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Recent Advances in Climate Economics

Paper Session

Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)

New Orleans Marriott, Galerie 1
Hosted By: Association of Environmental and Resource Economists
  • Chair: Megan R. Bailey, University of Calgary

Rapid Methane Action, Tipping Points in the Climate System, and Economic Climate Damages

Thomas Stoerk
,
National Bank of Belgium and London School of Economics
Simon Dietz
,
London School of Economics
James Rising
,
University of Delaware and Climate Impact Lab
Drew Shindell
,
Duke University

Abstract

The climate impacts of methane emissions have increasingly attracted attention. Methane mitigation is seen as both rapid and cost-effective: cutting methane would lower the rate of warming and therefore climate damages in the near term. It hence would provide complementary benefits to the longer-term ones achieved by decarbonization on the way to net-zero. However, to date, no research has quantified how much the avoided near-term warming from rapid methane action would reduce the economic damages from climate change. Moreover, more limited temperature overshoot on a pathway towards a Paris-compatible temperature target could lower the risks from economic damages related to tipping points.

In this work, we couple a frontier climate economics toolkit with the latest methane science and recent methane action scenarios. The scenarios are based on the Global Methane Assessment (GMA), which forms the evidence base for much of the most recent policy action on methane, such as the Global Methane Pledge. Our analysis includes scenarios with taxation, the implementation of the Global Methane Pledge, 1.5C-consistent scenarios and implementation of all identified technical mitigation options from the GMA.

Our toolkit centres around the META model, a recent climate-economy integrated assessment model that combines frontier damage functions at the country-level for both temperature and sea-level rise and recent advances in climate science. META also allows us to study tipping points in the climate system, and it includes an explicit methane emissions module updated to match the latest methane science. META will be implemented using the Mimi Framework in Julia.

Estimates for economic climate impacts in each scenario will focus on marginal damages (SC-CH4, SC-CO2, and the ratio of both), total damages and damages due to tipping points in the climate system. We also produce geophysical estimates for how rapid methane action affects warming and sea-level rise around the world.

Technology Lock-In and Optimal Carbon Pricing

Jonathan Hawkins-Pierot
,
Yale University
Katherine Wagner
,
University of California-Berkeley and University of British Columbia

Abstract

This paper studies the implications of low energy prices today for energy efficiency and climate policy in the future. If adjustment costs mediate manufacturing plants’ responses to increases_ in energy prices, incumbents may be limited in their ability to re-optimize energy-inefficient production technologies chosen based on past market incentives. Using U.S. Census data and quasi-experimental variation in state energy prices, we first show that the initial electricity prices that manufacturing plants pay in their first year of operations are important determinants of long-run energy intensity. Plants that open when the prices of electricity and fossil fuel inputs into electricity are low consume more energy throughout their lifetime, regardless of current electricity prices. We then measure the relative contributions of initial productivity and capital adjustment frictions to creating this “technology lock-in” by estimating a model of plant input choices. We find that lock-in can be largely explained by persistent differences in the relative productivity of energy inputs chosen at entry. We discuss how these long-run effects of low entry-year energy prices increase the emissions costs of delayed action on carbon policy.

Industry Exit and Externalities: Evidence from Coal Phase-Out Programs and Climate Change

Shefali Khanna
,
Imperial College London
Megan R. Bailey
,
University of Calgary

Abstract

Coal phase-out programs (CPOs) have become popular policy tools for facilitating decarbonization of the electricity sector. These programs, which typically involve scheduled retirement of coal-fired electricity generation plants along with compensation for their owners, their workers, and the upstream mining industry, have unique implications for the cost-effectiveness and distributional impacts of climate policy. We develop a theoretical framework for evaluating how an industry exit program compares to Pigouvian pricing along these outcomes for an industry with large externalities. We then exploit the decarbonization of the US electricity sector in 2005-2020 as a baseline against which we compare several counterfactual CPOs to determine changes in cost-effectiveness, distributional impacts, and net benefits that would have occurred if the US utilized such a program to achieve the same amount of decarbonization. We also compare these outcomes between a scenario that applies Pigouvian pricing to the US electricity sector (for both global and local damages) and a CPO designed to approximate Pigouvian pricing. Using detailed models of fossil-fired electricity generation unit production and wholesale market prices, we capture how the supply and output prices for electricity would adjust under various CPOs. We use these projections to calculate changes to producer surplus, external benefits, and consumer surplus that would have occurred under various CPOs, which underlie our cost-effectiveness, distributional impacts, and net benefits estimates. Finally, we explore the need for complementary policy to help industry exit programs best approximate Pigouvian pricing by altering rules about entry of natural gas-fired electricity in the US setting.

Are Carbon Markets Reshaping the U.S. Electricity Industry?

Matthew Zaragoza-Watkins
,
Vanderbilt University
Bing Yang Tan
,
National University of Singapore

Abstract

How do regional carbon markets affect competition within regulated industries? Moreover, how should they regulate emissions associated with imported products? California’s regional carbon market uses border carbon adjustments (BCA) to regulate imported electricity, which imports account for a third of the state’s end-use consumption. This paper studies the effects of California’s regional carbon market on fossil-fired electricity generating units (EGUs) connected to the Western electricity grid from 2013 to 2020. We extend the generalized synthetic controls method to estimate heterogeneous, general-equilibrium treatment effects on output and emissions. Our approach uses machine learning to jointly construct counterfactuals from EGUs connected to the Eastern and Texas electricity grids. We find that emissions and output at out-of-state coal-fired EGUs and in-state gas-fired EGUs declined, while emissions and output among out-of-state gas-fired EGUs increased. Overall, the program reduced fossil fired EGU emissions by 46 MMT and caused precisely no change in total output. Our results indicate that BCA can effectively support market-based policies. While significant, our estimates are a fraction of the emissions reductions attributed to electricity imports under the program’s accounting framework. To maximize the effectiveness of BCA, regulators should account for the risk of adverse selection as firms attempt to minimize their emissions obligations without creating real reductions.

Discussant(s)
Tamma Carleton
,
University of California-Santa Barbara
Arik Levinson
,
Georgetown University
Erin Mansur
,
Dartmouth College
Catie Hausman
,
University of Michigan
JEL Classifications
  • Q5 - Environmental Economics
  • Q2 - Renewable Resources and Conservation