Abatement Investment Research Articles

Carbon policies and productivity uncertainty: An intertemporal analysis

Prior literature on carbon policy analysis in a random environment focused on the existence of the level (first-moment) shocks, while recent research (e.g. Bloom (2009)) has emphasized the nonnegligible impact of uncertainty (second-moment) shocks on the macroeconomy. We study the mechanism by which an uncertainty shock affects carbon emissions, and how it interacts with different carbon policies by using a two-period model that yields a tractable and analytical solution. Due to the irreversibility of abatement investment, firms that are averse to uncertainty reduce their abatement investment as productivity uncertainty increases, which in turn reduces the abatement efficiency. However, greater uncertainty discourages production and reduces carbon emissions, which is consistent with the pattern observed in the data. By comparing social welfare across carbon taxation, intensity, and capacity regimes, we show that a carbon intensity target is the best policy and can simultaneously stabilize carbon emission and intensity. Carbon taxation and capacity regimes would both inevitably raise the carbon intensity level as productivity uncertainty increases.

Dynamic Optimal Control of Transboundary Pollution Abatement under Learning-by-Doing Depreciation

This paper analyzes a dynamic Stackelberg differential game model of watershed transboundary water pollution abatement and discusses the optimal decision-making problem under non-cooperative and cooperative differential game, in which the accumulation effect and depreciation effect of learning-by-doing pollution abatement investment are taken into account. We use dynamic optimization theory to solve the equilibrium solution of models. Through numerical simulation analysis, the path simulation and analysis of the optimal trajectory curves of each variable under finite-planning horizon and long-term steady state were carried out. Under the finite-planning horizon, the longer the planning period is, the lower the optimal emission rate is in equilibrium. The long-term steady-state game under cooperative decision can effectively reduce the amount of pollution emission. The investment intensity of pollution abatement in the implementation of non-cooperative game is higher than that of cooperative game. Under the long-term steady state, the pollution abatement investment trajectory of the cooperative game is relatively stable and there is no obvious crowding out effect. Investment continues to rise, and the optimal equilibrium level at steady state is higher than that under non-cooperative decision making. The level of decline in pollution stock under finite-planning horizon is not significant. Under the condition of long-term steady state, the trajectories of upstream and downstream pollution in the non-cooperative model and cooperative model are similar, but cooperative decision-making model is superior to the non-cooperative model in terms of the period of stabilization and steady state.

Business responses to climate policy uncertainty: Theoretical analysis of a twin deferral strategy and the risk-adjusted price of carbon

Climate policies are currently insufficient to meet stabilization goals and remain uncertain. This paper develops a conceptual model to illustrate investment decisions of a risk-neutral firm faced with uncertain climate policy requirements. The firm trades off lost profits from abating too much (being “long”) versus too little (being “short”). Despite risk neutrality, profits are nonlinear such that uncertainty encourages a twin deferral strategy of deferring investment in deploying abatement technology as well as in buying and holding (banking) emissions allowances. This strategy avoids risks of stranded abatement investments but suppresses carbon prices such that prices are projected to evolve through a sequence of stepwise jumps as policies mature. Prices may spike dramatically during an abatement “short squeeze” if firms must rapidly abate in tandem. To mitigate such risk, firms may engineer payoffs from abatement strategies if they have access to suitable hedging tools. These potentially include call options (the right but not obligation to purchase at a fixed price) on avoided emissions from tropical deforestation, as well as investments in R&D and price guarantees (put options) on abatement. Policy makers should support development of hedging tools while enhancing certainty over future policies.

Cost-Effectiveness Implications of Carbon Price Certainty

While a firm knows the carbon price with certainty under a tax, it must form an expectation about future allowance prices to identify its cost-effective abatement investment under a capand-trade program. We illustrate graphically how errors in forming this expectation increase the costs of irreversible pollution abatement investment under cap-and-trade relative to a tax. We describe empirical “cost-effectiveness anomalies” in allowance markets that may be attributed to cap-and-trade's inherent uncertainty. We model investment under simulated US carbon tax and cap-and-trade policies and find that allowance price uncertainty can increase resource costs 20 percent for a given quantity of emission abatement.

