Europe and Global Environmental Issues

The island of San Servolo in Venice, where the workshop was held, would be an early victim of global warming

With globalisation intensifying as it is, most things local increasingly have to be viewed in a global context. So is it with the How to Construct Europe project, which, supported by Germany’s Leibniz Association, marks the 50th Anniversary of the Treaty of Rome and seeks to discuss a future direction for European integration.

With this global imperative in mind, a workshop was held within the framework of this year’s CESifo Venice Summer Institute dealing with Europe and Global Environmental Issues. Organised by Peter Egger (University of Munich and Ifo Institute) and John Whalley (University of Western Ontario), the workshop tackled such issues as how global environmental considerations will shape European processes, how Europe should approach global negotiations, and how trade and other policies will be affected by environmental considerations.

The keynote lecture, delivered by Carlo Carraro, of Fondazione Eni Enrico Mattei (FEEM) and the University of Venice, dealt with issues surrounding climate and energy policies, in particular the effects (or lack thereof) over time of applying given policies with variously ambitious targets as compared to doing nothing at all, ie, as he put it, just conducting “business as usual”.

The need for a better understanding of future energy scenarios, of their compatibility with the objective of stabilizing greenhouse gas concentrations, and of their links with climate policy, he said, calls for the development of hybrid models that include both the technological detail typical of bottom-up models and the long-run dynamics typical of top-down models. One such model, which he has been instrumental in developing, is the World Induced Technical Change Hybrid model (WITCH), a neoclassical optimal growth model with energy input detail. The model captures the main economic interrelationships between world regions and is designed to analyse the optimal economic and environment policies in each world region as the outcome of a dynamic game.

David Anthoff, of the International Max Planck Research School on Earth System Modelling, presented a paper dealing with international equity weights and national decision-making on climate change. The costs of the damage caused by carbon dioxide emissions must consider the impacts of climate change over people with different incomes and in different jurisdictions, he explained, but previous approaches to equity weighing are inappropriate from a national decision-maker’s point of view, because domestic impacts are not valued at domestic values. For that reason, he and his co-author propose four alternatives (namely sovereignty, altruism, good neighbour, and compensation) with different views on concern for and liability towards foreigners.

Raymond Riezman, in turn, addressed international trade and the feasibility of global climate change agreements. In particular, he examined the incentives for individual country participation in global climate change negotiations. Climate change, he stressed, is a classic externality problem, which suggests that the core of the global warming game without side payments may be empty. Small countries have little incentive to participate in cooperative arrangements which either fully or partially internalize the externality, as they have to
undertake costs of their carbon mitigation actions, but being small they result in little
improvement in the global climate. Large countries, by contrast, have more incentive to participate as their actions, while costly to them, have a significant impact on global temperature change.

Mr Riezman was followed by Karl Farmer, who presented a paper dealing with the Effects of Unilateral Emission Permits Reduction on Terms of Trade, Capital Accumulation, and Welfare in a World Economy, which investigates the economic effects of one country unilaterally reducing the emissions permit level in a permit system aimed at abating emissions from production that deteriorate the global environment. The result of this more stringent permit policy is that the capital stock falls both in the country that applies it and abroad, while its terms of trade improve.

Inmaculada Martínez-Zarzoso presented a paper exploring the impact of urbanization on CO2 emissions, which showed that, whereas the impact of population growth on emissions is above unity and only slightly different for upper, middle, and low- income countries, when urbanization is examined a very different picture emerges with regard to the impact on emissions for low and lower-middle-income countries and upper-middle income countries.

Next was Elisa Lanzi, whose paper examined different scenarios for extending the current EU Emissions Trading Scheme to aviation in which a high, medium and low cap were considered. Her conclusion is that the inclusion of aviation is efficient in reducing emissions only if a low cap is chosen.

Karsten Neuhoff discussed the fact that adaptation and mitigation are equally important components of climate policy. For example, while many less-developed countries only have relatively small emissions volumes, and consequently have less need for mitigation policies, they are often the most impacted by climate change, and therefore require most support for adaptation. This calls for finding a framework that will facilitate effective international cooperation on both adaptation and mitigation beyond UN market mechanisms.

Yan Dong explored the potential contribution that trade policy initiatives can make towards the achievement of significant global carbon emissions reductions and the potential impacts of proposals now circulating in this direction, including carbon free trade area proposals. While trade policy can play a relatively small and supportive role in supporting global emissions reduction initiatives, the future evolution of the trading system will likely be where environmentally motivated arrangements act as an overlay on top of prevailing trade and financial arrangements in the WTO and IMF.

John Whalley, one of the organisers of the workshop, discussed the current negotiations on climate change, which were initiated in Bali in December 2007 and are scheduled to conclude by the end of 2009 in Copenhagen. These negotiations are effectively the second round in ongoing global negotiation on climate change, after Kyoto expires. The inclusion of China and other rapidly growing economies will be critical and we highlight the obstacles inherent in their participation in the negotiating process.

Thomas Brewer focused on International Energy Technology Transfers for Climate Change Mitigation. Technology transfer varies significantly among three existing institutional settings: North-South Official Development Assistance, Global Private International Investment and Trade, and International Public-Private Cooperation Agreements. The international technology transfer negotiating and analytic agendas need to be expanded and refined.

Lastly, Huifang Tian discussed China’s participation in global environmental negotiations. Three main issues seem likely to dominate the agenda: interpretation of the Common but Differentiated Responsibilities (CBR) principle, the choice of negotiation instruments, and non-compliance. We suggest that a possible interpretation of the CBR reflecting China’s desire to leave room to grow when undertaking emission reduction commitments might be for China to take on emission intensity commitments while OECD countries take on emission level commitments.

• Visit the CESifo Venice Summer Institute page
• See the workshop's programme
• Visit the How To Construct Europe Project page
• CESifo Working Papers published in the past three months