Session 3

Question 1

What is carbon leakage?

Answer 1

• the increase in GHG emissions in rest of world divided by decrease of emissions in country due to GHG policy

Question 2

How does Carbon Leakage relate to imports/exports of a country?

Answer 2

• country emits less emissions due to policy -> produces less because of higher costs
• demand has to be fulfilled -> imports more than before, emissions embedded in increase of imports is amount of carbon leakage
• exports get smaller
• climate policy, trade barrier, type of goods, how hard it is to relocate production influence true leakage

Question 3

Why is it difficult to identify carbon leakage in practice?

Answer 3

• no information about emissions without policy
• amount of true leakage unclear, hard time seperating carbon leakage from other developments leading to changes in trade and production patterns

Question 4

What two methods to counter carbon leakage do we know and how do they work?

Answer 4

• Border Carbon Adjustments
  
  • country’s customs measure amount of carbon embedded in imported goods
  • charge importer for this amount the same price that domestic producers pay through GHG policy
  • problem: not allowed under WTO rules
• Compensations
  
  • cap and trade: free allocation for companies with risk of leakage
  • environmental taxation: exemptions or lower rates for companies at risk
  • renewable energy: exemptions from surcharges for companies at risk

Question 5

What is so problematic about carbon leakage & policies in real life?

Answer 5

• debate counterfacutal as hard to measure
• policy makers very sensitive (risking jobs for green policy)
• complete elimination of leakage unrealisitc (international agreement or border adjustments)
• companies that successfully claim to be at risk will likely receive compensation

Question 6

What are depletable resources?

Answer 6

• are exhausted when last unit is consumed
• opposite of inexhaustible resources
• problem: depletable resources can become to expensive before being exhausted, hard to distinguish from inexhaustible resources

Question 7

What is a model to estimate the efficient amount of extraction of a non-renewable resource and what are its problems?

Answer 7

• hotelling model
• problems:
  
  • net prices usually not available because extraction costs unobservable -> market prices used
  • several strong assumptions may cause firms behavior not to be efficient: extraction costs, resource stocks, discount rates not constant, no externalities, political considerations, no perfect foresight

Question 8

What is the result of the hotelling rule to determine the efficient amount of extraction of a non renewable resource?

Answer 8

• see image
• P_t = a - b R_t is the demand function of a period in regard to the amount of extraction R
• p is the discount rate
• c is the marginal extraction cost of a period, in general constant
• restriction Stock S which will completely be extracted

Question 9

What happens to the resource rent (price - extraction cost) with growing discount rate p?

Answer 9

it grows

Question 10

What is the green paradox?

Answer 10

• usually policy introductions to limit use of bad resources are announced far in advance
• > this might lead to more extraction until then, making the policy absurd

Question 11

Using the hotelling model, what happens if government places a per unit tax on selling coal in t=1?

Answer 11

• with tax producers receive less rent for their resource after introduction of policy
• resource owner’s rent today has to adjust for guaranteeing optimal extraction
• P₀ needs to decrease, therefore extraction today increases

Question 12

Using the hotelling rule, what happens if government plaxes a tax on using coal in t=1?

Answer 12

• with tax on consumption, demand reduces
• resource owner’s rent today has to adjust to guarantee optimal extraction
• therefore extraction increases

Question 13

Using the hotelling rule, what happens if the government restricts extraction in t = 1?

Answer 13

• Extraction in t = 1 reduces
• resource owner’s rent today has to adjust to guarantee inter-temporal optimality
• Extraction in t = 0 needs to decrease and therefore price today increases
• > quantitiy restriction could work better than usage or selling taxes/restrictions

Question 14

What is intertemporal carbon leakage?

Answer 14

shift in extraction and therefore emissions from future to present -> green paradox

Question 15

What is a strong green paradox?

Answer 15

When shifting emissions to present (intertemporal carbon leakage) increases cumulative emissions.

Question 16

How can clean energy help avoiding the green paradox?

Answer 16

• green paradox occurs in a world with no clean energy alternative
• with affordable clean alternative, fuel consumers will switch at certain price -> it becomes uneconomical to mine the resource, emissions stay in ground
• > mix of sustainability policy and support for green R&D is promising

Question 17

How can the green paradox influence spatial leakakge?

Answer 17

• Intertemporal leakage can reinforce spatial leakage through a price effect
• price effect: price of resource decreases due to policy in other country, this causes rise in emissions in country without carbon tax