Tag: Environmental policy

Navigating Environmental Policy Consistency Amidst Political Change

Posted on May 6, 2024 | Policy Brief

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Europe, like other parts of the world, currently grapples with the dual challenges of environmental change and democratic backsliding. In a context marked by rising populism, misinformation, and political manipulation, designing credible sustainable climate policies is more important than ever. The 2024 annual Energy Talk, organized by the Stockholm Institute of Transition Economics (SITE), gathered experts to bring insight into these challenges and explore potential solutions for enhancing green politics.

In the last decades, the EU has taken significant steps to tackle climate change. Yet, there is much to be done to achieve climate neutrality by 2050. The rise of right-wing populists in countries like Italy and Slovakia, and economic priorities that overshadow environmental concerns, such as the pause of environmental regulations in France and reduced gasoline taxes in Sweden, are significantly threatening the green transition. The current political landscape, characterized by democratic backsliding and widespread misinformation, poses severe challenges for maintaining green policy continuity in the EU. The discussions at SITEs Energy Talk 2024 highlighted the need to incorporate resilience into policy design to effectively manage political fluctuations and ensure the sustainability and popular support of environmental policies. This policy brief summarizes the main points from the presentations and discussions.

Policy Sustainability

In his presentation, Michaël Aklin, Associate Professor of Economics and Chair of Policy & Sustainability at the Swiss Federal Institute of Technology in Lausanne, emphasized the need for environmental, economic, and social sustainability into climate policy frameworks. This is particularly important, and challenging given that key sectors of the economy are difficult to decarbonize, such as energy production, transportation, and manufacturing. Additionally, the energy demand in Europe is expected to increase drastically (mainly due to electrification), with supply simultaneously declining (in part due to nuclear power phaseout in several member states, such as Germany). Increasing storage capacity, enhancing demand flexibility, and developing transmission infrastructure all require large, long-term investments, and uncompromising public policy. However, these crucial efforts are at risk due to ongoing political uncertainty. Aklin argued that a politics-resilient climate policy design is essential to avoid market fragmentation, decrease cooperation, and ensure the support for green policies.  Currently, industrial policy is seen as the silver bullet, in particular, because it can create economies of scale and ensure political commitment to major projects. However, as Aklin explained, it is not an invincible solution, as such projects may also be undermined by capacity constraints and labour shortages.

Energy Policy Dynamics

Building on Aklin’s insights, Thomas Tangerås, Associate Professor at the Research Institute of Industrial Economics, explored the evolution of Swedish energy policy. Tangerås focused on ongoing shifts in support for nuclear power and renewables, driven by changes in government coalitions. Driven by an ambition to ensure energy security, Sweden historically invested in both hydro and nuclear power stations. In the wake of the Three Mile Island accident, public opinion however shifted and following a referendum in 1980, a nuclear shutdown by 2010 was promised. In the new millennia, the first push for renewables in 2003, was followed by the right-wing government’s nuclear resurgence in 2010, allowing new reactors to replace old ones. In 2016 there was a second renewable push when the left-wing coalition set the goal of 100 percent renewable electricity by 2040 (although with no formal ban on nuclear). This target was however recently reformulated with the election of the right-wing coalition in 2022, which, supported by the far-right party, launched a nuclear renaissance. The revised objective is to achieve 100 percent fossil-free electricity by 2040, with nuclear power playing a crucial role in the clean energy mix.

The back-and-forth energy policy in Sweden has led to high uncertainty. A more consistent policy approach could increase stability and minimize investment risks in the energy sector. Three aspects should be considered to foster a stable and resilient investment climate while mitigating political risks, Tangerås concluded: First, a market-based support system should be established; second, investments must be legally protected, even in the event of policy changes; and third, financial and ownership arrangements must be in place to protect against political expropriation and to facilitate investments, for example, through contractual agreements for advance power sales.

The Path to Net-Zero: A Polish Perspective

Circling back to the need for climate policy to be socially sustainable, Paweł Wróbel, Energy and climate regulatory affairs professional, Founder of GateBrussels, and Managing Director of BalticWind.EU, gave an account of Poland’s recent steps towards the green transition.

Poland is currently on an ambitious path of reaching net-zero, with the new government promising to step up the effort, backing a 90 percent greenhouse gas reduction target for 2040 recently proposed by the EU However, the transition is framed by geopolitical tensions in the region and the subsequent energy security issues as well as high energy prices in the industrial sector. Poland’s green transition is further challenged by social issues given the large share of the population living in coal mining areas (one region, Silesia, accounts for 12 percent of the polish population alone). Still, by 2049, the coal mining is to be phased out and coal in the energy mix is to be phased out even by 2035/2040 – optimistic objectives set by the government in agreement with Polish trade unions.

In order to achieve this, and to facilitate its green transition, Poland has to make use of its large offshore wind potential. This is currently in an exploratory phase and is expected to generate 6 GW by 2030, with a support scheme in place for an addition 12 GW. In addition, progress has been achieved in the adoption of solar power, with prosumers driving the progress in this area. More generally, the private sectors’ share in the energy market is steadily increasing, furthering investments in green technology. However, further investments into storage capacity, transmission, and distribution are crucial as the majority of Polands’ green energy producing regions lie in the north while industries are mainly found in the south.

Paralleling the argument of Aklin, Wróbel also highlighted that Poland’s high industrialization (with about 6 percent of the EU’s industrial production) may slow down the green transition due to the challenges of greening the energy used by this sector. The latter also includes higher energy prices which undermines Poland’s competitiveness on the European market.

Conclusion

The SITE Energy Talk 2024 catalyzed discussions about developing lasting and impactful environmental policies in times of political and economic instability. It also raised questions about how to balance economic growth and climate targets. To achieve its 2050 climate neutrality goals, the EU must implement flexible and sustainable policies supported by strong regulatory and political frameworks – robust enough to withstand economic and political pressures. To ensure democratic processes, it is crucial to address the threat posed by centralised governments decisions, political lock-ins, and large projects (with potential subsequent backlashes). This requires the implementation of fair policies, clearly communicating the benefits of the green transition.

On behalf of the Stockholm Institute of Transition Economics, we would like to thank Michaël Aklin, Thomas Tangerås and Paweł Wróbel for participating in this year’s Energy Talk.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Nuclear Renaissance: Powering Sweden’s Climate Policy

Posted on April 15, 2024 | Policy Brief

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The current Swedish government has put nuclear energy front and center of their climate policies, with a goal of two new reactors in commercial operation by 2035, and around ten new reactors by 2045. In light of this revived focus, this policy brief tackles the following question: is a large-scale expansion of nuclear energy an environmental and economically efficient solution to achieve Sweden’s climate policy objective of net zero emissions by 2045? To answer this, three important aspects are analyzed: potential emission reductions, the cost-effectiveness of such abatement, and the practicality of the proposed timelines. As a case study, we draw lessons from the large-scale build-out of nuclear power in France in the late 1970s. The results show that France significantly reduced emissions of carbon dioxide (CO2), at a net economic benefit, and with an average reactor construction time of around six years. However, today’s situation in Sweden contrasts sharply with France in the 1970s. Electricity production in Sweden is already low-carbon, the cost of alternative zero-carbon electricity sources has plummeted, and construction costs and timelines for nuclear power have steadily increased since the 1970s. Therefore, new reactors in Sweden are likely to yield only modest emission reductions at a relatively high abatement cost, and with construction times around two to three times longer than those achieved by France.

A Renewed Focus on Nuclear Energy

When the current government in Sweden, led by Prime Minister Ulf Kristersson, came into power in 2022, they swiftly made changes to Sweden’s environment and climate policies. The Ministry of Environment was abolished, transport fuel taxes were reduced, and the energy policy objective was changed from “100 percent renewable” to “100 percent fossil free”, emphasizing that nuclear energy was now the cornerstone in the government’s goal of reaching net zero emissions (Government Office 2023, Swedish Government 2023). This marked a new turn in Sweden’s relationship with nuclear energy: from the construction of four different nuclear power plants in the 1970s – of which three remain operational today – to the national referendum on nuclear energy in 1980, where it was decided that no new nuclear reactors should be built and that existing reactors were to be phased-out by 2010 (Jasper 1990).

Today’s renewed focus on nuclear energy, especially as a climate mitigation policy tool is, however, not unique to Sweden. As of 2022, the European Commission labels nuclear reactor construction as a “green investment”, the US has included production tax credits for nuclear energy in their 2023 climate bill the Inflation Reduction Act, and France’s President Macron is pushing for a “nuclear renaissance” in his vision of a low-carbon future for Europe (Gröndahl 2022; Bistline, Mehrotra, and Wolfram 2023; Alderman 2022).

France As a Case Study

In the 1970s, France conducted an unprecedented expansion of nuclear energy, which offers valuable insights for Sweden’s contemporary nuclear ambitions. Relying heavily on imported oil for their energy needs, France enacted a drastic shift in energy policy following the 1973 oil crisis. In the subsequent decade, France ordered and began the construction of 51 new nuclear reactors. The new energy policy – dubbed the Messmer Plan – was summarized by the slogan: “All electric, all nuclear” (Hecht 2009).

To support the expansion of new reactors, the French government made use of loan guarantees and public financing (Jasper 1990). A similar strategy has recently been proposed by the Swedish government, with suggested loan guarantees of up to 400 billion kronor (around $40 billion) to support the construction of new reactors (Persson 2022).

France’s Emissions Reductions and Abatement Costs

To make causal estimates of the environmental and economic effects of France’s large-scale expansion of nuclear energy, we need a counterfactual to compare with. In a recent working paper – titled Industrial Policy and Decarbonization: The Case of Nuclear Energy in France – I, together with Jared Finnegan from University College London, construct this counterfactual as a weighted combination of suitable control countries. These countries resemble France’s economy and energy profile in the 1960s and early 1970s, however, they did not push for nuclear energy following the first oil crisis. Our weighted average comprises five European countries: Belgium, Austria, Switzerland, Portugal, and Germany, with falling weights in that same order.

Figure 1 depicts per capita emissions of CO2 from electricity and heat production in France and its counterfactual – ‘synthetic France’ – from 1960 to 2005. The large push for nuclear energy led to substantial emission reductions, an average reduction of 62 percent, or close to 1 metric ton of CO2 per capita, in the years after 1980.

Figure 1. CO2 emissions from electricity and heat in France and synthetic France, 1960-2005.

Andersson and Finnegan (2024).

Moreover, Figure 1 shows that six years elapsed from the energy policy change until emission reductions began. This time delay matches the average construction time of around six years (75 months on average) for the more than 50 reactors that were constructed in France following the announcement of the Messmer Plan in 1974.

Table 1. Data for abatement cost estimates.

Andersson and Finnegan (2024).

Lastly, these large and relatively swift emission reductions in France were achieved at a net economic gain. Table 1 lists the data used to compute the average abatement cost (AAC): the total expenses incurred for the new policy (relative to the counterfactual scenario), divided by the CO2 emissions reduction.

The net average abatement cost of -$20 per ton of CO2 is a result of the lower cost of electricity production (here represented by the levelized cost of electricity (LCOE)) of new nuclear energy during the time-period, compared to the main alternative, namely coal, – the primary energy source in counterfactual synthetic France. LCOE encompasses the complete range of expenses incurred over a power plant’s life cycle, from initial construction and operation to maintenance, fuel, decommissioning, and waste handling. Accurately calculated, LCOE provides a standardized metric for comparing the costs of energy production across different technologies, countries, and time periods (IEA 2015).

Abatement Costs and Timelines Today

Today, more than 50 years after the first oil crisis, many factors that made France’s expansion of nuclear energy a success are markedly different. For example, the cost of wind and solar energy – the other two prominent zero-carbon technologies – has plummeted (IEA 2020). Further, construction costs and timelines for new nuclear reactors in Europe have steadily increased since the 1970s (Lévêque 2015).