Optimal production and emission reduction policies for a remanufacturing firm considering deferred payment strategy

Carbon emission reduction is regarded as an effective way to protect the environment, which requires a large amount of capital. Thus, for a remanufacturing firm with limited initial capital, trade credits act as an effective financing method in supporting production and emission reductions. In this study, under the cap-and-trade and government's subsidy policies, a joint decision on recycling, remanufacturing and emission reduction by a financially constrained remanufacturer with considering deferred payment to a third-party recycler is analyzed. On the basis, optimization models are established to derive the optimal recycling quantity, carbon reduction rate and government subsidy rate by using a backward induction. Furthermore, an analytical comparison is provided between the cases of base model, carbon abatement investment model and deferred payment model. Numerical experiment results indicate that the remanufacturer can always make use of the investment option to further decrease its carbon emissions and gain more profit. We also find that deferred payment can effectively mitigate carbon emissions only when the degree of emission efforts is more than a certain critical value, and it also plays a positive role in the third-party recycler's revenue, especially for the case with higher initial capital. Some other managerial implications are further discussed.

Command-and-control regulation, incentive for pollution abatement, and market structure

This paper analyzes the effect of command-and-control regulation on firms’ incentives for pollution abatement, market structure, and social welfare. We consider a regulation under which firms are not allowed to produce if they were found in noncompliance with the preset emissions standard during the government’s imperfect inspection. In the case of the ex ante monopoly, a loose standard coupled with an intensive inspection effectively induces perfect compliance. In the case of the ex ante duopoly, the intensified inspection directly creates market entry barriers, but it also induces firms to increase abatement investments for better environmental compliance, which indirectly promotes market competition. Moreover, a firm invests more in pollution abatement if it is initially cleaner or more production-efficient than its rival, or if it has fewer potential rival. We also find that regulatory tightening may harm social welfare by reducing the probability of entry, and social welfare may be higher under monopoly than under duopoly when government inspection is sufficiently intensive.

Distinct exporters and the environment: Empirical evidence from China manufacturing

With the continuous advancement of economic interaction and vertical specialization in world economics, the importance of processing exports is catching up with ordinary exports. Although environmental consequences of export have been discussed from macro and micro perspectives, the effect of distinct exports, especially processing exports, on the environment at the plant level receives scant attention and remains unclear. To explore the firm-level environmental differences between processing exports and ordinary exports, in this paper we investigate how pollution emitted by individual establishments reacts to distinct export status by employing a panel of plant-level data from China manufacturing sector for the years 2006 and 2007. Our estimates indicate that exporters obtain both economic and environmental advantages over non-exporters, and processing exports generate fewer emissions than non-processing exports. For exporters, the beneficial effect of the decline in pollution intensity driven by the adoption of clean technology outweighs the negative effect of production expansion. Compared to non-processing exporters, processing ones have lower pollution intensity due to the inclination of abatement investments and the inclined inflows of FDI that bring advanced abatement technology to processing trade sectors.

A Differential Game of Transboundary Pollution Control and Ecological Compensation in a River Basin

This paper investigates a Stackelberg differential game between an upstream region and a downstream region for transboundary pollution control and ecological compensation (EC) in a river basin. Among them, the downstream region as the leader chooses its abatement investment level and an ecological compensation rate to encourage upstream investing in water pollution control firstly. After then, the upstream region as the follower determines its abatement investment level to maximize welfare. FFurthermore, we take into consideration the effects of efficiency-improving and cost-reducing learning by doing which are originated from abatement investment activity of both regions simultaneously. The results show the following. (i) There is an optimal ecological compensation rate and under which a Pareto improvement result can be obtained. (ii) Carrying out EC will shift some abatement investment from the downstream region into the upstream region. (iii) The efficiency-improving and cost-reducing learning by doing derived from abatement investment activity of both regions can decrease the optimal ecological compensation rate, increase abatement investment,and improve the social welfare.

Modeling Myths: On the Need for Dynamic Realism in DICE and other Equilibrium Models of Global Climate Mitigation

