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Published by: SK m Nirob (mithu) on Jan 30, 2014
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Zentrum für EuropäischeWirtschaftsforschung GmbH
Centre for EuropeanEconomic Research
Discussion Paper No. 02-68
Climate Policy Induced Investmentsin Developing Countries
The Implications of Investment Risks
Christoph Böhringer and Andreas Löschel
Discussion Paper No. 02-68
Climate Policy Induced Investmentsin Developing Countries
The Implications of Investment Risks
Christoph Böhringer and Andreas Löschel
Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:
Nontechnical Summary
This paper investigates the implications of investment risks in climate policy inducedinvestments in developing countries. Emission crediting provides market-based incentives toinvest in climate-friendly (i.e. emission mitigation) projects since emission reductions can besold on international permit markets, thus recovering higher initial investment costs. Weprovide a quantitative assessment of how investment risks to project-based emission creditingbetween industrialized countries and developing countries affect the magnitude anddistribution of economic gains from joint implementation of emission abatement. Based on amulti-region partial equilibrium model of marginal carbon abatement cost curves, we find thatproject-based emission crediting in developing countries drastically reduce the overall costsfor industrialized countries that aim at substantial cutbacks of their business-as-usual emissionlevels. At the same time, it provides considerable income to developing countries with largerlow-cost abatement options. The incorporation of country-specific investment risks inducesonly small changes to the magnitude and distribution of benefits from project-based emissiontrading vis-à-vis a situation where investment risks are absent. Only if investors are highlyrisk-averse will the differences in risk across developing countries become more pronouncedand induce a non-negligible shift in comparative advantage from high-risk developingcountries to low-risk developing countries. Although the total amount of emission creditsacross all developing countries will distinctly shrink for this case (i.e. domestic abatementshares in industrialized countries increase), the low-risk developing countries may attracthigher project volumes at the expense of high-risk countries and may also benefit from highereffective prices per emission credit compared to a simulation without risk. The oppositeapplies to high-risk countries. The welfare implications of risk incorporation for industrializedcountries are unambiguously negative. Sensitivity analysis with respect to the magnitude of investment risks highlights the relevance of risk aspects. When investors go for high safety of returns and perceive substantial differences in project-based risks across countries, only verycheap projects in high-risk developing countries will be realized, and the associated benefitsto high-risk countries may fall close to zero, while low-risk developing countries will fareeven better. Our results are supported by empirical evidence on regional imbalances of activities implemented jointly under the pilot phase of the Kyoto Protocol.

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