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Matti Liski Department of Economics, Aalto University, Finland |
Carbon leakage: a mechanism design approach
It is tricky to design local regulations on global externalities. Firms may relocate and merely shift the externality-causing activities to another location if the regulation is too costly and inadequately compensated. Yet, the true ease of moving is only known by the firm, and any compensation scheme comes at a risk of paying unnecessarily high transfers to some of the firms. Regulated industries fiercely lobby for compensations, emphasizing the cost of regulation and easiness to relocate production to other countries. If the aim is to keep all the firms, these claims need to be respected although they are difficult to verify. But doing so will create potentially large private rents to the industries. The issue has become topical in the EU Emission Trading Scheme (ETS), where industrial emitters considered to be susceptible to “carbon leakage” have received both generous allocations of free emission allowances and direct monetary compensations.This set-up raises an important question for the policy design that we address in this research. How should such local regulations on a global problem be designed to reach environ-mental targets and to limit “leakage” without creating excessive private rents? In particular, how much industries under leakage risk should be compensated, and how they should be compensated — with lump-sum transfers or by compromising on the level of regulation? The main challenge, that seems unavoidable, is that only firms know, firstly, the true costs of moving to another location and, secondly, the cost of compliance if staying in the regime. Taking a mechanism design approach, we study the optimal design of environmental policies when firms have such two-dimensional private information. We also provide an illustrative quantification of the optimal carbon leakage policy for key sectors in the EU emissions trading program.
Matti Liski is a Professor at the Department of Economics at
Aalto University. He has been a visiting scholar or associate at
the Toulouse School of Economics, the MIT Center for Energy and
Environmental Policy Research, the Energy Policy Research Group
(EPRG) of the University of Cambridge, and CESifo-Munich. His
fields of interests are energy and environmental markets,
natural resources, microeconomic theory, public economics,
growth and industrial organization. His most recent
contributions to environmental and resource economics relate to
climate policies and carbon pricing. His past and current
professional duties include: editor of the Scandinavian Journal
of Economics, and associate editor or member of board of
Environmental and Resource Economics and Environment and
Development Economics.
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Stockholm Resilience Center, Stockholm University, Sweden |
Understanding and managing change in a complex and interdependent world – a modelling approach
Many of the environmental problems we are facing today are the result of complex interactions between humans and ecosystems across multiple scales. They can cause sudden resource collapses, such as the collapse of the Baltic cod fishery, but can also render an unsustainable situation very persistent, such as in poverty traps. While human action drives ecological change it is often the type and time scale of human responses to ecological change that triggers or prevents a regime shift or creates a very persistent state. Understanding the social-ecological mechanisms that prevent undesirable change or enable desired change will help identify entry points for improving governance and enabling sustainability transformations. In this talk I will present work that combines in-depth field research with mathematical and computational modelling to identify mechanisms of change in natural resource use systems, particularly fisheries and agriculture. I will focus on the importance of social-ecological feedbacks and discuss the use of multi-methods approaches to facilitate an integrative analysis that builds on knowledge about human behaviour, societal and ecological processes from various disciplines.
Maja Schlüter is Associate professor at the Stockholm Resilience Centre, Stockholm University. Maja’s research focuses on social-ecological interactions and mechanisms underlying social-ecological systems phenomena, such as the collapse of the Baltic Sea cod, poverty traps, the diversity of self-governance forms in Mexican small-scale fisheries, or cooperation in common pool resource management. Her work uses mathematical and agent-based modeling to test hypotheses about multi-level causes of observed phenomena and to explore consequences of selected human-nature interactions. She is head of the ERC funded research group SES-LINK, member of the editorial board of Ecology and Society and co-leads the complex adaptive systems and resilience thinking stream at the Stockholm Resilience Center.