We analyze and critique how optimizing Integrated Assessment Models, and specifically the widely-used DICE model, represent abatement costs. Many such models assume temporal independence –abatement costs in one period are not affected by prior abatement. We contrast this with three dimensions of dynamic realism in emitting systems: inertia, induced innovation, and path dependence. We extend the DICE model with a stylized representation of such dynamic factors. By adding a transitional cost component, we characterize the resulting system in terms of its capacity to adapt in path-dependent ways, and the transitional costs of accelerating abatement. We formalize a resulting metric of the pliability of the system, and the characteristic timescales of adjustment. With the resulting DICE-PACE model, we show that in a system with high pliability, the optimal strategy involves much higher initial investment in abatement, sustained at roughly constant levels for some decades, which generates an approximately linear abatement path and emissions declining steadily to zero. This contrasts sharply with the traditional formulation. Characteristic transition timescales of 20-40 years result in an optimum path which stabilizes global temperatures around a degree below the traditional DICE behavior; with otherwise modest assumptions, a pliable system can generate optimal scenarios within the goals of the Paris Agreement, with far lower long run combined costs of abatement and climate damages. We conclude that representing dynamic realism in such models is as important as – and far more empirically tractable than – continued debate about the monetization of climate damages and ‘social cost of carbon.’

When will China achieve its carbon emission peak? A scenario analysis based on optimal control and the STIRPAT model

Abstract China is the largest greenhouse gas emitter around the world, and is committed to achieving an emissions peak by 2030. Although some studies have identified methods to project the emissions trajectory, they have disregarded the effect of abatement capacity of highly successful Clean Development Mechanism (CDM) projects (i.e. abatement knowledge stock) over the past decade. In addition, the literature lacks evidence to justify results, with several questions, such as when the emissions peak will be reached and how much carbon will be emitted at the peak, remaining unaddressed. This study introduces both theoretical and empirical model for estimating the greenhouse gas emissions peak in China. The findings revealed that there is potential to reach a carbon emissions peak, estimated at 117.70 MtCO2e, by 2028. The policy implications indicated that carbon pricing and the nation-wide Emissions Trading Scheme are the most important instruments to facilitate energy transition and clean coal technology (i.e. carbon capture and storage) development. This implies that the carbon price and carbon abatement investment may need to be greater than US$32.5/tCO2e and US$57,370,000/year to meet Paris Agreement goals by 2030 in China.

Should low-carbon capital investment be allocated earlier to achieve carbon emission reduction?

Abatement effort can bring about different consequences towards emissions, which is mainly due to the mechanism within the abatement investments. In this paper, the study aims to study in more depth how differentiated evanescent and inertia abatement investments should be allocated to achieve carbon reduction, and also to show that the abatement path and costs differ sensibly between these two allocations. Inertia performance is the critical determinant to this distinction, however which can be influenced deeply by the overestimation of the economic growth. The work confirms the results in theory that the abatement trends differentiated between the evanescent and the inertia case, in which the former is more likely to be an early-move action and however the latter tends to suffer from the converted burden with the underassessment of the growth. Turning to the numerical method, the work gauges the magnitude of the differentiated abatement efforts as well as the burden shifting between them. These qualitative results also confirm our ratiocination, which further help to analyze some intricate disturbances beyond the power of theory. Also we can find that the total cost is increasing due to the introduction of the operating cost, and the accumulated capital of the inertia abatement is more smooth and weighs less. The peak of the accumulated capital is dropping by 38%. Moreover, the evanescent abatement effort is more attractive than the basic case, which is risen universally by 22%. The study derives some policy implications for the ranking to the implementation of the abatement efforts and for incentive instruments to be set up at the industrial level.

Strategic supply chain decisions under environmental regulations: When to invest in end-of-pipe and green technology

In this paper, we study the green technology and end-of-pipe abatement decisions of a multi-facility firm along with its facility size decisions. We utilize a model that captures three different environmental regulations: (1) emissions tax, (2) emissions permit-trading, and (3) command-and-control. Our results show that if the variable emissions tax, permit price or emissions penalty is nonzero, the firm should always invest in green technology emissions reductions. In general, we observe an all-or-nothing trend regarding end-of-pipe abatement investment. In particular, the firm invests in best available end-of-pipe abatement technology (BACT-EOP) when the variable emissions tax, permit price or emission penalty is greater than the per unit cost of end-of-pipe abatement. Moreover, we show that investments in end-of-pipe abatement can enhance investments in green technology, but that investments in end-of-pipe abatement should be pursued secondarily. Furthermore, we find that while the facility size, and consequently the local and global transportation emissions, are not impacted by an emissions tax regulation, facility size is impacted by an emissions permit trading or command-and-control emissions regulation. With regards to emissions, frequently there is a direct trade-off between local vs. global transportation and production emissions. To illustrate, we show that regulations that yield the lowest local production emissions, i.e. emissions from a single facility, do not always yield the lowest global production, and local and global transportation emissions. In fact, the conditions that yield the lowest local transportation emissions yield the largest global transportation emissions, and vice versa.

