WP 2021.15 Investment Strategies and Corporate Behaviour with Socially Responsible Investors: A Theory of Active Ownership

Published in Economica (2022), 89, 997–1023.

Christian Gollier – Sébastien Pouget

Socially responsible investors constitute an important force in today’s global financial markets. This paper examines conditions under which socially responsible investors induce companies to behave responsibly. We develop an asset pricing model in which some shareholders are active owners, i.e., they engage companies by voting on strategic decisions. Differences of objective among shareholders arise because socially responsible investors value corporate externalities. In our baseline model, we show that a firm may choose a responsible strategy, even if the majority of investors are not responsible. We also demonstrate that such choice of a responsible strategy might be fragile because it might depend on investors’ self-fulfilling beliefs. We then extend our baseline model to analyse the link between divestment and engagement strategies, the case with multiple firms, the role of benefit corporation charters and the impact of a large investor.

WP 2021.14 Limites à la croissance et destruction créatrice dans le cadre d’un modèle à générations de capital

Published in Revue Francophone du Développement Durable (2021), 18, 1-18.

Marc Germain

This paper studies the path of a resource-constrained economy in an original vintage capital growth model involving a Schumpeterian process of creative destruction.
The path of the economy is characterized by three successive phases: (i) unsustainable « high » growth; (ii) after a peak, a deep and brutal decline; (iii) slower growth gradually leading to equilibrium. The slowdown and reversal of the economy are due to the continuous rise in the cost of exploiting the resource, which occurs despite technical progress due to the creative destruction process.
This process also has a non-monotonic trajectory, in particular its destruction component behind the economic obsolescence of equipment. The latter evolves in the opposite direction to production, in contradiction with the widespread assumption of a constant capital depreciation rate.

WP 2021.13 How can ports act to reduce underwater noise from shipping? Identifying effective management frameworks

Published in Marine Pollution Bulletin (2022), 174, 113136.

Laura Recuero Virto – Hervé Dumez – Carlos Romero – Denis Bailly

Through a survey and interviews with representative stakeholders, this paper aims to find mechanisms to align commercial interests with underwater noise reductions from commercial shipping. While acknowledging the wide variations in ports’ specificities, port actions could support a reduction in underwater noise emissions from commercial shipping through changes in hull, propeller and engine design, and through operational measures associated with reduced speed, change of route and travel in convoy. Though the impact of underwater noise emissions on marine fauna is increasingly shown to be serious and wide-spread, there is uncertainty in the mechanisms, the contexts, and the levels which should lead to action, requiring precautionary management. Vessels owners are already dealing with significant investment and operating costs to comply with fuel, ballast water, NOx and CO2 requirements. To be successful, underwater noise programs must align with these factors.

Ports could propose actions such as discounted port fees and reduced ship waiting times at ports, both depending on underwater noise performance. Cooperation between ports to scale up actions through environmental indexes and classification societies’ notations, and integration with other ports’ actions could help support this. However, few vessels know their underwater noise baseline as there are very few hydrophone stations, and measurement methodologies are not standardized. Costs increase and availability decreases dramatically if the vessel buyer wants to improve the noise profile. Local demands regarding airborne noise close to airports boosted global pressure on the aviation industry to adopt existing quieting technology. This experience of the aviation noise control could inform the underwater noise process. Since 2017, the Vancouver Fraser Port Authority has been implementing a voluntary vessel slowdown trial for commercial vessels in key known foraging areas for southern resident killer whales, which are locally considered an emblematic species.

WP 2021.12
Sectoral, resource and carbon impacts of increased paper and cardboard recycling

Etienne Lorang – Antonello Lobianco – Philippe Delacote

Recycling is emerging as an alternative to extraction in many industries and one of the corner stones of the circular economy. In this paper, we assess the role of paper and cardboard recycling on the forest sector, both from an economic and carbon perspective. For that purpose, we model this recycling industry within our forest sec- tor model, in order to relate it to other wood products. As the forest sector has an important potential for climate change mitigation, this model allows us to assess the effects on the resource and the carbon balance of the forest sector. We show that these results are strongly linked to the hypothesis of substitution or complementarity between recycled and wood-pulp.

WP 2021.11
Price incentives and unmonitored deforestation: Evidence from Indonesian palm oil mills

Valentin Guye – Sebastian Kraus

We create a novel, spatially explicit microeconomic panel of Indonesian palm oil mills, to provide the first estimates of deforestation price elasticities based on observations of the actual prices paid at mill gates. To identify the price elasticity, we spatially model how deforestation in upstream plantations is exposed to downstream, conditionally exogenous, shocks on mill-gate prices. We provide the first evidence that deforestation for smallholder plantations, and illegal deforestation, are price elastic. This implies that a price instrument can disincentivize deforestation where it is most difficult to monitor, and contain leakages from conservation regulations.

