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Climate Change at Times of Economic Crisis

Pablo Del Río Institute for Public Policies and Goods

Xavier Labandeira FEDEA and rede (Universidade de Vigo)

Colección Estudios Económicos 05-09 Economía de Cambio Climático Fedea – Iberdrola ISSN 1988-785X www.fedea.es

CLIMATE CHANGE AT TIMES OF ECONOMIC CRISIS

Pablo Del Ríoa Xavier Labandeirab

Abstract

The aim of this paper is to explore the implications of the current economic crisis for climate change trajectories and climate change policies. It is argued that, contrary to what many would expect, the economic recession negatively affects emissions reduction efforts through its discouraging effects on investments in low-carbon technologies. It is also argued that, although the growing climate change concerns justify public intervention even at times of economic hardship, there are reciprocal influences between the economic crisis and climate policy-making. Indeed, given the greater competition on scarce resources and short-term priorities for the use of those resources, the economic crisis strengthens the case for a suitable design of climate policies which leads to costeffective emissions reductions in an intertemporal perspective. This calls for clear, longterm and stable policy frameworks in order to reduce the risks for investors. At the international level this requires more, and not less, collaboration between countries. There are also implications in terms of the choice of instruments. Traditional marketbased climate policy instruments, such as taxes and emissions trading schemes are particularly attractive on their own for several reasons, but should be integrated with technology-policy instruments using the revenues of the former to fund the later. Furthermore, the economic crisis provides an opportunity to apply an environmental tax reform. Finally, the counter-cyclical effects of a low-carbon investment package should not be underestimated.

Keywords: Recession, carbon mitigation, countercyclical policies

a Corresponding author. Institute for Public Policies and Goods, CSIC, C/Albasanz 26-28. 28037 Madrid, Spain. E-mail: pablo.delrio@cchs.csic.es b FEDEA and rede (Universidade de Vigo), Spain.
The authors are members of the FEDEA-Iberdrola chair on Economics of Climate Change and are thankful to Christian Egenhofer and Michael Hanemann for their suggestions. They are, however, fully responsible of any remaining errors or omissions. Funding from the Spanish Ministry of Education and Science (SEJ2006-12939) is gratefully recognized.

1. Introduction

Climate change mitigation is arguably one of the most important environmental and socioeconomic challenges currently facing humankind. There is a widespread scientific consensus that temperatures should not increase above 2ºC by 2010 as, otherwise, very dangerous impacts on ecosystems and human societies could result. This means that atmospheric concentrations of greenhouse gases (GHG) should be below 400 parts per million (ppm), while the concentration in 2005 was 375 ppm (IPCC 2007a). Indeed, reaching those concentration levels would require immediate and drastic emissions reductions1, with equivalent systemic changes in current behaviours, social organization and technologies. In this context, there is a pressing need for investments in the development, deployment and diffusion of low carbon technologies in the short, medium and long terms, especially in the energy and transport sectors.

In the last few months, however, there has been an increasing debate on how the current recession may impact climate change policies (Egenhoffer 2008). The irruption of the world financial crisis and its contagion to the real economy has reopened the well-known debate on the compatibility between economic development and environmental protection, but has also led to a wider discussion on the usefulness of environmental policies and actions within countercyclical packages. Climate change policies have been at the core of this debate as a result of their large visibility in recent times and, given the high carbonisation of our societies, of their potential economic implications. And all this in a context in which there are currently intensive international negotiations to replace the Kyoto Protocol.

On the one hand, some argue that the current economic crisis may reduce the priority given to climate policy because governments are likely to avoid burdening business and industry with extra costs and regulation at a time when the economy is fragile and jobs may be at risk (Wooders and Runnalls 2008). This assumes, therefore, a low political will to implement climate policy in the short term and a reduced incentive to participate in international agreements to tackle the issue in the longer term. On the other hand, there are advocates of exactly the opposite, i.e., that climate change provides an opportunity for a large programme of development and investment in low-carbon technologies that, in turn, could provide a way out of the recession (Greenpeace 2008)2. The fact that climate change mitigation is also associated to a reduction in the dependency on foreign fossil energy stocks, another major concern nowadays, and to (economic and environmental) improvements in energy efficiency is usually stressed as a positive factor in this debate.

