Environmental Economics & Policies; Climate Change and Environment; Carbon Policy and Trading; Montreal Protocol; Economic Theory & Research; Markets and Market Access; Energy and Environment
Summary: Efficient reduction of carbon dioxide emissions requires coordination of international efforts. Approaches proposed include carbon taxes, emission quotas, and jointly implemented energy projects. To reduce emissions efficiently, requires equalizing the marginal costs of reduction between countries. The apparently large differentials between the costs of reducing emissions in industrial and developing countries, implies a great potential for lowering the costs of reducing emissions by focusing on projects in developing countries. Most proposals for joint implementation of energy projects emphasize installing more technically efficient capital equipment, to allow reductions in energy use for any given mix of input, and output. But such increases in efficiency are likely to have potentially important second-round impacts: 1) Lowering the relative effective price of specific energy products. 2) Lowering the price of energy relative to other inputs. 3) Lowering the price of energy-intensive products relative to other products. The author explores the consequences of these second-round impacts, and suggests ways to deal with them in practical joint-implementation projects. For example, the direct impact of reducing the effective price of a fuel is to increase consumption of that fuel. Generally, substitution effects also reduce the use of other fuels, and the emissions generated from them. If the fuel whose efficiency is being improved, is already the least emission-intensive, the combined impact of these price changes is less likely to be favorable, and may even increase emissions. In the example the author uses, increase in coal use efficiency was completely ineffective in reducing emissions, because it resulted in emission-intensive coal being substituted for less polluting oil and gas.
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