WP 2021.10
Technological progress and carbon price formation: an analysis of EU-ETS plants

Marc Baudry – Anouk Faure

This study investigates the nature of technological progress in six manufacturing industries covered under the EU-ETS, plus the power sector, and its effect on carbon price formation using marginal abatement cost curves. We adopt a technological frontier framework that we calibrate to input and output data at the plant level from 2013 to 2017, with a directional distance function approach. Our results reveal that most of the time, technological progress resulted in inflating baseline emissions, despite decreasing the carbon intensity of production. In our sample industries, technological progress therefore leads to increase abatement efforts, raising the equilibrium price of carbon.

WP 2021.09
Decomposing weather impacts on crop profits: the role of agrochemical input adjustments

François Bareille – Raja Chakir

The costs of climate change borne by agriculture are critically dependent on farmers’ adaptation. In this paper, we investigate how farmers adjust their input mix in response to weather fluctuations during the growing season using individual panel data from Meuse (France) between 2006 and 2012. Specifically, we consider weather and price information to estimate structural models of profit-maximizing farmers with crop-specific yields and input-crop-specific demand functions, conditionally on farm and annual fixed effects. The results show that weather fluctu-ations affect crop yields but that farmers adapt their fertilizer and pesticide applications. We use our estimates to simulate the impacts of a climate change scenario: we show that farmers in Meuse would increase fertilizer applications by 2.60% but reduce pesticide applications by6.92% under an RCP 4.5 scenario in 2050. These adjustments limit the negative direct impacts of climate change on plant growth, though heterogeneously among crops. In total, the added value of the agricultural sector is likely to reduce by 3.02%. Society could benefit from adaptation as the reduction in damage due to agrochemicals’ negative externalities represents twice the market costs borne by the agricultural sector.

WP 2021.08
The impact of income inequality on public environmental expenditure with green consumerism

Lesly Cassin – Paolo Melindi-Ghidi – Fabien Prieur

This article analyzes the impact of income inequality on environmental policy in the presence of green consumers. We first develop a model with two main ingredients: citizens, with different income capacities, have access to two commodities whose consumption differs in terms of price and environmental impact, and they vote on the environmental policy. In this setting, there exists a unique political equilibrium in which the population is split into two groups, that differ in the type of good, conventional vs. green, they consume. The analysis shows that a change in the level of inequality induces variations in both the size and composition of these two groups of citizens. This in turn determines whether or not more inequality stimulates the public policy. We then conduct an empirical investigation on a panel of European countries over the period 1996-2019. We find the existence of an inverted J-shape relationship between inequality and public environmental spending. This outcome can be explained by the combination of a composition effect, affecting the green group, and a substitution effect between private green consumption and public environmental spending.

WP 2021.07
Tackling Transport-Induced Pollution in Cities: A Case Study in Paris

Marion Leroutier – Philippe Quirion

Urban road transport is an important source of local pollution and CO2 emissions. To tackle these externalities, it is crucial to understand who contributes to emissions today and what are the alternatives to high-emission trips. We estimate individual contributions to transport-induced emissions, by bringing together data from a travel demand survey in the Paris area and emission factor data for local pollutants and CO2. We document high inequalities in emissions, with the top 20% of emitters contributing 75-85% of emissions on a representative weekday, depending on the pollutant. Top emissions result from a combination of high distances travelled, a high reliance on car and, mainly for local pollutants, a higher emission intensity of cars. We estimate with counterfactual travel times that 53% of current car drives could be shifted to electric bikes or public transport with a limited time increase. This would reduce the emissions from daily mobility by 19-21%, with corresponding annual health and climate benefits of around €245m.

WP 2021.06
 The Environmental Unsustainability of Pubic Debt: Non-Renewable Resources, Public Finances Stabilization and Growth

Nicolas Clootens – Francesco Magris

This paper introduces a public debt stabilization constraint in an overlapping generation model in which non-renewable resources constitute a necessary input in the production function and belong to agents. It shows that stabilization of public debt at high level (as share of capital) may prevent the existence of a sustainable development path. Public debt thus appears as a threat to sustainable development. It also shows that higher public debt-to-capital ratios (and public expenditures-to-capital ones) are associated with lower growth. Two transmission channels are identified. As usual, public debt crowds out capital accumulation. In addition, public debt tends to increase resource use which reduces the rate of growth. We also analyze the dynamics and we show that the economy is characterized by saddle path stability. Finally, we show that the public debt-to-capital ratio may be calibrated to implement the social planner optimal allocation.