Figure 2 depicts the LCOE for the main electricity generating technologies between 2009 and 2023 (Bilicic and Scroggins 2023). The data is for the US, but the magnitudes and differences between technologies are similar in Europe. There are two important aspects of this figure. First, after having by far the highest levelized cost in 2009, the price of solar has dropped by more than 80 percent and is today, together with wind energy, the least-cost option. Second, the cost of nuclear has steadily increased, contrary to how technology cost typically evolves over time, meriting nuclear power the “a very strange beast” label (Lévêque, 2015, p. 44). By 2023, new nuclear power had the highest levelized cost of all energy technologies.

Regarding the construction time of nuclear reactors, these have steadily increased in both Europe and the US. The reactor Okiluoto 3 in Finland went into commercial operation last year but took 18 years to construct. Similarly, the reactor Flamanville 3 in France is still not finished, despite construction beginning 17 years ago. The reactors Hinkley Point C in the UK were initiated in 2016 and, after repeated delays, are projected to be ready for operation in 2027 at the earliest (Lawson 2022). Similarly, in the US, construction times have at least doubled since the first round of reactors were built. These lengthened constructions times are a consequence of stricter safety regulations and larger and more complex reactor designs (Lévêque, 2015). If these average construction times of 12-18 years are the new norm, Sweden will, in fact, not have two new reactors in place by 2035. Further, it would need to begin construction rather soon if the goal of having ten new reactors by 2045 is to be achieved.

Figure 2. Levelized Cost of Electricity, 2009-2023.

Source: Bilicic and Scroggins (2023).

Sweden’s Potential Emission Reductions

The rising costs and extended construction times for new reactors are notable concerns, yet the crucial measure of Sweden’s new climate policy is its capacity to reach net zero emissions across all sectors. Figure 3 depicts per capita emissions of CO2 from electricity and heat production in Sweden and OECD countries between 1960 and 2018.

Figure 3. Sweden vs. the OECD average.

Source: IEA (2022).

In 2018, the OECD’s per capita CO2 emissions from electricity and heat averaged slightly over 2 metric tons. In comparison, Sweden’s per capita emissions at 0.7 metric tons are low and represent only 20 percent of total per capita emissions. Hence, the potential for substantial emission cuts through nuclear expansion is limited. By contrast, Sweden’s transport sector, with CO2 emissions more than two times larger than the emissions from electricity and heat, presents a greater chance for impactful reductions. Yet, current policies of reduced transport fuel taxes are likely to increase emissions. The electrification of transportation could leverage the benefits of nuclear energy for climate mitigation, but broader policies are then needed to accelerate the adoption of electric vehicles.

Conclusion

As Sweden rewrites its energy and climate policies, nuclear energy is placed front and center – a position it has not held since the 1970s. Yet, while nuclear energy may experience a renaissance in Sweden, it will not be the panacea for reaching net zero emissions the current government is hoping for. Expected emission reductions will be modest, abatement costs will be relatively high and, if recent European experiences are to be considered an indicator, the aspirational timelines are likely to be missed.

Considering these aspects, it’s imperative for Sweden to adopt a broader mix of climate policies to address sectors such as transportation – responsible for most of the country’s emissions. Pairing the nuclear ambitions with incentives for an accelerated electrification of transportation could enhance the prospects of achieving net zero emissions by 2045.

References

  • Alderman, L. (2022). France Announces Major Nuclear Power Buildup. The New York Times. February 10, 2022.
  • Andersson, J. and Finnegan, J. (2024). Industrial Policy and Decarbonization: The Case of Nuclear Energy in France. Working Paper.
  • Bilicic, G. and Scroggins, S. (2023). 2023 Levelized Cost of Energy+. Lazard.
  • Bistline, J., Mehrotra, N. and Wolfram, C. (2023). Economic Implications of the Climate Provisions of the Inflation Reduction Act. Tech. rep., National Bureau of Economic Research.
  • Government Office. (2023). De första 100 dagarna: Samarbetsprojekt klimat och energi. Stockholm, January 25, 2023.
  • Gröndahl, M-P. (2022). Thierry Breton: ’Il faudra investir 500 milliards d’euros dans les centrales nucléaires de nouvelle génération’.  Le Journal du Dimanche January 09, 2022.
  • Hecht, G. (2009). The Radiance of France: Nuclear Power and National Identity after World War II. MIT Press.
  • IEA. (2015). Projected Costs of Generating Electricity: 2015 Edition. International Energy Agency. Paris.
  • IEA. (2020). Projected Costs of Generating Electricity: 2020 Edition. International Energy Agency. Paris.
  • IEA. (2022). Greenhouse Gas Emissions from Energy (2022 Edition). International Energy Agency. Paris.
  • Jasper, J. M. (1990). Nuclear politics: Energy and the state in the United States, Sweden, and France, vol 1126. Princeton University Press.
  • Lawson, A. (2022). Boss of Hinkley Point C blames pandemic disruption for 3bn delay. The Guardian. May 20, 2022.
  • Lévêque, F. (2015). The economics and uncertainties of nuclear power. Cambridge University Press.
  • Persson, I. (2022). Allt du behöver veta om ’Tidöavtalet. SVT Nyheter. 14 October, 2022.
  • Swedish Government. (2023). Regeringens proposition 2023/24:28 Sänkning av reduktionsplikten för bensin och diesel. State Documents, Sweden. Stockholm, October 12, 2023.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Impact of Technological Innovations and Economic Growth on Carbon Dioxide Emissions

Posted on April 8, 2024 | Policy Brief

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This policy brief offers an examination of the interplay between economic growth, research, and development (R&D), and CO2 emissions in different countries. Analysing data for 83 countries over three decades, our research reveals varying impacts of economic and R&D activities on CO2 emissions depending on country income level. While increased economic growth often leads to higher emissions due to greater industrial activity, our model indicates that increased GDP levels, when interacted with enhanced investments in R&D, is associated with reduced CO2 emissions. Our approach also recognizes the diverse economic conditions of countries, allowing for a more tailored understanding of how to tackle environmental challenges effectively.

Technological Innovation and CO2 Emissions

Human activity has over the past few decades significantly contributed to environmental problems, in particular CO2 emissions. The consequences from increased CO2 emissions, such as global warming and climate change, have motivated extensive research focused on understanding their impact and finding potential solutions to associated issues.

Economic growth, and research and development (R&D) can serve as differentiating factors between countries when it comes to their pollution levels, specifically measured by CO2 emissions per capita. Higher levels of economic growth are associated with increased industrial activity and energy consumption, which may lead to increased CO2 emissions. At the same time, countries that invest more in R&D often focus on developing cleaner technologies and implementing sustainable practices, which may result in reduced CO2 emissions.

In this policy brief, we analyse CO2 emissions’ dependencies on technological innovation and economic growth. For our analysis we group the considered 83 countries into three wealth levels: High, Upper Middle, and Lower Middle income levels. This grouping facilitates a better understanding of the complex interplay between wealth, innovation and growth and their projection into emissions. Considering each wealth level group separately also allows us to account for varying economic and developmental contexts.

Data

Based on data availability, we analyse 83 countries, spanning from 1996 to 2019, inclusive. We follow current research trends and use R&D intensity as a proxy for technological innovation (see Chen & Lee, 2020; Petrović & Lobanov, 2020; Avenyo & Tregenna, 2022).

Data on energy use originate from Our World in Data. R&D data from after 2014 are based on figures from the UNESCO Institute for Statistics. All other indicators come from World Development Indicators (WDI).

Table 1 presents an overview of the variables considered in our empirical model. Our response variable is CO2 emissions per capita. We include several covariates (i.e. urban population, renewable energy, trade), found to be significant in previous studies where CO2 emissions was considered the dependent variable (Avenyo & Tregenna, 2022; Wang, Zeng & Liu, 2019; Petrović & Lobanov, 2020; Chen & Lee, 2020).

Table 1. Variable description.

Additionally, we include quadratic terms for GDP and R&D to account for nonlinearity and non-monotonicity. Also, we incorporate the interaction term between GDP and R&D (see Table 3). This allows us to evaluate whether the impact of technological innovations on CO2 emissions is dependent on the GDP level, or vice versa.

Wealth Level Classification

Existing literature highlights significant variation between countries in terms of economic growth and income levels, particularly in relation to R&D expenditure and CO2 emission levels (see Cheng et al., 2021; Chen & Lee, 2020; Petrović & Lobanov, 2020; Avenyo & Tregenna, 2022). Given this we deployed the Mclust method (Scrucca et al., 2016; Fraley & Raftery, 2002), and classified our considered countries into three distinct groups based on their median Gross National Income (GNI) over a specified range of years for each country. Following this methodology, we obtained three groups of countries: High, Upper Middle and Lower Middle. The list of countries categorized by their respective wealth level is presented in Table 2.

Table 2. Countries within each wealth group.

Low-income countries, (as categorized by the World Bank in 2022) were not included in the analysis as the study focuses on the impact of technological innovations on CO2 emissions, innovations which are less frequent in such economies. Limited infrastructure, financial resources, and access to technology often result in lower levels of R&D activities in low-income countries, which reduces the number of measurable innovations.

The Hybrid Model

Our leading hypothesis is that country income levels (measured by GDP) mediates the relationship between innovation (measured by R&D expenditures) and CO2 emissions. To test this, one could estimate this relationship for each group of countries separately. This policy brief instead estimates the relationship for the whole sample of countries accounting for group differences via interaction effects. Specifically, our estimation allows for interaction terms between some or all covariates and the wealth level. This approach, which we refer to as the hybrid model, thus combines elements of both pooled and separate models. It is a great alternative to separate models as it allows for estimation of both group-specific and sample-wide effects, and as it contrasts differential impacts across wealth level groups.

We test two versions of the hybrid model, one full and one reduced. The full model incorporates interactions with all covariates while the reduced model includes some indices without interactions, resulting in a relationship shared across all wealth levels. The reduced model assumes that the variables Renewable energy consumption, Energy use and Trade exhibit the same relationship with CO2 emissions across all wealth levels.

Both the reduced and full hybrid models have similar coefficients for the variables and interactions that they share. While the coefficients share signs in both the full and reduced hybrid models, they are smaller, in absolute values, in the reduced hybrid model. In Table 3 we present the estimates from the reduced hybrid model.

Table 3. Results from the reduced hybrid model with CO2 emissions as dependent variable, by wealth group level.

Note: The upper part of the table (denoted “interaction variables”) depicts the coefficients for the interaction term between the variable in the respective row and the income group in the respective column. * denotes a 0.05 significance level. ** denotes a 0.01 significance level. ***denotes a 0.001 significance level.

Several things are to be noted from Table 3. First, for High and Upper Middle wealth level countries there is a significant positive association between innovation (as proxied by R&D) and CO2 emissions. However, the significance levels of the interaction term for R&D and GDP reveal that the relationship between R&D and CO2 is not constant across wealth levels even within each group. Specifically, it appears that relatively high values of GDP and R&D are associated with a decrease in CO2 emissions in High and Upper Middle wealth level countries. This suggests that in wealthier countries, advancements in technology and efficient practices derived from R&D are likely contributing to reduced emission levels. Interestingly, GDP has no direct effect on emissions for countries in these two wealth groups. Rather, GDP only affects emissions through the interaction term with R&D.

In turn, for the Lower Middle wealth level countries, R&D has no impact on CO2 emissions, whether directly or via interaction with GDP. Instead, higher GDP leads to a significant increase in emissions. This suggests that for these countries economic growth entail CO2 emissions while R&D activities are too small to have a mediating effect.

