Research
Publications
Directed Technical Change, Environmental Sustainability, and Population Growth [Journal of Environmental Economics and Management (2023)]
Abstract: Population growth has two potentially counteracting effects on pollution emissions: (i) more people imply more production and thereby more emissions, and (ii) more people imply a larger research capacity which might reduce the emission intensity of production, depending on the direction of research. This study investigates how to achieve a given climate goal in the presence of these two effects. A growth model featuring both directed technical change and population growth is developed. The model allows for simultaneous research in polluting and non-polluting technologies. Both analytical and numerical results indicate that population growth is a burden on the environment, even when all research efforts are directed toward non-polluting technologies. Thus, research subsidies alone cannot ensure environmental sustainability. Instead, the analysis highlights the importance of carbon taxes for climate change mitigation.
Carbon Leakage in a Small Open Economy: The Importance of International Climate Policies (with Ulrik Beck and Louis Stewart) [Energy Economics (2023)]
Abstract: A substantial literature investigates carbon leakage effects for large countries and climate coalitions. However, little is known about leakage effects for a small open economy within a climate coalition. To fill this gap in the literature, we incorporate international climate policies relevant for a small open EU economy into the general equilibrium model GTAP-E. We focus our analysis on Denmark, but we show that our framework can be applied to any EU economy. We find substantial leakage associated with an economy-wide CO2e tax. This result is strongly affected by EU climate policies. We also present sector-specific leakage rates and find large sectoral differences.
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Testing R&D-Based Endogenous Growth Models [Oxford Bulletin of Economics and Statistics (2023)]
Abstract: This study examines US productivity growth through the lens of R&D-based growth models. A general R&D-based model, nesting different model varieties, is developed. These varieties are tested using a novel cointegrating relationship and US data for the period 1953–2018. The results provide evidence against the widely used fully endogenous variety and support for other varieties including the semi-endogenous variety. Further, the results are systematically consistent with the presence of fishing-out effects in knowledge production, implying that productivity-enhancing innovations become increasingly harder to achieve as technologies become more advanced. Forecasts suggest that the US productivity growth slowdown continues over the coming decades.
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Climate Policy in the Shadow of National Security [Economics Letters (2023)]
Abstract: Historical events underscore that heavy reliance on foreign fossil fuel supply may come at a national security cost. The present study derives the optimal policy of a net fossil fuel importing economy with a binding climate target, when fossil fuel imports are associated with national security costs. The study shows that optimal carbon taxes are differentiated across fossil fuels and that domestic fossil fuel production should be subsidized. Further, carbon capture and storage should be taxed, while no subsidies should be granted to green energy production. These results contrast the typical climate policy recommendation of uniform carbon taxation.
A Coordination Failure between EU Climate Policies Exemplified by the North Sea Energy Island (with Marc S. Jacobsen) [Climate Policy (2023)]
Abstract: We highlight a coordination problem between the EU Emissions Trading System (ETS) and the EU's offshore renewable energy strategy. We exemplify this coordination failure by analyzing carbon leakage effects associated with Denmark's planned North Sea energy island. The Danish energy island project will not start production before 2033, implying a long interval between project announcement and production. Using a dynamic model of the EU ETS, we show that the large time gap between announcement and production likely results in a ‘Green Paradox’, where the energy island increases aggregate EU ETS emissions. The mechanism leading to the emission increase is complicated and works through the Market Stability Reserve (MSR). The estimated 2050 leakage rate is 145 percent in our main scenario and not below 100 percent in any alternative scenario. We discuss how to improve the climate benefits of the energy island or similar large-scale renewable energy projects. This includes possible revisions to the EU ETS and the role of Power-to-X technologies.
Optimal Energy Taxes and Subsidies under a Cost-Effective Unilateral Climate Policy: Addressing Carbon Leakage (with Peter Birch Sørensen) [Energy Economics (2022)]
Abstract: We analyze how a country pursuing a unilateral climate policy may contribute to a reduction in global CO2 emissions in a cost-effective way. To do so its system of energy taxes and subsidies must account for leakage of emissions from the domestic to the foreign economy. We focus on leakage occurring via international trade in electricity and via shifts between domestic and foreign production of other goods. The optimal tax-subsidy scheme is based on an intuitive principle: Impose a uniform carbon tax on all additions to global emissions caused by changes in domestic production and consumption of energy, including additions to emissions occurring via shifts in international trade. Emissions from the sector exposed to foreign competition should be taxed at reduced rates to avoid excessive carbon leakage, and a part of the carbon tax on electricity should be levied at the consumer rather than the producer level to ensure taxation of the carbon content of imported electricity. Producers of renewables-based electricity should receive a subsidy to internalize their contribution to the reduction of global emissions. In other sectors emissions should be taxed at a uniform rate corresponding to the marginal social cost of meeting the target for emissions reduction. Simulations calibrated to data for the Danish economy suggest that redesigning energy taxes and subsidies to account for carbon leakage can generate a welfare gain.