1 In their famous article in Science, Pacala and Socolow (2004 p 968) claim that “reaching the stabilization target at 500 ppm (CO2 only) would require that emissions would be held near the present level of 7 billion tons of carbon per year (GtC/year) for the next 50 years, even though they are currently on course to more than double”. Furthermore, they show that stabilization at any level requires that net emissions do not simply remain constant, but eventually drop to zero. Similarly, the IPCC (2007a) estimates that, in order to reach stabilisation targets between 445-490 ppm in 2010 (all GHG, 350-400 ppm for CO2 only), global CO2 emissions should be reduced by 85% to 50% in 2050 with respect to 2000 levels. In a similar vein, the European Council (2007) and the European Commission (2009) recall that meeting the 2°C objective will require global greenhouse gas emissions to peak within the next 10 to 15 years, followed by substantial global emission reductions of up to 50% by 2050 compared to 1990.

How can the current recession affect the climate change problem, what are their likely impacts on climate change policies and what are the lessons for policy-making? These questions are subsequently dealt with in the next three sections of the paper. Indeed, we are interested in pinpointing the effects of the severe economic downturn on GHG emission trajectories and highlighting the new challenges and constraints that are likely to be faced by climate change policies (including adaptation and mitigation). The article certainly constitutes a first approximation whose main aims are to structure the debate around a key current issue and to provide some preliminary recommendations for public policies in the field.

2. The impact of the economic crisis on GHG emissions

Some commentators have pointed out that an economic crisis of the magnitude we are experiencing today may bring about positive environmental effects. This, which also applies to the problem of climate change, is related to the fact that a lower demand generally means less consumption and related emissions. Yet this message becomes less clear when we go beyond the obvious: a lower economic capacity may lead to the consumption of goods with an inferior environmental quality (and lower prices) and to an over-exploitation of resources in developing countries. Furthermore, the fall in the prices of some goods could encourage their consumption and their associated environmental degradation. This is clearly the case, nowadays, with energy prices, which may provoke an excessive and inefficient consumption and negative technological effects. In fact, low energy prices reduce the economic viability for the development and operation of cleaner technologies that, as indicated before, are crucial to tackle the climate change issue.

Indeed, since climate change is a problem with a very long-term horizon, the impact on investments in low-carbon technologies is an issue of utmost relevance. Whereas the short-term effects of the crisis on consumption are likely to result in a reduction in emissions, it is the longterm impact on investments which matters, and this is negatively affected by the economic crisis. Therefore, a main point is that the economic crisis may reduce temporarily the growth in GHG emissions but will not shift the world onto a low-carbon trajectory, i.e. it may aggravate carbon lock-in as explained below3.

2 For example, renewable energy is thought to be more employment-intensive than conventional sources of energy. In 2006, more than two million people globally were working in sectors related to renewable energy and that number could be as high as twenty million by 2030 (Johnson 2009). However, once the economy-wide effects are taken into account it is debatable whether such a gain from climate policy could result. This is an empirical issue to which only general equilibrium models can provide an answer.

In fact, the technologies of tomorrow needed to curb GHG emissions should be developed and implemented today, which could be affected by the economic crisis. Furthermore, in some sectors, existing infrastructures are long-lasting assets (up to 40 years in the electricity generation sector, for instance), which can not be economically replaced in the short term. Therefore, if currently carbon-intensive technologies and infrastructures reaching the end of their usage are not substituted by cleaner alternatives, and new technologies needed to cover the increase in energy use are based on conventional (fossil) energy sources, then the economy will continue to be trapped in a high-carbon trajectory for decades.