Second, medium and high-technology industry value added manufacturing is only significant for countries within the Upper Middle wealth level. This is in line with previous literature (see Avenyo & Tregenna, 2022, Wang, Zeng & Liu, 2019). A higher proportion of medium and high-technology industry value added is often negatively associated with CO2 emissions due to the adoption of cleaner and more environmentally sustainable technologies and practices within these industries. Additionally, these industries are often subject to stringent environmental regulations. As a result, these industries can contribute to reduced emission levels, becoming key drivers of sustainable economic growth and environmental protection (Avenyo & Tregenna, 2022). Interestingly, in our estimation, this result is evident only for Upper Middle wealth level countries.

Third, urban population is only significantly increasing emissions for High wealth level countries. Such positive relationship can be attributed to several factors. There is often a higher concentration of industrial and manufacturing activities in urban areas, leading to increased emissions of pollutants as urbanization increases (Wang, Zeng & Liu, 2019). Additionally, urban areas tend to have higher energy consumption and transportation demands, further contributing to higher emission levels.

When it comes to the factors jointly estimated across wealth groups, the positive relationship between renewable energy consumption and CO2 emissions is well-documented within the literature (Chen & Lee, 2020) which emphasizes the need for sustainable energy practices and efficient resource management to mitigate adverse environmental impacts. In line with this, the significant negative relationship between renewable energy consumption and CO2 emissions suggests that an increase in renewable energy usage is associated with a reduction in CO2 emissions. This is in line with previous findings demonstrating that technological progress helps reduce CO2 emissions by bringing energy efficiency (Akram et al., 2020; Sharif et al., 2019).

Conclusion

This policy brief analyses the effects of GDP and technological innovations on CO2 emissions. The theoretical channels linking economic development (and technological innovations) and CO2 emissions are multifaceted, warranting the need for an econometric assessment. We study 83 countries between 1996 and 2020 in a setting that allows us to disentangle the effects across countries with different income levels.

Our findings underscore the importance of considering the various income levels of the considered countries and their interplay with R&D expenditures in environmental policy discussions. Countries with Lower Middle income levels exhibit insignificant effects from R&D expenditures on CO2 emissions, while for Upper Middle and High wealth level nations, increased R&D expenditures incurs higher emissions.

The moderating role of GDP adds complexity to this relationship. At sufficiently high wealth levels, GDP weakens the effect of R&D on emissions. This alleviating effect becomes stronger as GDP increases until reaching a turning point, at which the impact reverses and R&D expenditures instead decrease emissions.

Our results on the significant nonlinear relationship between R&D, GDP and CO2 emission levels highlights the complexity of addressing environmental challenges within the context of macroeconomics. It suggests that policies promoting both R&D and economic growth simultaneously can foster more sustainable development paths, where economic expansion is accompanied by a more efficient and cleaner use of resources, leading to lower CO2 emissions. This decoupling of economic growth from emissions is likely to be further enhanced by governments incentivising research and development focused on improved energy efficiency and emission reduction.

References

  • Akram, R., Chen, F., Khalid, F., Ye, Z., & Majeed, M. T. (2020). Heterogeneous effects of energy efficiency and renewable energy on carbon emissions: Evidence from developing countries. Journal of cleaner production, 247, 119122.
  • Avenyo, E. K., & Tregenna, F. (2022). Greening manufacturing: Technology intensity and carbon dioxide emissions in developing countries. Applied energy, 324, 119726.
  • Chen, Y., & Lee, C. C. (2020). Does technological innovation reduce CO2 emissions? Cross-country evidence. Journal of Cleaner Production, 263, 121550.
  • Cheng, C., Ren, X., Dong, K., Dong, X., & Wang, Z. (2021). How does technological innovation mitigate CO2 emissions in OECD countries? Heterogeneous analysis using panel quantile regression. Journal of Environmental Management, 280, 111818.
  • Fraley C. and Raftery A. E. (2002) Model-based clustering, discriminant analysis and density estimation. Journal of the American Statistical Association, 97/458, pp. 611-631.
  • Petrović, P., & Lobanov, M. M. (2020). The impact of R&D expenditures on CO2 emissions: evidence from sixteen OECD countries. Journal of Cleaner Production, 248, 119187.
  • Scrucca, L., Fop, M., Murphy, T. B., & Raftery, A. E. (2016). mclust 5: clustering, classification and density estimation using Gaussian finite mixture models. The R journal, 8(1), 289.
  • Sharif, A., Raza, S. A., Ozturk, I., & Afshan, S. (2019). The dynamic relationship of renewable and nonrenewable energy consumption with carbon emission: a global study with the application of heterogeneous panel estimations. Renewable energy, 133, 685-691.
  • Wang, S., Zeng, J., Liu, X., (2019). Examining the multiple impacts of technological progress on CO2 emissions in China: a panel quantile regression approach. Renew. Sustain. Energy Rev. 103, 140–150.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Insights and Research Shared at the 2023 FREE Network Retreat

Posted on October 3, 2023 | Policy Brief

FREE network retreat Image from the conference

The 2023 FREE Network Retreat, an annual face-to-face event for members of the FREE Network, gathered its representatives to share and exchange research ideas and to discuss its institutes’ respective work and joint efforts within the Network. An academic session highlighted multiple overarching areas of interest and opportunities for research collaboration and included a plenary session on topics ranging from theoretical underpinning of Vladimir Putin’s regime to climate change beliefs and to consumer behaviour in credit markets. A session addressing the respective institute’s work during the last year also demonstrated the importance and relevance of the FREE Network’s joint initiatives on gender, democracy and media, and climate change and environment: FROGEE, FROMDEE and FREECE. This brief gives a short outline of the plenary session and an overview of some further topics covered during the conference.  

The Academic Day

The Academic Day consisted partly of a plenary session and partly of an academic session. The academic session was outlined to demonstrate the wide spectrum of research interests within the network and to promote and highlight the opportunities for research collaboration. Designed as a series of poster sessions, each organized around a common research theme, it allowed for an exchange of ideas between presenting researchers and the audience while displaying the overlap of the various research interests across the institutes. At the same time, the poster session combined the broad range of topics within 10 overarching subjects (trade, gender, migration and education, public economics, energy, labor, political economy and development, macro, conflict, and theory and auctions).

The plenary session further illustrated the wide variety of topics the FREE Network researchers’ work on. During the plenary session, three distinguished presentations were held, summarized in what follows.

“Why Did Putin Invade Ukraine? – A Theory of Degenerate Autocracy”

Firstly, Konstantin Sonin, Professor at the University of Chicago Harris School of Public Policy, gave a presentation of his working paper (with Georgy Egorov, Northwestern University) in which the Russian full-scale invasion of Ukraine is explained through a theoretical framework on dictators’ decision-making in degenerate autocracies.

Sonin outlined how the beliefs about Ukraine in Kremlin, prior to the invasion, were factually wrong. For example, Kremlin believed that Ukraine, despite plenty of facts pointing in the opposite direction, lacked a stable government and had an incapable army. Further, it was believed that the US and Europe wouldn’t care about Ukraine and that Russian troops would be welcomed as liberators – the latter exemplified by the fact that Russia sent police and not the army during the first phase of the invasion. He also stressed that the decision to invade Ukraine is likely to have disastrous consequences for Vladimir Putin, his regime, and for Russia as a whole. This is, however, not the first example of a disastrous decision made by a leader of an autocratic regime, leading up to the question: What explains such choices that should not rationally have been made? And how can leaders make them in highly institutionalized environments where they are surrounded by councils and advisors who are supposed to possess the best expertise?

The model presented by Sonin assumes a leader in such highly institutionalized environment that wishes to stay in power and whose decisions are based on input from subordinates. The subordinates differ in level of their expertise and the leader thus chooses the quality of advice that he receives through his choice of subordinates.  In turn, while giving advice to the leader, the subordinate considers two factors: the vulnerability of the leader and their own prospects should the leader fall. In equilibrium there is a tradeoff as competent subordinates are also less loyal (since a more competent person might know when to switch alliances and have better prospects if the regime changes).

The leader also has access to repression as an instrument. Repression decreases his changes to be overthrown but raises the stakes for a potential future power struggle, as a leader with a history of repression is more likely to be repressed by his successor.

This interaction creates a feedback loop. If a dictator chooses repression, he feels more endangered, and he then chooses a more loyal subordinate who is less likely to deceive him for personal gain under a potential new regime. However, this leads to the appointment of less competent subordinates whereafter the information that flows to the leader becomes less and less reliable – as illustrated by Kremlin’s beliefs about Ukraine prior to the war.

There are three types of paths in equilibrium, Sonin explained; 1. “stable autocracy”, with leaders altering in power and choosing peaceful paths without repressions 2. “degenerate autocracy” – where the incumbent and opponent first replace each other peacefully and then slide into the repression-based change of power (until one of them dies and the story repeats), and 3. “consecutive degenerate autocracy” – where each power struggle is followed by repression.

Concluding his presentation, Sonin highlighted that in a degenerate autocracy such as Russia, individual decisions by the leader are rarely crucial due to the high level of institutionalization. However, as shown by the model, the leader is inevitably faced with a situation where he is surrounded by incompetent loyalists feeding him bad intel and setting him up to make disastrous decisions – most recently displayed in Vladimir Putin’s decision to invade Ukraine.

“Facing the Hard Truth: Evidence from Climate Change Ignorance”

Pamela Campa, Associate Professor at Stockholm Institute of Transition Economics, gave the conference’s second presentation, which detailed her work (with Ferenc Szucz, Stockholm University) on climate change skepticism.

Campa opened her talk with the current paradox regarding climate change, where, in the scientific community there is a strong consensus about the existence of climate change, but in society at large, skepticism is largely prevalent. This can be exemplified by one quarter of the US population not believing in global warming in 2023, and Europeans not believing in the fact that humans are the main driver of climate change.

According to Campa, the key question to answer is therefore “Why does ignorance about climate change persist among the public – in spite of the overwhelming evidence?”. One possible explanation may be a deficit in comprehension; people simply don’t understand the complexity of climate change and thus follow biased media and/ or politicians more or less sponsored by lobbyists. However, research have shown scientifical literacy to be quite uncorrelated with climate change denial, contradicting the above explanation. The second hypothesis, and of focus in the study, instead revolve around the concept of information avoidance. To test the hypothesis that people actively avoid climate change information, the authors key in on coal mining communities in the US having been exposed to negative shocks in the form of layoffs. These communities are of interest given their strong sense of identity and the fact that they are directly affected by the green transition. Arguably, a layoff shock would negatively affect not only their economy, but also pose a threat to their perceived identity. Given the context, it can thus be assumed that these communities to a larger extent would avoid information on climate change and information post-shock to restore the threatened identity.

The authors consider US counties experiencing mass layoff (more than 30 percent of mining jobs lost between 2014 and 2017) as treated counties, finding that in these counties, learning about climate change is 30 to 40 percent lower than in counties having experienced no mass layoffs. To account for the fact that the layoff itself may cause changes in learning, the authors also consider an instrument variable analysis in which gas prices are exploited as instrument for the layoffs – once again displaying the fact that people in affected communities believe climate change to be caused by humans to a lesser extent, when compared to counties in which no mass layoffs had occurred.

Interestingly, when controlling with other industries with somewhat similar characteristics (such as metal mining), the drop in climate change learning disappears, feeding in the notion of “identity-based information avoidance”.

The lack of support for and consensus among the public of the ongoing climate change and its drivers might pose a threat for the green transition as well as reduce personal effort to reduce the carbon footprint, Campa concluded.

“Consumer Credit with Over-Optimistic Borrowers”

In the plenary session’s last presentation, Igor Livshits, Economic Advisor and Economist at the Federal Reserve Bank of Philadelphia, presented his working paper (with Florian Exler, University of Vienna, James MacGee, Bank of Canada and Michèle Tertilt, Mannheimer University) on consumer credit and borrower’s behaviour.

