Essays on modelling the economics of energy and the climate

Abstract

This thesis consists of four papers. Using different formulations of climate tipping points that trigger abrupt and irreversible damages, the first paper derives optimal environmental taxes in an analytically tractable model and depend on only a few parameters and a temperature projection. In a stylised approach, optimal taxes are constant as a ratio of income and are the sum of a deterministic damage component and a tipping risk component. If a tipping point may be triggered by temperature crossing a threshold, optimal tax-to-income ratios eventually fall and the price for short-lived methane emissions relative to long-lived carbon dioxide emissions should rise over time. The second paper considers a hypothetical choice between a carbon tax and a clean research subsidy. This paper argues that the absence of a non-energy sector has led some previous literature to find that subsidies outperform taxes. An integrated assessment model with endogenous technology is described. Numerical exercises find that a permanent global tax-only policy outperforms a permanent subsidy-only policy and this result is robust to many different parameter settings and assumptions. However, in the more optimistic case where optimal policy begins in 2050, the performances of subsidy-only and tax-only policies in the interim are closer. The third paper argues that a clean transition in electricity generation will likely be driven by variable renewable energy. The elasticity of substitution between wind and solar inputs and dirty inputs in electricity is estimated to be 3 or more by fitting an aggregate production function to OECD panel data. A high elasticity is consistent with detailed electricity models which also predict that the substitutability decreases as the share of clean inputs rises, as integrating intermittent energy supply becomes increasingly difficult. A simple dispatch model of electricity generation demonstrates this characteristic. Decreasing substitutability implies higher costs of a clean transition, greater costs from regions transitioning sequentially rather than together, and a greater role for carbon taxes over research subsidies. The fourth paper discusses how the framework used to endogenise technology growth by Acemoglu et al. (2012) can exhibit increasing returns to research and hence multiple equilibria, including an unstable interior equilibrium. The paper discusses several methods to determine how a unique equilibrium might be specified. Alternative methods can produce substantially different results when the elasticity of substitution between clean and dirty inputs is high. Show more