The problem is that the investment flows required to situate the world economy on a low-carbon path are substantial. Several documents provide an estimate of these flows, mostly for the 2030 horizon and in two scenarios: a reference scenario (also called business as usual or baseline scenario) and an alternative scenario (which usually foresees concentration levels allowing the world economy to stay below the 2ºC threshold. Concerning investments in the baseline scenario, in the 2008 edition of the IEA World Energy Outlook (WEO2008) cumulative investment in energy-supply infrastructure of 2007 US$ 26 trillion is projected over the 2007-2030 period, with more than half of it directed towards the power sector (IEA 2008a). The previous version of that report (WEO2007) (IEA 2007), and the IEA Energy Technology Perspectives document (ETP) (IEA 2008b) predicted a cumulative investment of US$ 22 trillion up to 2030, with the figure reaching US$ 117 trillion when investments in the demand side were considered. The ETP also identifies the investment needs up to 2050, with total cumulative figures in the Baseline scenario estimated at US$ 254 trillion.

The alternative scenarios differ between the previous studies. WEO2008 considers two climate policy scenarios: the 450 Policy Scenario, which leads to the stabilisation of greenhouse gases at 450 ppm CO2-eq, and the 550 Policy Scenario, leading to stabilisation at 550 ppm4. In WEO2007 the Policy Scenarios include the implementation of policies currently being considered by governments and a 550 Policy Scenario. In ETP two scenarios are considered: the ACT scenario, where emissions are stabilised in 2050, and the BLUE scenario emissions where reduced by

3 Carbon lock-in refers to the difficulty to shift the economy and technological systems into a low-carbon path. Whereas traditional economic approaches emphasize the role of existing physical infrastructures and the long age o the capital stock in key sectors (energy production and transport), more recent 'evolutionary' approaches consider a wide array of sources of carbon lock-in, including economic and non-economic barriers to changes in complex technological systems. A complete overview of these barriers is provided by Unruh (2000) and Marechal (2007).
2°C.
4 The 550 Policy Scenario equates to an increase in global temperature of approximately 3°C, the 450 Policy Scenario to a rise of around The 550 Policy Scenario involves a plateauing of greenhouse-gas emissions by 2020 and reductions soon after. The 450 Policy Scenarios involves much more substantial reductions after 2020. Even then, emissions overshoot the trajectory needed to meet the 450 ppm CO2 target, requiring greater emissions reductions after 2030. In both scenarios, total emissions are significantly lower in 2030 in all major emitting countries.

50% by 2050. As they contemplate emission constraints, investment flows considerably increase in those alternative scenarios. For example, in WEO2008 the 550 Policy Scenario requires an additional investment in power plants (more renewables, nuclear, and carbon capture and storage) and in energy efficiency that respectively represent 4.5% and 11.5% of the Reference Scenario. In WEO2007, however, investments in energy-supply infrastructure in the Policy Scenarios are lower than in the Reference Scenario, mostly due to reductions in energy use as a result of greater investments in energy efficiency appliances and equipment by consumers and firms. In ETP, additional investments associated to ACT and BLUE scenarios respectively represent 7% and 18% of baseline total investments and are equivalent to 0.4% and 1.1% of cumulative GDP between 2005 and 2050.

Ensuring that such paramount investment flows fully materialise is difficult on its own, but much more in a situation of economic recession. Therefore, at a time of economic crisis, carbon lock-in is more likely due to several factors.

First, as a result of the financial crisis, access to capital becomes more difficult and discourages investments in general (including investments in low-carbon technologies). This difficulty to raise cash will be so particularly in developing and less developed countries.

Second, given the long lifetime of most energy infrastructures and technologies5, the opportunities provided by capital cycles to replace carbon-intensive technologies by cleaner alternatives should not be missed. Albeit it could be argued that the lower demand for energy reduces the need for new investments, affecting the first factor, the substitution of technologies and equipment already written-off to cover even a lower demand would be inescapable. In this sense, the economic crisis influences the type of investments to be realised as well as the already implemented technologies. It is likely that investors will tend to prioritise less capitalintensive technologies, i.e., investments with lower up-front costs and shorter pay-back periods. This makes low-carbon capital-intensive technologies (such as renewables or nuclear energy) a less attractive option with respect to other technologies (such as combined cycle) which, in turn, has consequences for future target-compatible emissions (and concentrations) trajectories6.

