Abstract
Globalization is accompanied by increasing current account imbalances. They can undermine the positive impacts of increasing international cooperation and trade on economic growth and income convergence. At the same time, climate change challenges the global community and requests for co-operative action. Regional energy transformation due to climate policies and the resulting regional mitigation costs are key variables of climate economic analysis. This study is the first that include current account imbalances and imperfect capital markets to investigate potential market feedback mechanisms between climate policies, energy sector transformation and capital markets. Furthermore, it answers the question whether the capital-intensive transformation towards zero-carbon economies increases the policy cost of mitigation under the condition of imperfect capital markets. First results demonstrate a dominant baseline effect of capital market imperfections on macroeconomic variables, and moderate effects on mitigation costs in global climate policy scenarios. For some regions (e.g. Middle East) estimates of relatively high mitigation costs are revised downwards, if imperfect capital markets are considered.
Highlights
In assessing the potential impacts of climate change, a majority of climatologists and climate impact researchers conclude that a stabilization of the climate system below a temperature change of 2 ◦ C has to be achieved
Capital market constraints can be expected to increase the costs of transformation towards carbon-free economies, because renewable energy technologies are more capital-intensive than fossil-based technologies
This study investigates the effects of representing imperfect capital markets in a large scale Integrated Assessment (IA) model
Summary
In assessing the potential impacts of climate change, a majority of climatologists and climate impact researchers conclude that a stabilization of the climate system below a temperature change of 2 ◦ C (compared to the preindustrial level) has to be achieved. Capital market constraints can be expected to increase the costs of transformation towards carbon-free economies, because renewable energy technologies are more capital-intensive than fossil-based technologies This may increase mitigation costs and reduce the incentive of capitalconstrained countries to join international efforts of fighting climate change. This paper fills this gap and in particular asks to which extent the representation of capital markets and capital market imperfections changes the global and regional costs of climate change mitigation To answer this question, the present study makes use of the Integrated Assessment (IA) model REMIND. Iyer et al (2015) do not model the capital market directly, but implemented region-specific risk mark-ups for investments into different electricity generation technologies They find that this change yield increasing mitigation costs.
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