Essays on the economics of climate change and networks

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Title: Essays on the economics of climate change and networks
ISBN: 978-952-323-038-5
Author: Itkonen, Juha V.A.
Organization: Bank of Finland
Series: Scientific monographs. E
ISSN: 1798-1085
Series year: 2015
Series number: 49
Year of publication: 2015
Publication date: 29.4.2015
Pages: 104
Subject (yso): markkinatalous; markkinat; talouskasvu; verkostot; ilmastonmuutokset; päästöt; päästökauppa; ympäristö
Keywords: häiriöt; kaupankäynti; sosiaaliset verkostot
Other keywords: climate; networks; economics; carbon Kuznets curve; social ties; EEO model; VAR model
Abstract: Climate change is one of the greatest market failures of our time. This thesis consists of three essays in which we study the economics of climate change using networks as a theoretical framework. In the first essay, we discover flaws in the foundations of a recent strand of literature estimating the carbon Kuznets curve (CKC). The CKC hypothesizes that carbon dioxide emissions initially increase with economic growth but that the relationship is eventually reversed. The recent literature attempts to estimate the CKC by adding energy consumption as a control variable. Due to model misspecifications related to the econometric methodology and database definitions, the results are biased to support the existence of a CKC. Consequently, the literature underestimates the need for climate policies. In the second essay, we study how social networks might help to explain why differences of opinion about climate change persist across segments of the lay public despite the scientific consensus. To do this, we programmed a Facebook application that collected survey data on concerns about climate change and network data on friendships. We found that respondents tend to have friends with similar concerns as their own, the unconcerned respondents have fewer friends, and any two respondents who disagreed about the seriousness of global warming were less than half as likely to be friends. The results indicate that the structure of the social network may hinder changes in opinions, explaining why opinions persist despite the scientific consensus. The results suggest that the communication of climate science could be improved by strategies that aim to overcome these network effects. In the third essay, we study permit markets which are connected by a network of links. A link allows participants of one emissions trading system to use permits of other systems. In a linked network of markets, foreign regulators can influence domestic policy outcomes even without a direct link. We apply graph theory to study these dependencies between markets to determine who exactly can affect domestic emissions and prices. We characterize the equilibrium’s dependency structure assuming perfect competition and an exogenous trading network. The results help to avoid unexpected foreign interference with domestic policy outcomes and to secure the effectiveness of climate change policies.
Table of contents: 1 Introduction 1 1.1 Background 1 1.2 Networks 2 1.3 The carbon Kuznets curve 3 1.4 Social ties 5 1.5 Emissions trading and linking 7 1.6 Different perspectives 8 2 Problems estimating the carbon Kuznets curve 15 2.1 Introduction 15 2.2 EEO model 17 2.3 The data and definitions 18 2.4 The problems in the recent CKC literature 20 2.4.1 Transformations in a VAR model 20 2.4.2 The interpretation of the parameters 21 2.4.3 Bias 23 2.5 Conclusions 26 Appendix 2.A Definition of carbon emissions 26 Appendix 2.B Mathematical derivations for Section 2.4.3 28 3 Social ties and concern for global warming 33 3.1 Introduction 33 3.2 Methodology 35 3.3 Results 38 3.3.1 Distribution of friends 38 3.3.2 Centrality and clustering 39 3.3.3 Probability of friendship 41 3.4 Conclusions 45 Appendix 3.A Local clustering coefficient 47 Appendix 3.B Full regression tables 48 Appendix 3.C Estimating conditional degree and transitivity 51 3.C.1 Preliminaries 52 3.C.2 Sampling scheme 53 3.C.3 Estimators 55 3.C.4 Estimator properties 55 3.C.5 Regression analysis 57 4 Emissions trading in a network of linked markets 67 4.1 Introduction 67 4.2 Preliminaries 72 4.2.1 Graphs and connectivity 72 4.2.2 The model 72 4.2.3 Discussion of model assumptions 74 4.3 Equilibrium 76 4.4 Equilibrium network 78 4.4.1 Adjacent sellers and buyers 79 4.4.2 Supply and demand components 80 4.4.3 Alternating supply and demand paths 81 4.4.4 Matching supply and demand components 82 4.5 Comparative statics 83 4.5.1 Nonzero equilibrium 83 4.5.2 Subset of equations 84 4.5.3 Marginal effects 84 4.6 Conclusions 86 Appendix 4.A Proofs 88 Appendix 4.B Numerical example 95 Appendix 4.C Graphical example 97 Appendix 4.D Cuban cigars example 99 Appendix 4.E Outline of the theory 100

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