There has been much debate on whether and how to regulate consumer credit products to limit misuse of credit. In 2009/2010 several initiatives and regulations (such as the 2009 Credit Card Accountability Responsibility and Disclosure Act) were introduced with the aim of protecting consumers and borrowers from arguments that sellers of credit products exploit lack of information and cognitive capacity of borrowers. There is however a lack of evaluation of such arguments and subsequent regulations, which Livshits explained to be the motivation behind the paper.

The paper differentiates between over-optimistic borrowers (behaviour borrowers) and rational borrowers (rationalists). While both types face the same risks, behaviour borrowers are more prone to shocks and are at the same time unaware of these worse risks (i.e., they believe they are rationalists). Focusing on these types of borrowers, the paper introduces a model in which the lenders endogenously price credit based on beliefs about the borrower type. Households decide whether to spend or save and if to file for bankruptcy in an environment in which they are faced with earning shocks and expense shocks.

In this structural model of unsecured lending and default, Livshits finds that behavioral borrowers’ “risky” behaviour negatively affects rationalists since both types are pooled together and, thus rationalists are overpaying to cover for the behaviour borrowers. A calibration of the model also suggests that behavioral borrowers borrow too much and file for bankruptcy too little and too late.

Livshits argued that the model does not provide evidence of the notion that borrowers need protection from lenders, but rather that borrowers need to be protected from themselves. In fact, had behaviour borrowers been made aware of the fact that they are overly optimistic about the actual state of their future incomes, they would borrow 15 percent less.

To address the increased risks behaviour borrowers take at the cost of rationalists, policies such as default made easier, taxation on borrowing, financial literacy efforts and score-dependent borrowing limits could all be considered. Such policies may lower debt and reduce bankruptcy filings but as they may also reduce welfare and exhibit scaling difficulties.

Updates from the Institutes

During the Retreat, the respective institutes shared the previous year’s work, and updates within the FREE Network’s three joint projects were also presented. These go under the acronyms of FROMDEE (Forum for Research on Media and Democracy in Eastern Europe), FREECE (Forum for Research on Eastern Europe; Climate and the Environment) and FROGEE (Forum for Research on Gender Economics in Eastern Europe), and address areas of great relevance in Eastern Europe and the Caucasus. Researchers from all FREE Network institutes work on these topics, with the most recent policy paper written in coordination by SITE, KSE and CenEA (with expert Maja Bosnic, Niras International Consulting). The policy paper focuses on the gender dimension of the reconstruction of Ukraine – putting emphasis on the necessity of gender budgeting principles throughout the various parts of reconstruction.  An upcoming joint research paper will consider the effects of gasoline price increase on household income across the Network’s countries, written under the FREECE umbrella.

The three themes of gender, media and democracy, and environment and climate are not only purely research topics within the institutes. They also reflect developments and challenges that the institutes to a various extent face in the respective contexts in which they operate. The work focusing on the reconstruction of Ukraine is an excellent example of an area that encompasses all three.

Another example of the relevance of the three themes features prominently in one of the institutes’ most tangible contribution to their respective societies: their education programs. Nataliia Shapoval, Vice President for Policy Research at Kyiv School of Economics (KSE), emphasized how KSE has – amid Russia’s war on Ukraine – managed to greatly expand. Over the past year, KSE has launched 8 new bachelor’s and master’s programs, some of which are directly targeted at ensuring postwar reconstruction competence. On a similar note, Lev Lvovskiy, Academic Director at the Belarusian Research and Outreach Center (BEROC) mentioned the likelihood of next year being able to offer students a bachelor’s program in economics and several business courses in Vilnius – BEROC’S new location. BEROC’s effort in providing quality education in economics to Belarus’ exile youth is considered a fundamental investment in the future of the country – providing a competent leading class capable of installing democracy and fair elections in Belarus once the current regime is gone. The emphasis on education was further highlighted by Salome Gelashvili, Practice Head, Agriculture & rural policy at the International School of Economics Policy Institute (ISET-PI) who not only mentioned the opening of a master’s program in Finance at ISET but also the fact that an increasing number of students who’ve recently graduated from PhD’s abroad are now returning to Georgia. Such investments into education are necessary to counter Russian propaganda in the region all three agreed, emphasizing the need to continually stem Russia’s negative influence in the region. This investment into education is also important to hinder countries from sliding away from democratic values – realized in Belarus and threatening in Georgia.

To further delve into the issues of democratic backsliding, a tendency that has been recently observed not only in the region but also more widely across the globe, FROMDEE will organize an academic conference in Stockholm on October 13th, 2023.

Concluding Remarks

The 2023 FREE Network Retreat provided a great opportunity for the Networks’ participants to jointly take part of new research and to share experiences, opportunities, and knowledge amongst each other. The Retreat also served as reminder of the importance of continuously supporting economic and democratic development, through research, policy work, and networking, in Eastern Europe and the Caucasus.

List of Presenters

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Environmental Enforcement in the EU: Insights from Administrative Cases in the US

Posted on May 23, 2023 | Policy Brief

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In March 2023, the European Parliament’s legal affairs committee voted unanimously in favor of a proposed update to the EU Directive on environmental crimes (Directive 2008/99/EC). The update seeks to step up enforcement of environmental legislation across Members States through criminal law aimed at severely punishing very serious environmental offenses. We argue that, while laudable in its goal of strengthening enforcement of environmental regulation at the EU level, the current effort might be insufficient since moderately serious offenses might remain largely unpunished. To address this shortcoming, we propose harmonizing administrative law as well. We consider additional benefits from relying on administrative law in terms of flexibility of punishment design, based on the US experience of using environmentally beneficial projects performed in affected areas as a form of punishment in administrative environmental settlements. We discuss evidence on the merits and potential limitations of the US approach based on Campa and Muehlenbachs (2022) and conclude that such an approach is worth considering in the EU context.

While the EU has set aggressive pollution reduction targets across its Member States (European Commission, 2021a), for example pledging to reduce deaths due to particulate matters to 55 percent of 2005 levels by 2030 (European Commission, 2023a), much work remains to be done. As documented in Lehne (2021), in 2020 all countries in Europe reported PM2.5 concentrations above the World Health Organization (WHO) guideline of 5mg/m3. Six countries, including three EU Member States (Italy, Croatia, and Poland) reported levels above the EU’s annual limit value of 25mg/m3. Further, Bulgaria, Poland, Portugal, Croatia, and Romania did not meet national targets for PM2.5 reduction (European Environment Agency, 2023). Main contributors to PM2.5 pollution are transportation and industrial activity, including energy production. High concentrations of these particles are known to increase physical and mental health risks (Persico, 2022; Persico et al., 2016), and risk of premature deaths (Fuller et al., 2022).

Environmental concerns across EU Member States are also not limited to air pollution. Across the EU, 28 percent of groundwater sources are affected by pollution from agriculture, 14 percent from industrial contamination, and 7.5 percent from mining waste (Kampa et al., 2021). The persistent pollution problems in the EU and their unequal distribution across regions despite growing EU-level environmental legislation underscores the importance of law enforcement. While all EU Member States are theoretically subject to the same overarching environmental standards and regulations, the enforcement of environmental laws differs widely across countries. To address this issue, the EU Commission (henceforth EC) has recently taken steps to further harmonize environmental enforcement across EU Member States.

In this brief we consider the EC’s proposal and argue that, while commendable in the goal of strengthening enforcement of environmental regulation at the EU level, it is also quite limited in terms of enforcement tools that it considers. Specifically, we discuss potential advantages of leveraging administrative law tools to enforce environmental regulation, whereas the EC approach is currently focused on criminal law. We consider the higher probability of prosecution and the enhanced flexibility in the type of penalties allowed by administrative enforcement actions. Finally, we discuss results from Campa and Muehlenbachs (2022), which studies the use of administrative penalties for environmental violations in the US and draws some lessons for environmental enforcement in other jurisdictions.

Strengthening Environmental Enforcement at the EU Level

While environmental regulation is a shared competence of the EU, enforcement has historically been left to national environmental authorities (European Parliament, 2016). In the face of a lack of institutional capacity at the national level, a result of this arrangement are generally low levels of environmental enforcement, widely heterogeneous across Member States (Mazur, 2011). EU institutions have tried unsuccessfully over time to address this challenge and harmonize enforcement across EU Member States. An early attempt was made in 2001, when the EU put in place minimum standards for environmental inspections that Member States carry out, though these were only non-binding guidelines, and Member States could not be sanctioned for flouting them (European Parliament, 2001). Mandatory standards were then introduced in 2008, with the EU Directive on environmental crimes (Directive 2008/99/EC), which forced national governments to apply criminal sanctions to those causing “substantial damage” to the environment. However, it has typically been difficult for the EC to sanction non-abiding Member States. Moreover, the obligation is limited to areas where the EU has competence and does not include minimum penalties.

In another attempt to step up their enforcement efforts, in 2016 the EC began publishing the annual Environmental Implementation Review, where each country is evaluated on its environmental affairs and enforcement (European Commission, 2023b). Although this does not improve the EC’s ability to efficiently sanction Member States, it does increase scrutiny and visibility. In 2021, the EC tabled a proposal to update the 2008 Directive on environmental crimes (European Commission, 2021b). The proposal acknowledged the insufficient number of environmental criminal cases successfully investigated and prosecuted as well as the large discrepancies in the transposition of the 2008 Directive across Member States. Against this background, the EC proposed to enlarge the scope of the 2008 Directive, establish minimum penalties, foster cross-border investigation and prosecution, and promote data collection and dissemination on criminal enforcement actions. In March 2023, the European Parliament’s legal affairs committee voted in support of the EC proposal, extending the list of offenses that would be criminally charged and increasing the size of the minimum penalties.

Environmental Enforcement, Administrative Law and “In-kind” Punishment

The efforts of EU institutions to improve and harmonize enforcement are exclusively focused on criminal law instruments. The EC’s 2021 proposal specifically links poor enforcement in Member States to their reliance on administrative law, which limits fines and thus allegedly reduces the deterrence value of enforcement actions. Indeed, sufficiently high fines are considered crucial to deter future violations (see, e.g., Aguzzoni et al., 2013). However, we argue that reliance on administrative law also has some advantages. In particular, we consider two potential benefits of administrative law based on existing studies, namely higher probability of case initiation and more flexibility in terms of penalty design.

Probability of Case Initiation

One of the shortcomings of the current enforcement framework highlighted by the EC is the very low number of environmental criminal cases that are ultimately prosecuted. Research on enforcement tends to link the low frequency of observed criminal cases to the high cost of criminal proceedings, especially relative to more informal administrative procedures (Faure and Svatikova, 2012). The cost dimension is especially relevant for cases that are moderately serious, but that nevertheless in aggregate contribute significantly to environmental degradation. The probability of catching violations is also relevant, together with the size of the penalty. A very large penalty for a criminal case that is highly unlikely to be prosecuted might be less deterring than a moderate penalty associated with very high probability of prosecution.

“In-kind” Penalties

Federal environmental regulations in the US are enforced through a combination of administrative and criminal law. The Environmental Protection Agency (EPA) initiates administrative cases or refers them to the Department of Justice when the gravity of the violation is large. Administrative cases result in settlements where the defendant can be ordered to pay a fine, which can vary from a few thousand to a few million dollars and which is determined according to various factors, such as the magnitude of environmental harm, the firm’s economic gain from violation, its violation history, and its ability to pay. Additionally, when a fine is established, defendants are given the opportunity to volunteer to pay for an environmentally beneficial project in the affected area. The EPA encourages these projects especially in areas subject to environmental justice concerns, namely those characterized by a large share of minority and low-income households.