The Environmental Impacts and Optimal Environmental Policies of Macroeconomic Uncertainty Shocks: A Dynamic Model Approach

The existing literature on carbon policy analysis in a random environment focuses on the existence of the level (first-moment) shocks, whereas recent research emphasized the nonnegligible impact of uncertainty (second-moment) shocks on macroeconomy. This paper studies the impact of uncertainty (second-moment) shocks on the carbon emissions, abatement investment, and output. We construct an environmental dynamic stochastic general equilibrium (E-DSGE) model that features uncertainty shocks from the good demand and supply. By comparing the social welfare among carbon taxation, intensity, and capacity regimes, we show that the carbon taxation is the best policy regarding positive uncertainty shocks of households preference (good demand), whereas capacity and intensity targets are preferable under the uncertainty shocks of firms productivity (good supply).

Economic‐related CO2 emissions analysis of Ordos Basin based on a refined STIRPAT model

AbstractIdentifying the impact factors of CO2 emissions is the basis of economic‐related CO2 emission analysis. In this study, we used the Stochastic Impacts by Regression on Population, Affluence, and Technology (STIRPAT) model to investigate the extent of influence of each impact factor on the CO2 emissions of Ordos Basin, a typical heavy industrial region and the largest coal production area of China. A new parameter, exhaust gas treatment costs ratio (R), was introduced into the STIRPAT model to examine the relationship between abatement investment and CO2 emissions. The impact factors that were positively associated with the CO2 emissions of Ordos Basin (and the corresponding coefficient values, from the largest to the smallest) were the population count (1.0449), property of secondary industry (0.8366), energy intensity (0.7672), GDP per capita (0.7598), property of tertiary industry (0.6978), and urbanization level (0.4641). The only negatively associated parameter was the exhaust gas treatment costs ratio, which had a coefficient value of −0.1339. In addition, the technological factors (i.e., energy intensity and exhaust gas treatment costs ratio) could be used as indicators of CO2 emission control. This study systematically investigated and discussed the impact factors of CO2 emissions in coal‐producing areas, to gain insight into the emissions’ characteristics and to lay a foundation for CO2 reduction in such regions. © 2019 Society of Chemical Industry and John Wiley & Sons, Ltd.

Selection of optimal coordination contract for sustainable supply chain under carbon tax

The purpose of this paper is to find an optimal coordinating contract on a two-echelon sustainable supply chain composed of a manufacturer and a retailer under carbon tax policy. Taking consumer environmental awareness (CEA) and manufacturer’s abatement investment cost into account, this study compares wholesale price contract, revenue-sharing contract and green cost-sharing contract, and finds that none of them can obtain coordination. Then, “Adjusted” contracts are introduced and proved that only adjusted revenue-sharing contract can coordinate the supply chain. Considering the profit redistribution proposition of the two-part tariff contract, the study introduces combined contracts, which are found capable of obtaining supply chain coordination as well as a win-win outcome.

Dynamic decision of transboundary basin pollution under emission permits and pollution abatement

In this paper, we develop a dynamic decision model of transboundary basin pollution with emission permits trading and pollution abatement investment. In our model, the stock of pollution abatement evolves according to the standard capital accumulation dynamics equation, the emission permits are bought or sold at price which is be determined by the equilibrium conditions of the permit market. The main objective of this paper is to explore the optimal levels of pollution emission and emission abatement investment under the regions’ non-coalition and coalition strategies, such that the discounted stream of regions’ net revenues is maximized. Our results show that (i) the upstream coalition can help the upstream region to increase the pollution abatement investment and decrease the pollution emission; (ii) in contrast, the downstream coalition can help the midstream region to increase the pollution abatement investment and decrease the pollution emission

Beach Pollution Effects on Health and Productivity in California.