5 As argued by IEA (2008), most IEA countries are entering a new investment cycle in power generation that provides an important opportunity to deploy cleaner and more efficient power generation technologies. Investment decisions taken over the next decade will lock in CO2 emissions for the next 40 to 50 years. For example, the PRIMES database for the EU shows that the average of thermal and nuclear plants operating in 2006 in the EU was roughly 23 years (EC 2008). Coal plants are substantially older than other fossil-fuels plants: 80% of coal (and lignite) plants operating today had been commissioned before 1990, which means that many should be replaced in the next two decades. Significant climate change mitigation will be only possible if they are substituted by low-carbon alternatives. 6 Precisely, those technologies will be needed to substantially curb emissions. Several simulation models show that these trajectories require that some decisions are already taken concerning the substitution of technologies and tha this involves substituting carbon-intensive for low-carbon technologies. For example, in the emissions reduction scenarios considered by the IEA (2008) the electricity system shifts to more capital-intensive renewables and nuclea generation.

Again, the challenge posed by the greater up-front investment needs of low-carbon technologies will be particularly significant for developing countries, where rapid economic growth is driving investments in proven low-cost fossil fuel technologies (IEA 2008).

Third, company managers will probably postpone the development of a corporate climate change strategy in times of economic crisis, as it usually occurs with other environmental issues in the corporate strategy.

Finally, climate policy is likely to be downplayed in economic recessions. Climate change issues might be given a lower priority because voters tend to prefer visible short-term actions at the expense of initiatives with (uncertain) long-term benefits. They will hardly be convinced that a policy which mainly aims to solve a long-term problem should be given priority with respect to short-term issues. This short-term focus (and bias) is always a problem for the implementation o climate policy (del Río and Labandeira 2009), but it is certainly aggravated during economic recessions7.

There are, however, two major ways through which climate policies could circumvent constraints to the investments in low-carbon technologies and increase their attractiveness versus their fossil-fuel counterparts. Either by creating a carbon price (which increases the variable costs o the dirtier technologies and, thus, their pay-off period, making the low-carbon alternatives more competitive) or by earmarking direct investment support to the cleaner alternatives through different types of support. The latter include direct subsidies to low-carbon technologies in the different stages of the technological change process: development (R&D subsidies), precommercialisation (demonstration projects) and commercialisation (capital grants for up-front investments or production subsidies, as in the case of feed-in tariffs for renewable energy technologies in most European countries)8.

Political economy thinking suggests that, at the national level, it is not politically profitable to increase the stringency (and costs) of climate policies. Doing so at times of economic recession is even less likely. If lenient emissions targets are adopted, then carbon prices in domestic emissions trading systems (ETS) implemented to comply with them will tend to be low. If the government prefers a carbon tax, again this will be low given the concerns on negative impacts on the competitiveness of domestic industries and, eventually, leakage problems. If countries already have targets and an ETS (as is the case in the EU) then the economic crisis will tend to result in less ambitious future targets and/or the introduction of design elements which are less costly for polluters (for example, grandfathering of allowances instead of auctioning) but not necessarily for society as a whole. Furthermore, it should be taken into account that the economic recession would probably put a downward pressure on carbon market prices in existing ETS and discourage the introduction, deployment and diffusion of low-carbon technologies. An obvious solution could be the use of taxes, albeit the decline of energy prices associated to the recession would require higher than usual tax rates to foster technological change and behavioural changes. Yet ETS would be still viable if their design allow for keeping prices over a given floor at any moment.