Campa and Muehlenbachs (2022) study the implications of using these projects in environmental enforcement cases in the US. The study reveals a large preference among the public for this “in-kind” form of penalty versus traditional fines, based on a survey of US residents. Moreover, a randomized survey experiment reveals that these environmental projects elevate the profile of the firm among the public as compared to a firm that only pays a fine, even when the penalties stem from the same violation. Similarly, the stock-market response to the announcement of these projects is positive, whereas announcing a settlement with a large penalty causes a drop in the stock-market price of the defendant. In terms of implications for environmental justice, the data analysis shows that the whitest and richest communities are the most likely to receive these projects, but the second largest share goes to communities where there are highest concentrations of minorities and low-income households.

Overall, the study finds that punishing firms through environmental projects can be beneficial for political economy reasons, given the large preference for this enforcement tool among the public and likely among firms, since firms seem to benefit from undertaking the projects. Moreover, while the targeting of environmental justice communities in the US is not perfect, tweaking the US arrangement could guarantee that the projects predominantly benefit those communities most harmed by environmental violations.

For EU adoption of environmental projects enforcement, a caveat is that the perception of these projects might be different among the public in the EU. Nonetheless, large-scale surveys modelled on those presented in Campa and Muehlenbachs (2022) can help in understanding public views in different regions. Moreover, the paper emphasizes that on the one hand, by benefiting defendants, the environmental projects might ultimately be a more lenient punishment than fines, with implications for deterrence and future environmental quality. On the other hand, environmental quality might also improve as a direct effect of the projects being implemented and due to improved monitoring in affected communities (Dimitri et al., 2006). Overall, the study finds that future environmental quality might be more likely to improve following fines rather than environmental projects. However, it cautions the reader on data limitations that causes the result to not be conclusive enough and calls for further research.

Conclusion

The persistence of environmental problems in the EU, as well as the striking differences in pollution levels across EU Member States, underscores the need for more and better environmental regulation. However, even in the presence of comprehensive and strict environmental rules, the protection of the environment is still inadequate if a proper enforcement mechanism is not in place. As observed in OECD (2009), proper enforcement ensures deterrence. Successful deterrence provides the best protection for the environment, while reducing the resources necessary to administer laws by addressing non-compliance before it occurs. EU institutions have recently taken important steps to improve and further harmonize enforcement of environmental regulation across Member States, with proposed updates to the existing Directive on the matter scheduled for Member-State discussion in upcoming months.

Specifically, the EU is seeking to step up the use of criminal law to prosecute environmental offenses across Member States, with mandatory penalties and increased cross-border coordination. We argue that the focus on criminal law has some drawbacks, which could be addressed by also harmonizing administrative enforcement across EU Member States. Researchers have previously argued that reliance on administrative law might increase the likelihood that offenses are investigated and prosecuted. We also present evidence from the use of administrative law in the US, where defendants in environmental cases can settle to pay part of their penalty “in-kind”, i.e. by performing environmental projects in areas affected by the alleged violations. The evidence suggests that the use of these projects is worth considering in other jurisdictions, including the EU, because they might be preferred by the public and could help addressing environmental justice concerns. An important caveat is that their implications for environmental protection are not clear, and more research should address this important aspect. On the subject, the existing evidence on environmental enforcement in the US, such as that presented in Campa and Muehlenbachs (2022), is established thanks to the availability of rich data sources kept by the US’ EPA. The EC’s recent proposal to systematically collect and disseminate data on environmental crimes is thus particularly welcome and should not be overlooked in the upcoming negotiations with Member States on the final content of the proposed Directive.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Cost of Climate Change Policy: The Case of Coal Miners

Posted on October 10, 2022 | Policy Brief

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The phasing out of coal is considered a key component of the upcoming energy transition. While environmentally appealing, this measure will have a devastating effect on those working in the coal industry. Using the dissolution of the UK coal industry under Margret Thatcher as a natural experiment, we estimate the long run costs of being displaced as a coal miner. We find that within the first year of displacement, earnings fall by 80-90 percent, relative to the earnings of a carefully matched blue-collar manufacturing worker, while the wages of miners who find alternative employment fall by 40 percent. The losses are persistent and remain significant fifteen years after displacement. Our results are considerably above the estimates provided by other studies in the job displacement literature and may serve as a guide for policy makers when aiming for a just energy transition.

The Coal Mining Industry and Global Warming

According to the recent IPCC report, limiting global warming to 2 degrees Celsius requires a near complete and rapid elimination of coal in the global use of energy. Such a drastic measure is bound to have devastating effects on anybody economically linked to and dependent on the coal industry. Our back-of-the-envelope calculation suggests that the closure of the currently 2300 active industrial coal mines would translate into more than 5 million displaced coal miners. In Figure 1 we plot the spatial distribution of coal mines, indicating the locations of the upcoming displacements globally.

Figure 1. Location of industrial coal mines. The seven biggest producers and exporters of coal are marked in green.

Source: SNL Energy Data Set produced by S&P Global.

In a new paper (Rud et al., 2022), we estimate the average loss in the earnings of coal miners who have been displaced following one of the most notorious labor disputes of the 20th century: the dissolution of the coal sector in the UK. When Margaret Thatcher came into power many of the mines were unprofitable (Glyn, 1988). Considering the mines to be ripe for closures, the UK government publicly announced the closure of 20 mines in 1984. After additional information on further closures reached the press, the Union of Miners called for a general strike. The strike lasted for nearly a year and ended with a devastating defeat of the miners. From 1985 and onwards, the closure of mines proceeded at such an incredible pace that the dissolution of the UK coal industry is considered the most rapid in the history of the developed world (Beatty and Fothergill, 1996). As shown in Figure 2, the closures resulted in an equally rapid displacement of miners, from 250 000 employed miners in 1975 to less than 50 000 by 1995.

Figure 2. Coal Mining Employment in the UK 1975-2005

Note: The number on employed miners is collected from National Coal Board (1970-1993) and used in Aragon et al., (2018). The percent of employment shown on the right axis was calculated from the New Earnings Survey, the main data source used in this paper.

The Effects of UK Coal Mine Closures on Miners

At the heart of our empirical analysis is the New Earnings Survey, a longitudinal dataset covering 1 percent of the UK population since 1975. For the period 1979-1995 (marked in gray in Figure 2), among the 25-55 years old and those who were employed by the same mine for at least two consecutive years, we identify 2152 miners who experienced a final separation from a mine. In our baseline specification, these miners are matched to a single manufacturing worker using a large array of observables such as age, gender, hours worked, pre-separation employment and earnings, geographical administrative unit (county), as well as whether their respective wage was determined in a collective agreement. By the nature of the exercise we are unable to match on industry and instead match on detailed occupational information. A variety of other matching procedures suggest our results are robust.

In Figure 3 we plot the estimated differences in the evolution of earnings and wages for four years before, and fifteen years after displacement. The coefficients are estimated conditional on time and individual fixed effects. Due to the normalization of the dependent variable, the estimates should be interpreted as the percentage change relative to pre-displacement values. In Panel A of Figure 3 we show that hourly wages and weekly earnings conditional on employment drop by around 40 percent in the year after displacement and recover only slowly. It should be noted that the losses in earnings conditional on employment are not driven by changes in hours since the two series are close to identical.

In Panel B of Figure 3 we show the effect on earnings taking into account the losses of those who have not been successful in finding alternative employment in another industry. To get to these results we need to make some assumptions since the New Earnings Survey neither includes earnings information on the self-employed, nor on those who are active in the informal sector. Many other studies in the job displacement literature share similar data limitations, so we follow their approach in dealing with these. On the one hand, we assume zero individual earnings for periods without any observed labor earnings in the data, as assumed by Schmieder et al. (2022) and Bertheau et al. (2022). This assumption does not appear too strong since there is some evidence suggesting that ignoring the self-employed only marginally affects the results (Upward and Wright, 2017; Bertheau et al., 2022). On the other hand, we complement our results with an approach inspired by Jacobson (1993) where we keep only individuals who experience positive earnings within four years after displacement. The latter approach provides a more conservative estimate of displacement costs by assuming zero earnings only for individuals who eventually return to work.

Figure 3. The hourly wage and earnings conditional on employment (Panel A), and overall earnings costs of final displacement from a mine (Panel B).

Note: We plot the coefficients of the estimated panel data model with time and individual fixed effects and distributed leads and lags. ”Earnings: come back” refers to the treatment group where we only include those who have positive earnings at some point four years after job loss, and impute periods without employment as zeros. ”Earnings: all zeros” refers to the treatment in which we replace the earnings of any miner with a zero if the miner is not observed for any year, without restrictions.

Interpreting all periods of missing information as zeros, we find the initial losses to be around 90 percent of pre-displacement earnings within the first year after separation, while the more conservative estimates are only slightly lower at around 80 percent in the short run. In the long run, the losses are persistent and remain significantly depressed even fifteen years after displacement. Over the fifteen years after displacement these numbers amount to the miners losing on average between 4 to 6 times of their pre-displacement earnings. This implies that miners only receive 40-60 percent of the present discounted counterfactual earnings.

Our estimates are considerably above those provided by studies in the job displacement literature that focus on mass layoffs. Couch and Placzek (2010), for instance, report initial losses to amount to about 25-55 percent, while Schmeider et al. (2022) find initial earnings losses to be around 30-40 percent. Davis and Wachter (2012) estimate the long-run effects based on US data and find the present discounted earnings losses to be on average 1,7 times the workers’ pre-displacement earnings.

The large estimated individual costs to the displaced miners are likely due to a combination of at least two reasons. First, the complete collapse of the sector forces displaced miners to reallocate and search for another job in other industries, and likely other occupations. Since coal mining is a highly specialized occupation, this greatly reduces miners’ ability to transfer the accumulated human capital to another activity (Beatty and Fothergill, 1996; Samuel, 2016). Second, most coal miners are employed in remote and rural areas where mining is often the main employer, something which remains an issue for current miners around the world (see Figure 1). This feature reduces local economies’ capacity to absorb displaced miners after a mine closure and, due to the need to relocate, greatly increases workers’ job searching costs.

Conclusion

While it is important to globally transition away from the excessive use of fossil fuels, we should keep in mind the devastating effects such transition will end up having on some groups. And while coal miners are particularly vulnerable to the upcoming energy transition, the ramifications do not stop there. Individuals employed in industries linked to the coal industry are likely to also be affected by its dissolution. Moreover, individuals employed in industries providing local services, such as retail stores, restaurants and pubs are likely to experience a significant drop in demand. Thus, the impact of coal mine closures on coal dependent communities typically goes far beyond the displacement of miners (Aragon et al., 2018). The closure of mines will lead to spikes in local unemployment, often unregistered (“hidden”), as well as an exodus of the population. Estimating and accounting for these effects is important if we aim to provide a just energy transition for all.

Attempts have been made to foster economic recovery of affected communities. Regeneration policies have included re-training of local workers, support of small and medium-sized businesses, and investments in local infrastructure, among others. However, their success has been limited and former mining communities remain among the poorest in the UK (Beatty et al., 2007). Preparing a set of policies which will have the capacity to reduce the costs of the transition, as not to repeat the devastating experience of UK coal miners and their communities, is an important task ahead of current policy makers.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Impact of Rising Gasoline Prices on Swedish Households – Is This Time Different?

Posted on May 2, 2022 | Policy Brief

Oil pumping jacks in sunset representing rising gasoline prices

The world is currently experiencing what can be labelled as a global energy crisis, with surging prices for oil, coal, and natural gas. For households in Sweden and abroad, this translates into higher gasoline and diesel prices at the pump as well as increased electricity and heating costs. The increase in energy-related costs began in 2021, as the world economy struggled with supply chain issues, and intensified as Russia invaded Ukraine at the end of February this year. In response, the Swedish government announced on March 14th this year that the tax rate on transport fuels would be temporarily reduced by 1.80 SEK per liter (€0.17) and that every car owner would receive a one-off lump-sum transfer of 1000 SEK in compensation (1500 SEK for car owners in rural areas). This reduction in transport fuel tax rates in Sweden is unprecedented. Since 1960, the nominal tax rate on gasoline has only been reduced three times – and then only by very small amounts, ranging from 0.04 to 0.22 SEK per liter. In this policy brief, we put the current gasoline price in Sweden into a historical context and answer two related questions: are Swedish households paying more today for gasoline than ever before? And should policymakers respond by reducing gasoline taxes?

