The Unassuming Economist

From VoxEU post by Mengjia Ren, Lee Branstetter, Brian Kovak, Daniel Armanios, Jiahai Yuan:

“Despite leading the world in clean energy investment in recent years, China continues to engage in massive expansion of coal power thanks to policies that effectively subsidise and (over)incentivise coal power investment. This column examines the effects of the 2014 devolution of authority from the central government to local governments on approvals for coal power projects. It finds that the approval rate for coal power projects is about three times higher when the approval authority is decentralised, and provinces with larger coal industries tend to approve more coal power.

After three decades of building up its capital stock, China has entered a phase where efficient allocation of capital resources is vitally important for sustained economic growth. However, due to governance problems and market distortions, many key industries in China have experienced serious capital misallocation and overcapacity issues in the past few years, with the energy industry being one of the most salient examples.

In line with high-profile government pledges to transform China’s energy system, China has led the world in investment in clean energy. In 2015 alone, China built a soccer field of solar panels every hour and one large wind turbine every hour (Carbon Tracker Initiative 2016), easily outpacing green energy investment in any other country. However, at the same time, China was building two coal plants per week. China approved nearly 200 gigawatts of new coal power capacity in 2015, even though the total capacity of the existing coal plants was 884 gigawatts (Ren et al. 2019). Competition from coal power has led to massive curtailment of wind and solar power generation because power grids were obligated to purchase a certain amount of coal power and thus had to reject much of the energy generated by China’s wind and solar power plants.

In the past five years, utilisation levels of all energy types fell sharply as growth in energy supply shot past energy demand (Figure 1 and Table 1). Nearly 50% of China’s coal power plants faced net financial loss in 2018 (Ji 2018). While policy efforts¹ have been made to contain the coal overcapacity crisis, under the existing governance structure and market rules, coal power investment in China is unlikely to return in the near future to an equilibrium where plants can still profit under a competitive market price of electricity. It also seems likely that coal power will continue to crowd out solar and wind power for the foreseeable future, raising concerns that China’s vaunted transition to a less carbon-intensive economy will not be managed efficiently.

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From an IMF working paper by Nicoletta Batini:

“France is the top agricultural producer in the European Union (EU), and agriculture plays a prominent role in the country’s foreign trade and intermediate exchanges. Reflecting production volumes and methods, the sector, however, also generates significant negative environmental and public health externalities. Recent model simulations show that a well-designed shift in production and consumption to make the former sustainable and align the latter with recommended values can curb these considerably and generate large macroeconomic gains. I propose a policy toolkit in line with the government’s existing sectoral policies that can support this transition.”

From the IMF’s latest report on Senegal:

“The natural resource landscape in Senegal has changed substantially following significant oil and gas discoveries between 2014 and 2017. This paper estimates the macroeconomic impact of these discoveries and discusses potential fiscal frameworks for managing related revenues. Pre-production investment (2019-2021) will lead to an increase in the current account deficit, but this will be followed by a boost to exports as hydrocarbon production comes online (2022 onwards). Discoveries are important but will not lead to a major transformation of the economy, with hydrocarbons expected to make up not more than 5 percent of GDP. Fiscal revenues would average about 1.5 percent of GDP over a 25-year period and about 3 percent of GDP when production peaks. Given the relatively small gains in revenue, staff recommends a fiscal framework that allows for an initial draw down of government resources to finance large up-front investment needs, followed by an appropriate target level of the non-resource primary balance which is to serve as a medium-term fiscal anchor. Issues related to managing the volatility of resource revenues are also discussed.”

From a new paper by Tarek Atalla, Simona Bigerna and Carlo Andrea Bollino:

“In the global carbon policy debate, pricing is considered to be a key instrument to achieving the desired levels of emissions reductions.

The Pigouvian tax is theoretically the best solution to tax carbon emissions, in order to achieve emissions reduction through financial investment, but it has not proved to be politically viable. A Pigouvian tax sets out to correct negative externalities, or consequences for society – such as the consequences of climate change – by levying additional taxes. However, from the viewpoint of the private sector, such taxation imposes a deadweight loss with respect to the original private equilibrium. This generates political resistance that may impede achieving the theoretical optimal solution.

Most international policy meetings since the Kyoto Protocol agreement have resulted in lukewarm commitments from developed economies and strong resistance from emerging economies over the fair economic allocation of the burden associated with the various calls for emissions reduction. This kind of situation suggests the need for alternative formulations, in the realm of what economists call ‘second-best options,’ to tackle the issue of realistically financing alternative policies.

This paper considers alternative policy formulation aimed at funding investment for climate policies, based on the principle of minimizing deadweight losses associated with taxation and on consumer preferences. (A deadweight loss is the added burden placed on consumers and suppliers when the market equilibrium is altered because of tax, for example. It results when supply and demand are out of equilibrium.)

The policy proposal we examine here is a Ramsey allocation, which aims at designing an economically optimal taxation scheme for financing climate mitigation investments. A Ramsey pricing policy, applied to energy prices, would mean that efficient taxation should be inversely proportional to the consumer (household) energy demand elasticity of the individual country. In other words, the more inelastic a country’s consumer energy demand, the higher the efficient taxation should be in that country. The overall taxation scheme is optimal because it minimizes the deadweight loss.

This strategy is not aimed at directly reducing emissions, and hence energy consumption. It can, in a more general way, help to assist with providing efficient funding for a wider range of policies, such as carbon sequestration, alternative fuels, energy efficiency, and the earth’s albedo enhancing. In this framework, notice that carbon sequestration and artificially enhancing the earth’s albedo represent technological solutions aimed at reducing carbon dioxide (CO2) concentration and adding sunlight reflecting aerosol in the soil
or stratosphere, thereby cooling the climate in a different way than reducing carbon emissions (NAS 1992). The strategy makes explicit use of household preferences, as expressed through their energy demand behavior, econometrically estimated at the world level.

A Ramsey allocation can be integrated into the general principle of mutual cooperation that motivates climate agreements, as it reflects a common but differentiated burden of all parties.”

From a new IMF working paper by Bertrand Gruss and Suhaib Kebhaj:

“This paper presents a comprehensive database of country-specific commodity price indices for 182 economies covering the period 1962-2018. For each country, the change in the international price of up to 45 individual commodities is weighted using commodity-level trade data. The database includes a commodity terms-of-trade index which proxies the windfall gains and losses of income associated with changes in world price as well as additional country-specific series, including commodity export and import price indices. We provide indices that are constructed using, alternatively, fixed weights (based on average trade flows over several decades) and time-varying weights (which can account for time variation in the mix of commodities traded and the overall importance of commodities in economic activity). The paper also discusses the dynamics of commodity terms of trade across country groups and their influence on key macroeconomic aggregates.”