WP 2021.05
 Should we fear transition risks? A review of the applied literature

Louis Daumas

The transition to a low-carbon economy will entail sweeping transformations of energy and economic systems. To such an extent that a growing literature has been worrying about the effect of such strain on the stability of financial system. This “financial transition risk”’ literature has highlighted that the conjunction of climate policy, technological change and changing consumption patterns may propagate to financial markets. If too brutal or unexpected, such dynamics may result in a “Climate-Minsky’” moment of systemic implications. Yet, recent historical developments have shown that financial markets can prove resilient to shocks onto transition-exposed industries such as fossil fuel producers. Should we thus fear transition risks? To answer this question, I propose a critical review of the relevant applied modelling and econometric literatures. Three sub-fields will be examined: the asset stranding literature, the financial econometrics of the low-carbon transition and the direct assessment of transition risks through prospective models. I will expound some key results of these literatures, and critically assess underlying methodologies.

WP 2021.04 Intragenerational inequality aversion and intergenerational equity

Robert D. Cairns – Stellio Del Campo – Vincent Martinet

We study the interplay between intragenerational and intergenerational equity in an economy with two countries producing and consuming from national capital stocks. We characterize the sustainable development path that a social planner would implement to achieve intertemporal egalitarianism. If intergenerational equity is defined with respect to the global consumption of each generation, regardless of its distribution between countries, consumption in the poor country should be set as low as possible to maximize investment and hasten convergence, resulting in important intragenerational inequalities. When social welfare accounts for intragenerational equity, the larger the intragenerational inequality aversion (IIA), the smaller the sacrifice asked of the poor country, but the lower the sustained level of generational welfare. Along the intertemporal welfare-egalitarian path with IIA, consumption in the poor country increases, while it decreases in the rich country, resulting in a global degrowth.

WP 2021.03 Output-Based Allocation and Output-Based Rebates: A survey

Philippe Quirion

Output-based refunding consists in distributing the value of taxes on pollution, or that of tradable emission allowances, to operators of emitting facilities, in proportion of their current production level. It is called output-based rebating in the case of taxes and output-based allocation in the case of tradable emission allowances. This practice is widespread, especially in climate policies, and has important economic consequences. We analyse these consequences, first in a deterministic setting and then accounting for uncertainty. While output-based refunding is detrimental to welfare in a deterministic, closed economy without prior distortions, it also provides some benefits. In particular, it is an efficient way to limit carbon leakage.
Then, we present the implementation of output-based allocation in the European Union, California, China, New-Zealand and Alberta, and discuss whether it should be maintained or phased out in the coming decades.

WP 2021.02 Common pool resource management and risk perceptions

Can Askan Mavi and Nicolas Quérou

Motivated by recent discussions about the issue of risk perceptions for climate change related events, we introduce a non-cooperative game setting where agents manage a common pool resource under a potential risk, and agents exhibit different risk perception biases. Focusing on the effect of the polarization level and other population features, we show that the type of bias (overestimation versus underestimation biases) and the resource quality level before and after the occurrence of the shift have first-order importance on the qualitative nature of behavioral adjustments and on the pattern of resource conservation. When there are non-uniform biases within the population, the intra-group structure of the population qualitatively affects the degree of resource conservation. Moreover, unbiased agents may react in non-monotone ways to changes in the polarization level when faced with agents exhibiting different types of bias. The size of the unbiased agents’ sub-population does not qualitatively affect how an increase in the polarization level impacts individual behavioral adjustments, even though it affects the magnitude of this change. Finally, it is shown how perception biases affect the comparison between centralized and decentralized management.

WP 2021.01
Expenditure-elasticity and income elasticity of GHG emissions: a survey of literature on household carbon footprint

Antonin Pottier

The relationship between income of households and their carbon emissions is often summed up by a number, the elasticity of the carbon footprint with respect to income. I survey here the cross-sectional studies of household carbon footprints and their estimation of elasticities with respect to income and with respect to expenditures. The distinction between the two elasticities comes from the fact that the saving rate rises with income.
I compile published estimates of elasticities of carbon footprint or energy requirements, and I compute new estimates. This totals around eighty estimates (a third of which are newly computed) for over twenty countries. It shows that, generally, the carbon footprint grows less rapidly than expenditures, and confirms that the incomeelasticity is lower than expenditure-elasticity. Unambiguously, the assumption of an income- elasticity equal to 1 is not supported by the published literature. I discuss the difference between carbon inequality and carbon concentration, the ambiguity in the literature between income-elasticity and expenditures-elasticity. I present the limitations of our knowledge on the income-carbon footprint relationship, from contestable assumption in the methodology as well as measurement errors in household budget surveys. I examine how elasticity can be used in “top-down” assessment of global distribution of carbon footprint.

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