Climate Policy-Induced Investments in Developing Countries: The Implications of Investment Risks

26 Pages Posted: 26 Feb 2008

See all articles by Christoph Böhringer

Christoph Böhringer

University of Oldenburg - Economic Policy; Centre for European Economic Research (ZEW)

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics

Abstract

International climate policy has assigned the leading role in emissions abatement to the industrialized countries while developing countries remain uncommitted to binding emission reduction targets. However, cooperation between the industrialized and the developing world through joint implementation of emission abatement promises substantial economic gains to both parties. In this context, the policy debate on joint implementation has addressed the question of how investment risks to project-based emission crediting between industrialized countries and developing countries affect the magnitude and distribution of such gains. In our quantitative analysis, we find that the incorporation of country-specific investment risks induces rather small changes vis-à-vis a situation where investment risks are neglected. Only if investors go for high safety of returns is there a noticeable decline in the overall volume of emission crediting and the associated total economic benefits. While the welfare effects of risk incorporation for industrialized countries are unequivocally negative, the implications across developing countries are ambiguous. Whereas low-risk developing countries attract higher project volumes and benefit from higher effective prices per emission credit compared to a reference scenario without risk, the opposite applies to high-risk countries. The politically undesired shift in comparative advantage of emission abatement against high-risk, typically least-developed, countries may become larger if risk-averse investors perceive large differences in project-based risks across countries. In this case, only very cheap mitigation projects in high-risk countries will be realized, driving down the respective country's benefits from emission crediting to the advantage of low-risk developing countries.

Suggested Citation

Bohringer, Christoph and Löschel, Andreas, Climate Policy-Induced Investments in Developing Countries: The Implications of Investment Risks. World Economy, Vol. 31, Issue 3, pp. 367-392, March 2008, Available at SSRN: https://ssrn.com/abstract=1096759 or http://dx.doi.org/10.1111/j.1467-9701.2007.01075.x

Christoph Bohringer (Contact Author)

University of Oldenburg - Economic Policy ( email )

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany
+49 6211235200 (Phone)
+49 6211235226 (Fax)

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/eroe

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