Publications

Summary

Climate policies can be applied either upstream, where fossil fuels are extracted, or downstream, where emissions are generated. Specific policy instruments can be defined for either level, and can take the form of a price signal such as through a tax, or a quantity limit such as through direct regulation or a permit market. In this study, we present an agent-based model to compare the performance of these different instruments and regulation levels. Since policy coverage is often limited, i.e. not all firms being under the regulator’s control, we also examine the impact of incomplete coverage on relative policy performance. Our analysis shows that only upstream regulation leads to an increase in fossil fuel prices, which is benefitial under limited coverage as it also affects firms not directly affected by the policy instruments; that prices under quantity-based regulation can decline after an initial peak, stabilizing at a lower level than under the tax; and that direct regulation is more efficient when applied upstream.

Summary

The extent to which adopting energy-efficient technologies results in energy savings depends on how such technologies are used, and how monetary savings from energy efficiency are spent. Energy rebound occurs when potential energy savings are diminished due to post-adoption behaviour. Here we review empirical studies on how six behavioural regularities affect three energy-relevant decisions and ultimately rebound: adoption of energy-saving products or practices, their intensity of use and spending of associated monetary savings. The findings suggest that behaviours that reflect limited rationality and willpower may increase rebound, while the effects of behaviours driven by bounded self-interest are less clear. We then describe how interventions associated with each of the behavioural regularities can influence rebound and thus serve to achieve higher energy savings. Future research ought to study energy-relevant decisions in a more integrated manner, with a particular focus on re-spending as this presents the greatest challenge for research and policy.

Summary

We assess evidence from theoretical-modelling, empirical and experimental studies on how interactions between instruments of climate policy affect overall emissions reduction. Such interactions take the form of negative, zero or positive synergistic effects. The considered instruments comprise performance and technical standards, carbon pricing, adoption subsidies, innovation support, and information provision. Based on the findings, we formulate climate-policy packages that avoid negative and employ positive synergies, and compare their strengths and weaknesses on other criteria. We note that the international context of climate policy has been neglected in assessments of policy mixes, and argue that transparency and harmonization of national policies may be key to a politically feasible path to meet global emission targets. This suggests limiting the complexity of climate-policy packages.

Summary

A price on emissions can be achieved through an emission tax or permit trading. The advantages and drawbacks of either instrument are debated. We present an agent-based model to compare their performance under bounded rationality and dynamic markets. It describes firms that face uncertainty about future demand and prices; use heuristic rules to decide production levels, trading prices, and technology adoption; and are heterogeneous in terms of production factors, abatement costs, and trading behavior. Using multiple evaluation criteria and a wide range of parameter values, we find that the main difference between the two policies lies in the fact that permit prices fall after successful abatement. This can lead to higher production levels under permit trading, but can also drive emission-efficient firms out of the market. Scarcity rents under permit trading can further create higher profit rates for firms, the extent of which is shown to depend on the mechanisms for market-clearing and initial allocation.

Summary

This survey discusses behavioral and experimental macroeconomics, emphasizing a complex systems perspective. The economy consists of boundedly rational heterogeneous agents who do not fully understand their complex environment and use simple decision heuristics. Central to our survey is the question of under which conditions a complex macro-system of interacting agents may or may not coordinate on the rational equilibrium outcome. A general finding is that under positive expectations feedback (strategic complementarity)—where optimistic (pessimistic) expectations can cause a boom (bust)—coordination failures are quite common. The economy is then rather unstable, and persistent aggregate fluctuations arise strongly amplified by coordination on trend-following behavior leading to (almost-)self-fulfilling equilibria. Heterogeneous expectations and heuristics switching models match this observed micro and macro behavior surprisingly well. We also discuss policy implications of this coordination failure on the perfectly rational aggregate outcome and how policy can help to manage the self-organization process of a complex economic system. (JEL C63, C90, D91, E12, E71, G12)

Summary

Financial constraints have an important impact on the development of eco-innovations but their effect varies according to the type of funding. This article studies the interaction between public funding on the one hand, and internal and external lack of funding on the other. The empirical analysis is based on a sample of European small- and medium-sized enterprises, and exploits information on firms’ involvement in eco-innovation activities, their drivers, and obstacles. Our results show that, even accounting for demand-pull effects and regulatory interventions, access to public funds and fiscal incentives is effective for improving the firm’s ability to introduce eco-innovations, particularly if the company has ample funds from either internal or external sources. Our findings suggest also that public funding is perceived by firms as complementary to other external finance.

Summary

We analyze the effectiveness of environmental policy when consumers are subject to social influence. To this end, we build a model of consumption decisions driven by socially-embedded preferences formed under the influence of peers in a social network. This setting gives rise to a social multiplier of environmental policy. In an application to climate change, we derive Pigouvian and target-achieving carbon taxes under socially-embedded preferences. Under realistic assumptions the social multiplier is equal to 1.30, allowing to reduce the effective tax by 38%. We show that the multiplier depends on four factors: strength of social influence, initial taste distribution, network topology and income distribution. The approach provides a basis for rigorously analyzing a transition to low-carbon lifestyles and identifying complementary information and network policies to maximize the effectiveness of carbon taxation.

Summary

We present a large-group experiment in which participants predict the price of an asset, whose realization depends on the aggregation of individual forecasts. The markets consist of 21 to 32 participants, a group size larger than in most experiments. Multiple large price bubbles occur in six out of seven markets. The bubbles emerge even faster than in smaller markets. Individual forecast errors do not cancel out at the aggregate level, but participants coordinate on a trend-following prediction strategy that gives rise to large bubbles. The observed price patterns can be captured by a behavioral heuristics switching model with heterogeneous expectations.

Summary

Agent‐based models (ABMs) have recently seen much application to the field of climate mitigation policies. They offer a more realistic description of micro behavior than traditional climate policy models by allowing for agent heterogeneity, bounded rationality and nonmarket interactions over social networks. This enables the analysis of a broader spectrum of policies. Here, we review 61 ABM studies addressing climate‐energy policy aimed at emissions reduction, product and technology diffusion, and energy conservation. This covers a broad set of instruments of climate policy, ranging from carbon taxation, and emissions trading through adoption subsidies to information provision tools such as smart meters and eco‐labels. Our treatment pays specific attention to behavioral assumptions and the structure of social networks. We offer suggestions for future research with ABMs to answer neglected policy questions.