7 According to a new Pew Centre Survey (PEW 2009), solving global warming has become the lowest policy priority of American citizens, out of 20 possible priorities. Only 30% of Americans believe that global warming is a top priorit (versus 38% who believed so in 2007), while 85% and 82% believe that the economy and jobs are much more relevant in this regard.
8 The most appropriate instrument will partly depend, as seen in section 4, on the stage of technological maturity of the different alternatives.

Low prices of conventional energy goods are not the only recession-related barrier for technological development. As a result of the current financial constraints, and the competition for scarce resources, private and public investments in environmental R&D will be seriously limited. Moreover, restrictions in public funding may negatively affect promotion schemes of low-carbon technologies (for example, feed-in tariffs for renewable energy), negatively influencing their development, deployment and diffusion.

Therefore, the crisis reduces the likelihood that technological policies and more stringent emissions targets are applied (i.e., the likelihood that high carbon prices result). In both cases the dynamic efficiency of mitigation policies is reduced, i.e., there are less incentives for low carbon technologies in all the stages of the technological change process, including mature and immature technologies.

Of course, it can also be argued that some firms and governments have opportunistically used the crisis to wriggle off the climate-change hook. Some governments in Eastern European countries have begun to challenge EU emission-reduction targets, fearing they will hit industry at the worst time. In any case, all the preceding issues will have clear influences on the international discussions for a global agreement to replace the Kyoto Protocol.

To sum up, this section has advanced several possible ways in which the current economic recession may affect GHG trajectories. From our analysis it seems clear that, contrary to naïve interpretations on the beneficial environmental effects from the economic crisis, the severe economic downturn currently taking place is likely to:

• Restrict funds available for investment in new equipment and technologies, which would result in lifetime extension of existing facilities and technologies (i.e., through retrofitting of old plants).

• Lead to the substitution of existing technologies reaching the end of their technical life for high-carbon alternatives, which would lead to carbon lock-in and would preclude attaining the 2ºC target.

• Reduce the likelihood that effective climate change policies are adopted, both at public and private (corporate) levels9.

3. Lessons and implications for climate policy-making

It is our view that climate change mitigation may provide investment and development technological opportunities that could contribute to reduce the impact of the crisis, acting as a countercyclical device. Myopic visions, as some of those advanced above, also forget that the problem of climate change is sufficiently urgent and serious to require immediate and significant actions.

A first and major lesson from the current economic crisis is that social goals require government involvement and climate change is no exception. The scientific community has sent a clea message on the potential damages of this phenomenon showing that, at best, the welfare potential of future generations would be seriously handicapped (see IPCC 2007b). The risks o delaying action would be excessive and would have a detrimental long-term socio-economic impact, as stressed by Stern (2007) and others. Furthermore, the ancillary benefits of climate change policies are rather short-term and tangible and include positive employment effects and diversification of energy sources (increased security of supply), among others.

Therefore, climate policy is still needed and justified at times of economic hardship. Yet climate policy is necessarily wide and diverse: the involvement of all sectors in the economy, the use of a wide array of policy tools, or the combination of mitigation and adaptation strategies (given the existing inertias of climate change), show the complexities and possibilities associated to them. Although many grandiloquent terms have been used to illustrate the idea of a countercyclical carbon package that combines the resources and possibilities of climate policies (Green New Deal, Low-carbon Marshall Plan, Third Industrial Revolution etc.), in this paper we focus on the use of technology-driven mitigation policies for the reasons stated in the Introduction10. In the same vein, Stern argues that responding to the financial crisis requires substantial fiscal expansion that could preferably be spent in R&D to effect a technological transition to a lower carbon economy11. The sort of expenditure required will need to be labour intensive in the short term and have long-term positive impacts so that the global economy comes out of the crisis and is put onto a low-carbon economic growth path.