The Price of Gasoline in Sweden

Sweden has a long history of using excise taxes on transport fuel as a means to raise revenue for the government and to correct for environmental externalities. As early as 1924, Sweden introduced an energy tax on the price of gasoline. Later in 1991, this tax was complemented by a carbon tax levied on the carbon content of transport fuels. On top of this, Sweden extended the coverage of its value-added tax (VAT) to include transport fuels in 1990. The VAT rate of 25 percent is applied to all components of the consumer price of gasoline: the production cost, producer margin, and excise taxes (energy and carbon taxes). Before the announced tax cut this year, the combined rate of the energy and carbon tax was 6.82 SEK per liter of gasoline. Adding the VAT that is applied on these taxes, amounting to 1.71 SEK, yields a total excise tax component of 8.53 SEK. This amount is fixed in the short run and does not vary with changes in the oil price.

Figure 1. Gasoline pump price: 2000-2022

Source: Monthly data on gasoline prices are provided by SPBI (2022).

Figure 1 shows the monthly average real price of gasoline in Sweden from 2000 to March of 2022. The price has increased over the last 20 years and is today historically high. Going back even further, the price is higher today than at any point since 1960. Swedish households are thus paying more for one liter of gasoline than ever before.

Figure 2. Gasoline expenditure per 100 km

Source: Trafikverket (2022).

However, a narrow focus on the price at the pump does not take into consideration other factors that affect the cost of personal transportation for households. First, the average fuel efficiency of the vehicle fleet has improved over time. New vehicles sold today in Sweden can drive 50 percent further on a liter of gasoline compared to new vehicles sold in 2000. Arguably, what consumers care about most is not the cost of one liter of gasoline per se but the cost of driving a certain distance – the utility we derive from a car is the distance we can travel. Accounting for the improvement over time in the fuel efficiency of new vehicles (Figure 2), we find that even though it is still comparatively expensive to drive today, the current price level no longer constitutes a historical peak. In fact, the cost of driving 100 km was as high, or higher, in the period from 2000-2008.

Second, any sensible discussion of the cost of personal transportation for households should also factor in changes in household income over time. The average real hourly wage has increased by close to 40 percent between 2000 and 2022. As such, the cost of driving 100 km, measured as a share of household income, has steadily gone down over time. Even more, this pattern is similar across the income distribution; for instance, the cost trajectory of the bottom decile group is similar to that of all employees. This is illustrated in Figure 3. In 1991, when the carbon tax was implemented, an average household had to spend around two-thirds of an hour’s wage to be able to drive a distance of 100 km. By 2020, that same household only had to spend one-third of an hour’s wage to drive the same distance. There is an increase in the cost of driving over the last two years but it is still cheaper today to drive a certain distance, in relation to income, compared to any year before 2012.

Taken all of this together, we have seen that over time, vehicles use fuel more efficiently on the expenditure side, and households earn higher wages on the income side. Based on this, we can conclude that the cost of travelling a certain distance by car is not historically high today. On the contrary, when measured as a share of income, it was 50 percent more expensive for most of the 21st century.

Figure 3. Cost of driving as a share of income

Source: Data on average hourly real wages are provided by Statistics Sweden (2022).

Response From Policymakers

It is, however, of little comfort for households to know that it was more expensive to drive their car – as a share of income – 10 or 20 years ago. We argue that what ultimately matters for the household is the short run change in cost – and the speed of this change. If the cost rises too fast, households cannot adjust their expenditure pattern quickly enough and thus feel that the price increase is unaffordable. And the change in the gasoline price at the pump has been unusually rapid over the last 12 months. From the beginning of 2021 until March of 2022, the pump price has risen by around 50 percent.

So, should policymakers respond by lowering gasoline taxes? The possibly surprising answer is that lowering existing gasoline tax rates would be counter-productive in the medium and long run. Since excise taxes are fixed and do not vary with the oil price, they reduce the volatility of the pump price by cushioning fluctuations in the market price of crude oil. The total excise tax component including VAT constitutes more than half of the pump price in Sweden, a level that is similar across most European countries. This stands in stark contrast with the US, where excise taxes only make up around 15 percent of the consumer price of gasoline. As a consequence, a doubling of the price of crude oil only increases the consumer price of gasoline in Sweden by around 35 percent, but in the US by around 80 percent. Furthermore, households across Sweden, Europe, and the US have adapted to the different levels of gasoline tax rates by purchasing vehicles with different levels of fuel efficiency. New light-duty vehicles sold in Europe are on average 45 percent more fuel-efficient compared to the same vehicle category sold in the US (IEA 2021). As such, US households do not necessarily benefit from lower gasoline taxation in terms of household expenditure on transport fuel and are even more vulnerable to rapid increases in the price of crude oil. Having high gasoline tax rates thus reduces – and not increases – the short run welfare impact on households. Hence, policymakers should resist the temptation to lower gasoline tax rates even during the current energy crisis. In the medium and long run, households would buy vehicles with higher fuel consumption and would be more exposed to price surges in the future, again compelling policymakers to adjust tax rates and creating a downward spiral. Instead, alternative measures should be considered to alleviate the effects of heavy price pressure on low-income households – for instance, revenue recycling of the carbon tax revenue and increased subsidies for public transport.

Conclusion

To reach environmental and climate goals, Sweden urgently needs to phase out the use of fossil fuels in the transport sector, which is Sweden’s largest source of carbon dioxide emissions. This is exactly what a gradual increase of the tax rate on gasoline and diesel would achieve. At the same time, it would benefit consumers by shielding them from the adverse effects of future oil price volatility.

The most common response from policymakers goes in the opposite direction. In Sweden, the Social Democrats – the governing party – have announced a tax cut on gasoline and diesel of 1.80 SEK per liter but the political parties in opposition have promised even larger tax cuts. Some proposals would even effectively abolish the entire energy and carbon tax on gasoline. Similar tax cuts have been announced for example in Belgium, France, the Netherlands, and Germany. Therefore, this time is indeed different – but in terms of the exceptional reactions from policymakers rather than in terms of the cost of gasoline that households face.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Environmental Policy in Eastern Europe | SITE Development Day 2021

Posted on January 10, 2022 | Policy Brief

20210517 Carbon Tax Regressivity FREE Network Image 06

The need for urgent climate action and energy transformation away from fossil fuels is widely acknowledged. Yet, current country plans for emission reductions do not reach the requirements to contain global warming under 2°C. What is worse, there is even reasonable doubt about the commitment to said plans given recent history and existing future investment plans into fossil fuel extraction and infrastructure development.  This policy brief shortly summarizes the presentations and discussions at the SITE Development Day Conference, held on December 8, 2021, focusing on climate change policies and the challenge of a green energy transition in Eastern Europe.

Climate Policy in Russia

The first section of the conference was devoted to environmental policy in Russia. As Russia is one of the largest exporters of fossil fuel in the world, its policies carry particular importance in the context of global warming.

The head of climate and green energy at the Center for Strategic Research in Moscow, Irina Pominova, gave an account of Russia’s current situation and trends. Similar to all former Soviet Union countries, as seen in Figure 1, Russia had a sharp decrease in greenhouse gas emissions (hereinafter referred to as GHG emissions) during the early 90s due to the dramatic drop in production following the collapse of the Soviet Union. Since then, the level has stabilized, and today Russia contributes to about 5% of the total GHG emissions globally. The primary source of GHG emissions in Russia comes from the energy sector, mainly natural gas but also oil and coal. The abundance of fossil fuels has also hampered investments in renewable resources, constituting only about 3% of the energy balance, compared to the global average of 10%

Figure 1. Annual greenhouse gas emissions per capita

Note: Greenhouse gas emissions are expressed in metric tons of CO2 equivalents. Source: Emissions Database for Global Atmospheric Research (EDGAR).

Pominova noted that it is a massive challenge for the country to reach global energy transformation targets since the energy sector accounts for over 20% of national GDP and 28% of the federal budget. Yet, on a positive note, the number of enacted climate policies has accelerated since Russia signed the Paris Agreement in 2019. One notable example is the federal law on the limitation of GHG emissions. This law will be enforced from the end of 2021 and will impose reporting requirements for the country’s largest emitters. The country’s current national climate target for 2030 is to decrease GHG emissions by 30% compared to the 1990 level. As shown in Figure 1, this would imply roughly a 10 percent reduction from today’s levels given the substantial drop in emissions in the 1990’s.

Natalya Volchkova, Policy Director at CEFIR in Moscow, discussed energy intensity and the vital role it fills in Russia’s environmental transition. Energy intensity measures an economy’s energy efficiency and is defined as units of energy per unit of GDP produced. Volchkova emphasized that to facilitate growth in an environmentally sustainable way it is key to invest in technology that improves energy efficiency. Several regulatory policy tools are in place to promote such improvements like bottom-line energy efficiency requirements, sectoral regulation, and bans on energy-inefficient technologies. Yet, more is needed, and a system for codification and certification of the most environmentally friendly technologies is among further reforms under consideration.

As a Senior Program Manager at SIDA, Jan Johansson provided insights on this issue from an international perspective. Johansson gave an overview of SIDA’s cooperation with Russia in supporting and promoting environmental and climate policies in the country. The main financial vehicle of Swedish support to Russia with respect to environmental policy has been a multilateral trust fund established in 2002 under the European Union (EU) Northern Dimension Environmental Partnership (NDEP). One of the primary objectives of the cooperation has been to improve the environment in the Baltic and Barents Seas Region of the Northern Dimension Area. Over 30 NDEP projects in Russia and Belarus have been approved for financing so far. Seventeen of those have been completed, and the vast majority have focused on improving the wastewater treatment sector.

Johansson also shed light on the differences that can exist between governments in their approach to environmental policy. For example, in the area of solid waste management, Russia prefers large-scale solutions such as landfills and ample sorting facilities. In Sweden and Western Europe, governments have a more holistic view founded on spreading awareness in the population, recycling, corporate responsibility, and sorting at the source.

Environmental Transition in Eastern Europe

In the second part of the conference environmental policies and energy transformation in several other countries in the region were discussed.

Norberto Pignatti, Associate Professor and Centre Director at ISET Policy Institute, talked about the potential for a sustainable energy sector and current environmental challenges in Georgia. The country is endowed with an abundance of rivers and sun exposure, making it a well-suited environment for establishing the production of renewable energy such as wind, solar, and hydro. As much as 95 % of domestic energy production comes from renewable sources. Yet, domestic energy production only accounts for 21% of the country’s total consumption, and 58% of imported energy comes from natural gas and 33% from coal. Furthermore, the capacity of renewable energy sources has declined over the last ten years, and particularly so for biofuel due to the mismanagement of forests. A notable obstacle Georgia faces in its environmental transition is attracting investors. Low transparency and inclusiveness from the government in discussions about environmental policy, along with inaccurate information from the media, has led to a low public willingness to pay for such projects. Apart from measures to overcome the challenges mentioned, the government is currently working on a plan to impose emission targets on specific sectors, invest in energy efficiency and infrastructure, and support the development of the renewable energy sector.

