of energy demand are hardly ever confronted with observations. This shortfall threatens the credibility policy-makers might attach to integrated energy-economy models. One reason for it is the lack of historical data against which to calibrate models, a prerequisite for attempting to replicate past trends. In this paper, we (i) assemble piecemeal historical data to reconstruct the energy performance of the residential building stock of 1984 in France; (ii) calibrate Res-IRF, a bottom-up model of residential energy demand in France, against these data and run it to 2012. In a preliminary simulation that only considers the data that were known at the beginning of the simulated period, we find that the model accurately predicts energy consumption per m² aggregated over all dwelling types, with a Mean Absolute Percentage Error below 1.5% and 85% of the variance explained. These figures reach 0.5% and 96% when we consider the best-fit of 1,920 scenarios covering the uncertainty surrounding the parameters of the initial year. Energy demand is unevenly well replicated across fuels, which reveals some limitations in the ability of the model to capture politically-driven trends such as the expansion of the natural-gas distribution network. The overall results however build confidence in the general accuracy of the Res-IRF model. We discuss the directions for data collection which would ease comparison between simulations and observations in future hindcast experiments.

WP 2019.02 Bargaining with Intertemporal Maximin Payoffs

Vincent Martinet – Pedro Gajardo – Michel De Lara

We frame sustainability problems as bargaining problems among stakeholders who have to agree on a common development path. For infinite alternatives, the set of feasible payoffs is unknown, limiting the possibility to apply classical bargaining theory and mechanisms.
We define a framework accounting for the economic environment, which specifies how the set of alternatives and payoff structure underlie the set of feasible payoffs and disagreement point.
A mechanism satisfying the axioms of Independence of Non-Efficient Alternatives and Independence of Redundant Alternatives can be applied to a reduced set of alternatives producing all Pareto-efficient outcomes of the initial problem, and produces the same outcome. We exhibit monotonicity conditions under which such a subset of alternatives is computable.
We apply our framework to dynamic sustainability problems. We characterize a “satisficing” decision rule achieving any Pareto-efficient outcome. This rule is renegotiation-proof and generates a time-consistent path under the axiom of Individual Rationality.

WP 2019.01 The Rise of NGO Activism

Julien Daubanes – Jean-Charles Rochet

Published in American Economic Journal – Economic Policy (2019), 11, 183-212.

Activist non-governmental organizations (NGOs) increasingly oppose firms’ practices. We suggest this might be related to the vulnerability of public regulation to corporate influence. We examine a potentially-harmful industrial project subject to regulatory approval. Under industry influence, the regulator may approve the project even though it is harmful. However, an NGO may oppose it. We characterize the circumstances under which NGO opposition occurs and under which it is socially beneficial. Our theory explains the role that NGOs have assumed in the last decades, and has implications for the social legitimacy of activism and the appropriate degree of transparency of industrial activities.

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