9 In this sense, Stern has recently advised against this phenomenon by comparing climate change to the current credit crisis: "we must have learned from this very serious financial problems to look ahead and think about the consequences of our actions. We have to treat climate change in the same way. If we leave this for 15 to 20 years, we will be in very difficult circumstances” (interview to Nicholas Stern, BBC 2008).
10 The countercyclical possibilities of direct expenses in retrofitting and new developments of low carbon infrastructures are clear. Also, the role of adaptation to the expected climatic changes may bring about an intense use of labour and capital. In all those cases, actions may be associated to local appropriation of benefits and with the

In any case, an economic recession strengthens the case for a suitable design of climate policies. Good policy design is always desirable but, in a context of less resources and larger financia risks, it becomes even more necessary. Although we intend to derive some policy recommendations that may be useful for the current situation, providing a detailed analysis of how future climate change policies should be defined is clearly beyond the scope of the article.

A first and important implication of the economic crisis on policies is that they need to be as stable as possible to reduce the risks for investors at a time of credit restrictions and difficulties to access capital markets. First, at a moment of high risk aversion, lacking a long-term credible international climate policy agreement could negatively add to such risks and, thus, be particularly damaging for climate change mitigation efforts12. Therefore, it is not a time for less but rather for more international collaboration on this issue, particularly between developed and developing countries. This need for clear, long-term and stable policy frameworks also applies to national climate policies as stressed by the literature on investment in low-carbon technologies (see e.g. Ragwitz et al 2007 for the case of renewables). Certainly, no additional risk premiums to invest in low-carbon technologies are needed as a result of discontinuous policies, although this does not mean that some flexibility (i.e., minor changes) can not be introduced within stable policy frameworks to take changing circumstances into account (Del Río 2009a).

A second implication of the crisis on climate policies is related to the countercyclical implications of instrument choice and application. Ideally, new opportunities to simultaneously contribute to economic expansion and to mitigate the weaknesses of the current energy system should be promoted through climate policy tools. Now the issue is how to combine different regulatory approaches in the energy and environmental realms, while simultaneously adapting them to a situation of crisis.

presence of short-term effects, which obviously enables their practical application. Yet, the treatment of those alternatives is beyond the objectives and possibilities of this paper.
11 Note that this proposal would also be shared by those who argue that we do not need another Kyoto-like climate change agreement, but rather direct investments (in the form of public funding of R&D) in low-carbon technologies. For example, Lomborg (2009) claims thatevery country should spend 0.05% of its gross domestic product on low-carbon energy R&D.
12 Capital stock built in the next decade may still be in use by 2050. There is an urgent need to clarify and agree on a set of longterm objectives to minimise the risk of needing to replace capital stock prematurely and possibly at substantial additional costs. This is especially the case for power plants, buildings and industrial installations. In addition, long-term policy aims need to be settled quickly so as to reduce the policy risks faced by investors (IEA 2008b).

The preference of economists for market-based, price or flexible incentives within environmenta policies is well known. These instruments allow for the internalisation of the environmental externality in a cost-effective manner, providing some incentive for technological change (Baumol and Oates 1988). The use of these market-based instruments within a so-called Green Tax Reform (GTR) represents the more ambitious version of these instruments (Gago and Labandeira 2000). The idea behind a GTR is that revenues from carbon taxes (or auctioned permits) can be used to reduce other distortionary taxes and thus provide a double dividend (environmental and fiscal benefits).

The economic crisis increases the attractiveness of market-based instruments for several reasons. First, because the economic crisis increases the need for instruments which are costeffective (in both a static and a dynamic sense). Second, as hinted before, because marketbased instruments that correct prices are particularly needed in a deflationary context for energy since they tackle the externality problem and promote the development and diffusion of cleaner technological alternatives. Third, because the social implementation of market-based incentives benefits from a context of low energy prices, in contrast to situations of high oil prices. Fourth, because a sustained increase in the prices of energy products favours improvements in energy efficiency, which in addition to contributing to climate mitigation, reduces the external dependence and vulnerability of energy sources.

