Climate Policy Induced Investments in Developing Countries

34 Pages Posted: 15 Jun 2003

See all articles by Christoph Böhringer

Christoph Böhringer

University of Oldenburg - Economic Policy; Centre for European Economic Research (ZEW)

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics

Date Written: 2002

Abstract

International climate policy has assigned the leading role in emissions abatement to the industrialized countries while developing countries remain uncommitted to binding emission reduction targets. However, cooperation between the industrialized and the developing world through joint implementation of emission abatement promises substantial economic gains to both parties. In this context, the policy debate on joint implementation has addressed the question of how investment risks to project-based emission crediting between industrialized countries and developing countries affect the magnitude and distribution of such gains. In our quantitative analysis, we find that the incorporation of country-specific investment risks induces rather small changes vis-a-vis a situation where investment risks are neglected. Only if investors go for high safety of returns is there a distinct decline in the overall volume of emission crediting and the associated total economic benefits. While the welfare effects of risk incorporation for industrialized countries are unequivocally negative, the implications across developing countries are ambiguous. Whereas low-risk developing countries attract higher project volumes and benefit from higher effective prices per emission credit compared to a reference scenario without risk, the opposite applies to high-risk countries. Sensitivity analysis with respect to higher risk estimates show that shifts in the comparative advantage of emission abatement against high-risk countries may become dramatic as only very low-cost mitigation projects will be realized, driving down the country's benefits from emission crediting to the advantage of low-risk developing countries. This result is supported by empirical evidence on regional imbalances of activities implemented jointly under the pilot phase of the Kyoto Protocol.

Keywords: investment risks, international climate policy

JEL Classification: D81, O16, Q25

Suggested Citation

Bohringer, Christoph and Löschel, Andreas, Climate Policy Induced Investments in Developing Countries (2002). ZEW Discussion Paper No. 02-68, Available at SSRN: https://ssrn.com/abstract=392921 or http://dx.doi.org/10.2139/ssrn.392921

Christoph Bohringer (Contact Author)

University of Oldenburg - Economic Policy ( email )

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany
+49 6211235200 (Phone)
+49 6211235226 (Fax)

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/eroe

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