Like Georgia, Poland is a country where energy consumption is heavily reliant on imports and where coal, oil, and gas stand for most of the energy supply. On top of that, Poland faces significant challenges with air quality and smog and a carbon-intensive energy sector. On the positive end, Poland established a government-industry collaboration in September 2021, that recognizes offshore wind as the primary strategic direction of the energy transition in Poland. Pawel Wróbel, Founder and Managing Director of BalticWind.EU, explained that the impact of the partnership will be huge in terms of not only energy security but also job creation and smog mitigation. The plan implies the installation of 5.9 GW of offshore wind capacity by 2030 and 11GW by 2040. Wróbel also talked about the EU’s European Green Deal and its instrumental role in accelerating the energy transition in Poland. By combining EU-wide instruments with tailor-made approaches for each of the member states, the Deal targets a 55% reduction in GHG emissions by 2030 through decarbonization, energy efficiency, and expanding renewable energy generation. Michal Myck, Director of CenEA, highlighted the role of social acceptance in accelerating the much-needed energy transition in Poland. In particular, to build political support, there is a crucial need for designing carbon taxes in a way that ensures the protection of vulnerable households from high energy prices.

Adapting to the European Green Deal will also create challenges for countries outside of the EU, especially if a European Carbon Border Adjustment Mechanisms (CBAM) is put in place in 2026 as suggested. Two participants touched on this topic in the context of Belarus and Ukraine respectively. Yauheniya Shershunovic, researcher at BEROC, talked about her research on the economic implications of CBAM in Belarus. It is estimated that the introduction of CBAM can be equivalent to an additional import duty on Belarusian goods equal to 3.4-3.8% for inorganic chemicals and fertilizers, 6.7-13.7% for metals, and 6.5-6.6% for mineral products. Maxim Fedoseenko, Head of Strategic Projects at KSE, shared similar estimations for Ukraine, suggesting that the implementation of CBAM will lead to an annual loss of €396 million for Ukrainian businesses and a decrease in national GDP of 0.08% per year.

An example of Swedish support to strengthen environmental policies in Eastern Europe was presented by Bernardas Padegimas, Team Leader at the Environmental Policy and Strategy Team at the Stockholm Environment Institute. The BiH ESAP 2030+ project is supporting Bosnia and Herzegovina in preparing their environmental strategy. This task is made more challenging by the country’s unique political structure with two to some extent politically autonomous entities (and a district jointly administered by the two), and elites from the three different major ethnic groups having guaranteed a share of power. The project therefore aims to include a broad range of stakeholders in the process, organized into seven different working groups with 659 members on topics ranging from waste management to air quality, climate change and energy. The project also builds capacity in targeted government authorities, raises public awareness of environmental problems, and goes beyond just environmental objectives: mainstreaming gender equality, social equity and poverty reduction. The project is 80 percent finished and will produce a strategy and action plan for the different levels of governance in the country’s political system.  There is also a hope that this process can serve as a model for consensus building around important but at times contentious policy issues more generally in the country.

Public Opinion and Energy Security

Finally, Elena Paltseva, Associate Professor at SITE, and Chloé le Coq, Professor at the University of Paris II Panthéon-Asses (CRED), shared two joint studies relating to the green transition in Europe.

Recent research shows that individual behavioral change has a vital role to play in the fight against climate change, both directly and indirectly through changes in societal attitudes and policies motivated by role models. A precondition for this to happen is a broad public recognition of anthropogenic climate change and its consequences for the environment. The first presentation by Paltseva and Le Coq focused on public perceptions about climate change in Europe (see this FREE policy brief for a detailed account). Using survey data the study explores variation in climate risk perceptions between Western Europe, the non-EU part of Eastern Europe, and Eastern European countries that are EU members. The results show that those living in non-EU Eastern European countries are on average less concerned about climate change. The regional difference can partly be explained by low salience and informativeness of environmental issues in the public discourse in these countries. To support this explanation, they study the impact of extreme weather events on opinions on climate change with the rationale that people who are more aware of climate change risks are less likely to adjust their opinion after experiencing an extreme weather event. They find that the effect of extreme weather events is higher in countries with less independent media and fewer climate-related legislative efforts, suggesting that the political salience of the environment and the credibility of public messages affects individuals’ perceptions of climate change risks.

The second presentation concerned energy security in the EU, and the impact of the environmental transition. It was argued that natural gas will play an important role in Europe’s green transition for two reasons. First, since the transition implies a higher reliance on intermittent renewable energy sources, there will be an increased need for use of gas-fired power plants to strengthen the supply reliability. Second, the electrification of the economy along with the phasing out of coal, oil, and nuclear generation plants will increase the energy demand. Today, about 20% of EU’s electricity comes from natural gas and 90% of that gas comes from outside EU, with 43% coming from Russia. To emphasize what issues can arise when the EU relies heavily on external suppliers, the presentation discussed a Risky External Energy Supply Index (Le Coq and Paltseva, 2009) that considers the short-term impact of energy supply disruptions. This index assesses not only the importance of the energy type used by a country but also access to different energy suppliers (risk diversification). The index illustrates that natural gas is riskier than oil or coal since natural gas importers in the EU depend to a greater extent on a single or few suppliers. Another crucial component of the security of gas supplies arises from the fact that 77% of EU’s net gas imports arrive through pipelines, which creates an additional risk of transit. Here, the introduction of new gas transit routes (from already existing suppliers) may increase diversification and decrease risks to the countries having direct access to the new route. At the same time, countries that share other pipelines with countries that now have direct access may lose bargaining power vis-à-vis the gas supplier in question, as demand through those pipelines could fall. Le Coq illustrated this point applying the Transit Risk Index developed in Le Coq and Paltseva (2012) to the introduction of the North Stream 1 pipeline. She concluded that the green transition and associated increase in demand for natural gas is likely to be associated with higher reliance on large gas producers, such as Russia, and resulting in energy security risks and imbalance in the EU. One way to counteract this effect is to exercise EU’s buyer power vis-a-vis Russia within the EU common energy policy. While long discussed, this policy has not been fully implemented so far.

Concluding Remarks

This year’s SITE Development Day conference gave us an opportunity to highlight yet another key issue, not only for Eastern Europe, but for the whole world: global warming and energy transformation. Experts from across the region, and policymakers and scholars based in Sweden, offered their perspectives on the challenges that lie ahead, but also highlighted initiatives and investments hopefully leading the way towards a brighter future.

List of Participants

  • Chloé Le Coq, Professor of Economics at the University of Paris II Panthéon-Assas (CRED). Paris, France. Research Fellow at SITE.
  • Maxim Fedoseenko, Head of Strategic Projects at KSE Institute. Kyiv, Ukraine.
  • Jan Johansson, Senior Program Manager, SIDA. Stockholm, Sweden.
  • Michal Myck, Director of CenEA. Szczecin, Poland.
  • Bernardas Padegimas, Team Leader: Environmental Policy and Strategy, Stockholm Environmental Institute. Stockholm, Sweden.
  • Elena Paltseva, Associate Professor, SITE/SSE/NES. Stockholm, Sweden
  • Norberto Pignatti, Associate Professor of Policy at ISET-PI, and Head of the Energy and Environmental Policy Institute at ISET-PI. Tbisili, Georgia.
  • Irina Pominova, Head of Climatwe and Green Energy at the Center for Strategic Research. Moscow, Russia.
  • Yauheniya Shershunovic, Researcher at BEROC, Minsk, Belarus. PhD Candidate at the Center for Development Research (ZEF). Uni Bonn.
  • Natalya Volchkova, Policy Director at CEFIR, Assistant Professor at the New Economic School (NES). Moscow, Russia.
  • Pawel Wróbel, Founder and Managing Director of BalticWind.EU. Poland.
  • Julius Andersson, Researcher at SITE. Stockholm, Sweden.
  • Anders Olofsgård, Associate Professor and Deputy Director at SITE. Stockholm, Sweden.

Green Concerns and Salience of Environmental Issues in Eastern Europe

Posted on June 7, 2021 | Policy Brief

Flooded street in Germany representing climate change risk perceptions

Changes in individual behavior are an essential component of the planet’s effort to reduce carbon emissions. But such changes would not be possible without individuals acknowledging the threat of anthropogenic climate change. This brief discusses the climate change risk perceptions across Europe. We show that people in Eastern Europe are, on average, less concerned about climate change than those in Western Europe. Using detailed survey data, we find evidence that the personal experience of extreme weather events is a key driver of green concern, and even more so in the non-EU Eastern part of Europe. We argue that this association might be explained by the relatively low quality and informativeness of public messages concerning global warming in this part of Europe. If information is scarce or perceived as biased, personal experience will resonate more.

Introduction

Climate change is one of the main threats to humanity. Tackling it entails a combined effort from all parts of society, from regulatory changes and industries adopting new greener business models to consumers adjusting their behavior. While an individual’s contribution to climate change may appear insignificant, research shows that the aggregate effect of mobilizing already known changes in consumer behavior may allow the European Union (EU) to reduce its carbon footprint by about 25% (Moran et al., 2020).

However, the first step for people to adjust their consumption patterns is to acknowledge the threat of anthropogenic climate change. Public ignorance about climate change’s impacts remains high across the world. Furthermore, citizens of more polluting countries are often relatively less concerned about climate change. This lack of awareness is not well-understood, in part due to the multi-dimensional local factors affecting it (Farrell et al., 2019).

This brief discusses the potential drivers of climate risk perceptions, focusing on the differences between Western Europe, Eastern European states that are part of the EU, and non-EU Eastern European countries. We first present the climate change concerns across these regions. We then discuss to which extent the country’s pollution exposure measures and individuals’ socio-economic characteristics can explain these differences. We show that the personal experience of extreme weather events is a key driver of green concern, and even more so in the non-EU part of Eastern Europe. We relate this result to the relatively low salience and informativeness of public messages concerning climate in this part of Europe and discuss potential policy implications.

Green Concerns and Pollution Exposure Across Europe

Figure 1 compares, across Europe, the share of poll respondents who see climate change as a major threat, based on the data from the Lloyd’s Register Foundation World Risk Poll 2020.  While there is a significant variation in climate risk perception within each region, respondents in Eastern Europe are, on average, less concerned about climate change than those in Western Europe. We observe a similar pattern between the EU and non-EU parts of Eastern Europe. 

Exposure to pollution does not seem to clearly explain these differences. Moreover, the patterns of correlation between climate concern and pollution differ across regions and measures of pollution exposure. The left panel of Figure 2 presents averages across the regions for two pollution measures: carbon emissions (which is, perhaps, reflecting climate threat in general) and air quality (which is more directly associated with health risks). We can see that CO2 emissions are the highest in the non-EU part of Eastern Europe, the least environmentally concerned region. Still, the EU part of Eastern Europe has the lowest average emissions per capita across the three regions (this ranking likely results from the interaction between reliance on fossil fuels, industrial structure, and level of development across the three regions). At the same time, when it comes to the average air quality (measured as the percentage of population exposed to at least 10 micrograms of PM2.5/m3), the non-EU EasternEuropean region is doing better than its EU counterpart, which is more climate concerned. Here, better average air quality in the non-EU Eastern European region is due to its relatively low population density, and consequently, low PM2.5 exposure in large parts of Russia. (See, more on the air quality gap within the EU in Lehne, 2021).

Figure 1: Climate concerns in Eastern and Western Europe

Source: Authors’ calculations based on Lloyd’s Register Foundation World Risk Poll 2020, question 5 “Do you think that climate change is a very serious threat, a somewhat serious threat, or not a threat at all to the people in this country in the next 20 years?”. Averages are calculated with population-representative weights.

The right panel of Figure 2 shows correlations between (country-level) climate concerns and pollution. For CO2, the correlation is negative in all three regions, suggesting that, within each region, more emitting countries are less concerned. This negative correlation, however, is the strongest in the EU-part of Eastern Europe and almost absent in the non-EU part. The differences between the regions are even more striking for the correlation between climate concerns and air quality: both in Western Europe and in the EU part of Eastern Europe, citizens of countries with worse air quality are more concerned about climate change. However, in non-EU Eastern Europe, the relation is the exact opposite: lower concerns about climate change go hand-in-hand with worse quality of air.