Moreover, a GTR in which the revenues from carbon prices are used to reduce taxes on labour is particularly interesting in this context of economic crisis and mounting unemployment. This is so because public deficits are likely to increase in order to finance the economic expansion and a GTR does not involve a loss in public receipts (i.e., it is revenue-neutral). Yet another revenueneutral option would be to use the revenues from the market-based incentive policy (taxes or ETS) to raise funds to finance the technological policy (R&D, demonstration). As indicated in the previous section, the idea is that revenues from carbon taxes (or auctioned allowances in ETS) are used to spur investments in the development or diffusion of green technologies that would provide new business opportunities.

In fact, the use of revenues from GTR to directly support the development and diffusion of lowcarbon technologies has not received much attention. Most GTR were thought of (in theory and practice) to induce efficiency gains (simultaneous reduction of externalities and excess burdens of conventional taxes). However, we believe that the new technologically-driven version of GTR constitutes a clear opportunity at a moment when the funding and incentives for the development and adoption of new technologies are scarce and energy prices are very low. In the environmental technological change literature, it has been recognised that the role of government is often most effective when it combines “supply-push” support (i.e., focus on R&D and technology standards) with “demand-pull” instruments (i.e. a focus on influencing the market through economic incentives such as regulation, taxation or guaranteed purchase agreements). A low-carbon technological transition depends on this combination

One of the reasons for the aforementioned combination lies in the different degree of effectiveness of the instruments and the distinct roles of the public and private actors in different stages of this technological change process. Whereas supply push and government involvement through direct technology support tends to be relatively more relevant in the first stages (technological development), demand pull, private sector investment and market incentives (taxes and emissions trading) are more needed in latter steps of the process (i.e., commercialisation and diffusion). This is so because, as argued by IEA (2008b), the degree of risk and speculation changes along the technological change process. Accordingly, the role of government changes due to changes in the degree and nature of the market failure. Whereas the “technological” externality is a more relevant barrier in the first stages of a low-carbon technology life-cycle, the “environmental” externality is more important in later stages13. Private sector competition is a significant driver of technology innovation. However, government support is essential in many cases to initiate the process of technology innovation and to facilitate successful deployment. Government-funded energy R&D can play a critical role in solving difficult technical problems that markets may fail to address. Public funding for full-scale “in the field” demonstration projects can also, in many circumstances, be critical for learning effects to occur, allowing technologies to advance along their learning curve and reduce their costs.

Given the long-lasting capital stock in some sectors (transport and power generation), a price incentive (combined with long-term emission targets which ensure that there will also be a carbon price in the long-term) will facilitate substitution by less carbon-intensive infrastructures and technologies and mitigate to some extent the lock-in problem. Policies need to be implemented now in order to avoid lock-in in long-lasting infrastructures which may make the achievement of more stringent mitigation targets more difficult (and costlier) given the long useful lifetimes of power plants. Measures like that would provide a price signal and ensure that plants fully depreciated can be replaced by mature and low-cost low-carbon technologies. Demonstration projects, support for R&D and creation of protected niches for currently promising, immature and high-cost technologies will hopefully allow the improvement and cost reductions in those technologies and put them “on the shelf” to replace the older ones. If they have not been allowed to reduce their cost and remain uncompetitive, such substitution will take place at a much greate cost (del Río 2009b). Carbon prices may not be enough to encourage the development of immature low-carbon technologies or they may have to be too high to encourage the uptake of mature but currently high costs climate-friendly technologies with a large cost-reduction potential. Technology policy instruments are more suitable for these later types of technologies, whereas market-based incentives are more appropriate to encourage the deployment and diffusion of fully mature ones.

13 The “double externality problem” provides an economic rationale for the public support for low-carbon technologies (del Río 2004; Newell 2008). The “environmental externality” refers to the lack of internalisation of the negative environmental externality resulting from CO2 emissions, which leads to lower than optimal costs for conventional technologies and, thus, lower than optimal deployment levels for low-carbon technologies. The technological externality is related to the public good nature of technological innovation, which results from spillover effects enabling copying of innovations and reducing the incentive to innovate.