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Optimal Carbon Taxation in EU Frontrunner Countries: Coordinating with the EU ETS and Addressing Leakage (with Peter Birch Sørensen) [Climate Policy (2022)]
Abstract: Several EU countries have targets for the reduction of CO2e emissions that go beyond the target set by the EU. We study what would be the optimal carbon tax policy in such EU frontrunner countries, focusing on two questions: 1) How should national climate policy be coordinated with the European Emissions Trading System (ETS), and 2) How should an EU frontrunner country address the risk of carbon leakage? We show that these issues are closely linked and that the answers to the two questions depend on the following factors: i) The shadow cost assigned to carbon leakage, ii) The rates of carbon leakage in the ETS and non-ETS sectors, and iii) The price of ETS emission allowances relative to the domestic marginal abatement cost of attaining the desired reduction of domestic emissions. Our analysis shows that it is preferable for an EU frontrunner country to implement a national ETS sector carbon tax that results in a higher total carbon price in the national ETS sector compared to the national non-ETS sector. We illustrate how our theoretical model can be combined with a modified version of the GTAP-E general equilibrium model of the world economy to estimate the parameters of the optimal national carbon tax scheme in an EU frontrunner country, using Denmark as an example. We find that the ETS sector should pay a total carbon price that is between 33 and 78 percent above that of the rest of the economy depending on the aversion to carbon leakage.
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Endogenizing the Cap in a Cap-and-Trade System: Assessing the Agreement on EU ETS Phase 4 (with Ulrik R. Beck) [Environmental and Resource Economics (2020)]
Abstract: In early 2018, a reform of the world’s largest functioning greenhouse gas emissions cap-and-trade system, the EU Emissions Trading System (ETS), was formally approved. The reform changes the main principles of the system by endogenizing the previously fixed emissions cap. We show that the effective emissions cap is now affected by the allowance demand and therefore not set directly by EU policymakers. One consequence of this is that national policies that reduce allowance demand can reduce long-run cumulative emissions, which is not possible in a standard cap-and-trade system. Using a newly developed dynamic model of the EU ETS, we show that policies reducing allowance demand can have substantial effects on cumulative emissions. Our model simulations also suggest that the reform reduces aggregate emissions in both the short and long run, but the long-run impact is substantially larger. Yet, the reform has a small impact on the currently large allowance surplus.
Comment on B. Carlén and B. Kriström: Are Climate Policies in the Nordic Countries Cost-Effective? In: L. Calmfors and J. Hassler, editors, Nordic Economic Policy Review 2019: Climate Policies in the Nordics. p. 148-151. Nordic Council of Ministers, 2019.
Working Papers
Optimal Unilateral Climate Policy with Carbon Leakage at the Extensive and the Intensive Margin (with Peter Birch Sørensen) [R&R, SJE]
Abstract: We analyse the optimal climate policy design in an open economy where the government is committed to a target for reduction of domestic CO2 emissions but where it is also concerned about carbon leakage. We highlight the importance of distinguishing between leakage at the extensive margin where firms relocate to a foreign country to avoid the domestic carbon tax, and leakage at the intensive margin where domestic firms lose world market shares to foreign competitors due to the tax. Assuming that the government cannot implement border carbon adjustments, we show that the optimal allocation can still be implemented through a set of instruments that includes taxes on emissions and on final consumption goods differentiated according to their marginal effects on foreign emissions, an output subsidy as well as a lump-sum location subsidy to leakage-exposed firms, subsidies to carbon capture, taxes on domestic energy use and on domestic production of fossil fuels, and a subsidy to domestic production of green energy. Simulation experiments indicate that the social welfare gain from implementing the optimal leakage-adjusted tax-subsidy scheme rather than a single uniform emissions tax could amount to 0.5 percent of national income. A location subsidy aimed at reducing leakage at the extensive margin contributes to reducing the welfare loss from leakage.
Directed Technical Change and Economic Growth Effects of Environmental Policy [trying to find the time to rewrite parts of this paper]
Abstract: A Schumpeterian growth model is developed to investigate how environmental policy affects economic growth when environmental policy also affects the direction of technical change. In contrast to previous models, production and pollution abatement technologies are embodied in separate intermediate good types. A set of stylized facts related to pollution emission, environmental policy, and pollution abatement expenditures is presented, and it is shown that the developed model is consistent with these stylized facts. It is shown analytically that a tightening of the environmental policy unambiguously directs research efforts toward pollution abatement technologies and away from production technologies. This directed technical change reduces economic growth and pollution emission growth. Simulation results indicate that even large environmental policy reforms have small economic growth effects. However, these economic growth effects have relatively large welfare effects which suggest that static models and exogenous growth models leave out an important welfare effect of environmental policy.
Paying indulgences for your climate sins
Abstract: This paper develops a simple economic model to characterize the optimal investment path associated with a long-run climate target like carbon neutrality by 2050. Introducing a short-run emission target increases the cost of reaching the long-run emission target if it pushes short-run mitigation investments above the optimal level associated with the long-run target. In this case, it may be cost-effective to employ a flexibility mechanism (like international emissions trading) that relaxes the short-run emission target by reducing greenhouse gas emissions in foreign economies. The developed model highlights the main mechanisms at work, and it is shown under which conditions it is cost-effective to employ a flexibility mechanism. In addition, the analysis shows how cost-benefit analyses focusing only on a short-run emission target exaggerate the cost-reducing potential of flexibility mechanisms. Finally, the analysis provides illustrative calculations and discusses how the results relate to current climate policies.