The United States (U.S.) Clean Water Act triggered over $1 trillion in investments in water pollution abatement. However, treated sewage discharge and untreated runoff water that are contaminated by fecal matter are discharged into California beach waters daily. Warnings are posted to thwart the public from contacting polluted coastal water, according to the California Code of Regulations (CCR). This paper evaluated the current policy by empirically examining the productivity loss, in the form of sick leave, which is caused by fecal-contaminated water along the California coast under the CCR. The findings of this study showed that Californians suffer productivity losses in the amount of 3.56 million sick leave days per year due to recreational beach water pollution. This paper also empirically examined the pollution-to-sickness graph that Cabelli’s classic study theoretically proposed. The results of the research assure that the existing water quality thresholds are still reasonably safe and appropriate, despite the thresholds being based on studies from the 1950s. The weakness of the CCR lies in its poor enforcement or compliance. Better compliance, in terms of posting pollution advisories and increasing public awareness regarding beach pollution effects on health, would lead to a significant decrease in sick leaves and a corresponding increase in productivity. Therefore, this study advocates for stronger enforcement by displaying pollution advisories and better public awareness of beach pollution effects on health.

The effect of production- versus consumption-based emission tax under demand uncertainty

Emission tax is an instrument widely adopted by countries and regions to incentivize emission abatement by emission-intensive firms including manufacturers. However, policies differ in how they allocate emission responsibilities among stakeholders. For example, the Chile emission tax directly penalizes manufacturers for the emissions they generate during their production (production-based emission tax), whereas the Sweden electricity emission tax penalizes the consumption of electricity rather than its production (consumption-based emission tax). These two methods have potentially varying implications on manufacturers' profits, their emission abatement decisions, as well as the resulting emission levels, especially when demand uncertainty is involved. In this paper, we investigate the impact of the two distinct methods by studying a profit-maximizing manufacturer facing stochastic demand. Under either production- or consumption-based emission tax, the manufacturer's optimal decisions on its selling price, production quantity and emission abatement investment are derived. Perhaps surprisingly, we show that under either tax, it is possible for an increase in the emission tax to discourage the manufacturer from investing in emission abatement. The impact of tax rate, abatement technology efficiency, and demand uncertainty on the manufacturer's profitability and abatement decision are also studied. Interestingly, higher demand uncertainty may motivate the manufacturer to invest more in emission abatement under production-based emission tax. Using a numerical example of an electricity power generator, we offer further insights into the comparison between the two taxes and find that there exist cases for either tax to dominate the other in terms of both profit and emissions.

Incentive equilibrium strategies of transboundary industrial pollution control under emission permit trading

In this paper, we investigate the incentive equilibrium strategies of two neighboring regions facing transboundary industrial pollution under abatement investment and emission permits trading in a differential game setting. Our paper can be viewed as an extension of the work of Yeung [2007. Dynamically consistent cooperative solution in a differential game of transboundary industrial pollution. Journal of Optimization Theory and Applications, 134, 143–160] in the context of the transboundary industrial pollution. Compared with the work of Yeung [2007. Dynamically consistent cooperative solution in a differential game of transboundary industrial pollution. Journal of Optimization Theory and Applications, 134, 143–160], our research significant features (i) introduce the emission permits trading into the transboundary industrial pollution control;(ii) take into account the pollution abatement investment; (iii) examine the incentive equilibrium strategies of transboundary industrial pollution control; and (iv) design an allocation mechanism for regions’ cooperative profits. Furthermore, we illustrate the results of the paper with a numerical example. The utility of this paper is how to make incentive equilibrium strategies in a situation where the neighboring regions facing transboundary industrial pollution under abatement investment and emission permits trading in a differential game setting.

Valuation of Noise Pollution and Abatement Policy: Evidence from the Minneapolis-St. Paul International Airport

Noise pollution has been shown to impact physical and mental health, and changes in air traffic over densely populated residential areas is an important contributor to this health risk. Albeit significant endogeneity concerns, hedonic models of house sale prices are typically used to quantify the losses that are capitalized into home values resulting from these adverse noise effects. We break new ground on this subject by disentangling the causal impacts of noise on house prices via a novel identification strategy that relies on changes in the exogenously determined noise abatement eligibility of Minneapolis homes. Combining a rich panel dataset of repeat sales with aircraft noise exposure of properties surrounding the Minneapolis-Saint Paul (MSP) International Airport, we identify the causal noise effects on home values that are abatement eligible from those that are ineligible based on two soundproofing initiatives between 1990 and 2014. We find robust evidence that aircraft noise persistently and significantly reduces the rate of appreciation of abatement ineligible homes by approximately two percentage points per decibel over three years prior to a property's sale, while the effect on eligible homes is fully mitigated. Based on our estimates, we approximate the average losses to owners of abatement ineligible homes around $25,000 per sale and find that the return on abatement investments could be as a high as 40% near MSP.