Albeit the previous technological reinterpretation of GTR seems particularly well suited at times of economic crisis to tackle climate change phenomena, other revenue uses could include the design of packages to offset distributional effects associated to the economic crisis or to the very application of carbon policies. In this sense, GTR revenues could be also used to fund direct subsidies for the poor or to the sectors mostly affected by regulatory policies due to leakage or loss of competitiveness.

On the other hand, it can be expected that the economic crisis increases the relevance of international coordination within traditional climate change policies. It is obvious that, in a context of generalised job losses and substantial reductions in economic activity, the phenomenon of emissions leakage (the relocation of production/GHG emissions to countries without climate change policies) will receive a special attention and may influence the definition of future policies or the change in currently implemented policies. Leakage can be triggered by the existence o differential costs to producers due to direct or indirect (e.g. through electricity consumption) emissions, and it is likely to occur when: i) climate policy commitments are globally incomplete, ii) GHG costs are relatively high, and iii) GHG costs cannot be passed to final commodity prices due to international competition. When final products are highly specialized (i.e. less exposed to international competition) or if other aspects dominate location decisions (infrastructures, human capital, transport costs, exchange rate risks, socio-political environment, etc.), leakage is less probable.

Several options have been considered by academics, policy makers and commentators to tackle the impact of regulations on GHG emissions in the presence of leakage. A straightforward option would be to use border tariff adjustments to avoid the economic and environmental costs associated to the loss of competitiveness and leakage phenomena. However, the previous procedures may be difficult to apply from both practical (how to calculate the border tax or the consumption-based allocation?) and legal perspectives (e.g. WTO limitations to the use of border tariff adjustments). In that case, Hoel (1996) has theoretically demonstrated that carbon intensive tradable sectors should face a lower carbon cost than other sectors of the economy. Indeed, this phenomenon has been already very common in real-world climate change policies. Most Scandinavian countries introduced GTR during the 1990s, although the perceived negative effects of GTR on the competitiveness of the rather sizeable energy intensive industries largely left these sectors exempted from the tax. GTR focused instead on households and producers not open to international markets (Zhang and Baranzini 2004), which can be another clue for climate policies during this recession.

Finally, it is likely that the economic crisis will induce significant changes in the design of mechanisms for the participation of developing countries (particularly, China and India). These changes are crucial for the success of a world strategy in this field. It is likely that explicit technological support to these countries will play a crucial role in this context, contributing to justify the foreseeable technological effort of the developed world (see above) and to limit the impact of the economic crisis on lower-income countries.

4. Conclusions

We have argued that the current economic crisis opens up new and unknown opportunities for new climate policy strategies which complement the more traditional regulatory approaches. The magnitude of the economic resources that should be mobilised in the transition towards a more sustainable energy system allows us to foresee a great role of counter-cyclical public policies. This has recently been understood by the Obama administration, which has included the necessary resources to double the production of energy from alternative sources in the next three years within its package to mitigate the economic crisis.

The technological and infrastructural revolution associated to the new energy paradigm may contribute to surmount the economic crisis. A counter-cyclical public intervention based on the support for low-carbon technologies will probably be more efficient than other available alternatives, often just focused on increasing aggregate demand, in terms of technological performance and productivity, while simultaneously enhancing the long-term growth potential of the economy. The challenge is monumental, however, because virtually all sectors are involved.

Apart from this rather intuitive message, the paper has proposed the reinterpretation of a well known environmental scheme, GTR, at times of economic crisis. A GTR whose revenues may be totally or partly devoted to technological advances to promote the drastic and immediate reductions of GHG emissions that are needed to tackle climate change phenomena, is especially suited for a recessive context. On the one hand, it raises (depressed) prices fossil-fuel energy and thus provides for more energy efficiency, less externalities and more incentives to develop climate-friendly technologies. On the other hand, it directly promotes the development of new lowcarbon technologies that can be the only solution of the environmental problem and simultaneously provide new jobs and investments at times of economic crisis. Finally, it does so without burdensome resource requirements in a moment with a remarkable, crisis-related, depletion of public funds

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