Figure 2: Emissions vs. Climate concerns in Eastern and Western Europe, 2018

Source: Authors’ calculations based on www.climatewatchdata.org, OECD and World Risk Poll 2020. The climate concern variable is a country-level weighted average of answers “Very high risk” to the World Risk Poll 2020 question 5, see note to Figure 1.

Green Concerns and Socio-economic Characteristics

Lower climate concerns in EU-part of the Eastern bloc have been documented before; they are often explained by the Eastern-European economies’ high reliance on coal and other fossil fuels, low-income levels, and other immediate problems that lower the priority of climate issues (e.g., Lorenzoni and Pidgeon 2006, Poortinga et al., 2018, or Marquart-Pyatt et al., 2019). Additionally, the literature suggests that climate beliefs are linked to individuals’ socio-economic characteristics, such as level of education, income, or gender (see, e.g., Poortinga, 2019), which may be different across the regions.

However, the regional differences in climate beliefs also persist when we use individual-level data and control for respondents’ individual characteristics, as well as for country-level variables, such as GDP per capita, oil, gas, and coal dependence of the economies, and exposure to emissions (at the country level, as our individual data does not have this information). This is illustrated in Column 1 of Table 1.

Table 1: Climate change beliefs determinants, individual-level cross-section data.

Source: This is an outcome of logistic regression. Experience =1 if the respondent answered “yes” to the World Risk Poll 2020 question L8D “Have you or someone you personally know, experienced serious harm from severe weather events, such as floods or violent storms in the past TWO years?” Media Freedom is based on 2018 Freedom House data, and scores media between 0 (worst) and 4 (best). Controls include age, gender, education, personal feelings about household income, income quantile, urban/rural, size of household, number of children under 15, las well as log of GDP per capita, log of CO2 per capita, mean exposure to PM2.5, and oil, gas and coal rents as a share of GDP. Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1

In what follows, we explore another key driver, the personal experience of extreme weather events. While there is a sizable literature on the effect of experience on climate beliefs, that factor was never, to our knowledge, considered to understand the difference in climate risk perception between the EU- and non-EU parts of Eastern Europe.  

Green Concern and Salience of Environmental Issues

In line with the recent climate risk perceptions literature (e.g., Van der Linden, 2015), we show that personal experience increases the likelihood of considering climate change as a major threat across all three regions (see column 2 in Table 1). The association is stronger in the EU part of Eastern Europe and even more so in the non-EU part (even if the difference between the last two is not statistically significant). This finding is confirmed when we control for (observable and unobservable) country-specific effects, such as social norms, via the inclusion of country-level fixed effects. In this case, extreme weather events make respondents more climate-conscious within each country (Column 3 of Table 1). In this specification, the effect differs statistically between the two groups of Eastern-European countries, even if only at a 10% significance level. To put it differently, the impact of personal experience with extreme weather events seems to close a sizable part of the gap in climate risk perceptions across the regions and more so in the non-EU part of Eastern Europe.

Our preferred explanation for this finding is that personal experience resonates with the quality and informativeness of public messages concerning global warming. If information is scarce or perceived as biased, personal experience will resonate more. The low political salience of environmental issues in Eastern Europe, inherited from its Soviet past (McCright, 2015), and lower media quality in Eastern Europe (see e.g., Zuang, 2021) are likely to affect the quality of public discourse concerning the risks of climate change, and, consequently, the information available to individuals.

The climate-related legislative effort across Eastern Europe reflects the low political importance of climate change in the region. According to the data from Grantham Research Institute on Climate Change and the Environment, non-EU transition countries, on average, have adopted 8 climate-related laws and policies, while the corresponding figure is 11.5 for EU transition countries and 18 for the countries in Western Europe. Further, Figure 3 shows a positive correlation between climate change concerns and the number of climate-related laws for Western Europe and the EU-part of Eastern Europe but a negative one for the non-EU part of Eastern Europe and Caucasus countries. One possible interpretation of these differences is that climate change is relatively low on the political agenda of (populist) regimes in the non-EU part of Eastern Europe, as climate-related legislative activity (proxied by, admittedly rough, a measure of the number of laws) does not reflect the intensity of population climate preferences.

Figure 3: Climate concern vs. Climate legislation

Source: Authors’ calculations based on climate legislation data from Grantham Research Institute on Climate Change and the Environment, and World Risk Poll 2020

Regarding the influence of media quality, column (4) of Table 1 shows that the effect of personal experience on climate change concern is negatively correlated with media freedom. One interpretation could be that individuals in countries with freer media infer less from their extreme weather experience because more accurate media coverage about climate risks improves the population’s knowledge on the issue.

Of course, the causality of the climate belief-experience relationship could also go in the other direction – people who are more concerned about climate change could be more likely to interpret their personal experience as weather-related extreme events. It is impossible to distinguish with the data at hand. However, Myers et al. (2013) show that both channels are present in the US, and the former channel dominates for the people less engaged in the climate issue. Stretching this finding to the Eastern Europe case, we argue that more precise information on the importance of climate change may partially have the same effect as experience – i.e., it will increase people’s awareness and concern about the consequences of global warming.

Conclusion

This brief addresses the differences in climate change beliefs between Eastern and Western Europe, as well as within Eastern Europe. It discusses the determinants of these differences and stresses the importance of personal experience, especially in the non-EU part of Eastern Europe. It relates this finding to the relatively low accuracy of information and quality of public discourse about climate change in the region.

We know already that tackling climate change requires reliable and accurate sources of information. This is especially crucial given what we outline in this brief. This issue resonates with the current social science analysis of the diffusion of climate change denial (see e.g., Farell et al., 2019, on the significant organized effort in spreading misinformation about climate change). Such contrarian information that relays uncertainty and doubt regarding the severity of the global climate change threat could have a severe impact, especially in situations with low political salience of climate change, like in non-EU Eastern Europe. A significant effort of both governments and civil society is needed to provide adequate information and mobilize the population in our common fight against climate change.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Carbon Tax Regressivity and Income Inequality

Posted on May 17, 2021 | Policy Brief

20210517 Carbon Tax Regressivity FREE Network Image 01

A common presumption in economics is that a carbon tax is regressive – that the tax disproportionately burdens low-income households. However, this presumption originates from early research on carbon taxes that used US data, and little is known about the factors that determine the level of regressivity of carbon taxation across countries. In this policy brief, I explore how differences in income inequality may determine the distribution of carbon tax burden across households in Europe. The results indicate that carbon taxation will be regressive in high-income countries with relatively high levels of inequality, but closer to proportional in middle- and low-income countries and in countries with low levels of income inequality.

Introduction

Climate change is one of the main challenges facing us today. To reduce emissions of greenhouse gases, and thereby mitigate climate change, economists recommend the use of a carbon tax. The environmental and economic efficiency of carbon taxation is often highlighted, but the equity story is also of importance: who bears the burden of the tax?

How the burden from a carbon tax is shared across households is important since it affects the political acceptability of the tax. For instance, the “Yellow Vests” protests against the French carbon tax started due to concerns that the tax burden is disproportionately large on middle- and working-class households. Research in economics also shows that people prefer a progressive carbon tax (Brännlund and Persson, 2012).   

In this brief, I explore what we know about the distributional effects of carbon taxes and analyze the link between carbon tax regressivity and levels of income inequality in theory and in application to Sweden as well as other European countries.

Carbon Tax Burden Across Households

It is a common finding in the economics literature that carbon taxes are, or would be, regressive (Hassett et al., 2008; Grainger and Kolstad, 2010). However, most of the earlier literature is based on US data, and the US is unrepresentative of an average high-income country in terms of variables that are arguably important for carbon tax incidence. Compared to most countries in Europe, income in the US is high but unequally distributed, carbon dioxide emissions per capita are high, the gasoline tax rate is low, and the access to public transport is poor. If we want to understand the likely distributional effects of carbon taxes across Europe, we thus need to look beyond the US studies.

A recent study by Feindt et al. (2020) examines the consumer tax burden from a hypothetical EU-wide carbon tax. They find that the distributional effect at the EU-level is regressive, driven by the high carbon intensity of energy consumption in relatively low-income countries in Eastern Europe. At the national level, however, carbon taxation in Eastern European countries is slightly progressive due to car ownership and transport fuel being luxuries. Conversely, in high-income countries – where transport fuel is a necessity – carbon taxation is slightly regressive.

That the incidence of carbon and gasoline taxation varies across countries with different levels of income, has been found in numerous studies (Sterner, 2012; Sager, 2019). To understand the source of this variation, we need to identify the determinants of the incidence of carbon taxes.

The Role of Income Inequality

In a recent paper, I, together with Giles Atkinson at the London School of Economics, present a simple model where the variation in the carbon tax burden across countries and time can be determined by two parameters: the level of income inequality and the income elasticity of demand for the taxed goods (Andersson and Atkinson, 2020). The income elasticity specifies how the demand for a good, such as gasoline, responds to a change in income. If the budget share decreases as income increase, we refer to gasoline as a necessity. If the budget share increases with income, we refer to gasoline as a luxury good. Our model predicts that rising inequality increases the regressivity of a carbon tax on necessities. Similarly, we will see a more progressive incidence if inequality increases and the taxed good is a luxury.

To mitigate climate change, a carbon tax should be applied to goods responsible for the majority of greenhouse gas emissions: transport fuel, electricity, heating, and food. To estimate the distribution of carbon tax burden, we must then first establish if these goods are necessities or luxuries, respectively. Gasoline is typically found to be a luxury good in low-income countries but a necessity in high-income countries (Dahl, 2012). Food, in the aggregate, is consistently found to be a necessity. A carbon tax on food would, however, mainly increase the price of red meat – beef has a magnitude larger carbon footprint than all other food groups – and red meat is generally a luxury good, even in high-income countries (Gallet, 2010). Lastly, electricity and heating are necessities, with little variation across countries in the level of income elasticities.  A broad carbon tax would thus likely be regressive in high-income countries, but more proportional, maybe even progressive, in low-income countries. The overall effect in low-income countries depends on the relative budget shares of transport fuel and meat (luxuries) versus electricity and heating (necessities). A narrow carbon tax on transport fuel has a less ambiguous incidence: it will be regressive in high-income countries where the good is a necessity and proportional to progressive in low-income countries where the good is a luxury.  

The income elasticities of demand, however, only provide half of the picture. To understand the degree of regressivity from carbon taxation, we also need to take into account the level of income inequality in a country. Our model predicts that a carbon tax on necessities will be more regressive in countries with relatively high levels of inequality. And increases in inequality over time may turn a proportional tax incidence into a regressive one.

To test our model’s prediction, we analyze the distributional effects of the Swedish carbon tax on transport fuel and examine previous studies of gasoline tax incidence across high-income countries. 

Empirical Evidence from Sweden

The Swedish carbon tax was implemented in 1991 at $30 per ton of carbon dioxide and the rate was subsequently increased rather rapidly between 2000-2004. Today, in 2021, the rate is above $130 per ton; the world’s highest carbon tax rate imposed on households. The full tax rate is mainly applied to transport fuel, with around 90 percent of the revenue today coming from gasoline and diesel consumption.

 Figure 1. Carbon tax incidence and income inequality in Sweden

Sources: Andersson and Atkinson (2020). Gini coefficients are provided by Statistics Sweden.

Using household-level data on transport fuel expenditures and annual income between 1999-2012, we find that the Swedish carbon tax is increasingly regressive over time, which is highly correlated with an increase in income inequality. Figure 1 shows the strong linear correlation between the incidence of the tax and the level of inequality across our sample period. The progressivity of the tax is measured using the Suits index (Suits, 1977), a summary measure of tax incidence that spans from +1 to -1. Positive (negative) numbers indicate that the tax is overall progressive (regressive) and a proportional tax is given an index of zero. The level of income inequality, in turn, is summarized by the Gini coefficient (0-100), with higher numbers indicating higher levels of inequality.

In 1991, when the Swedish carbon tax was implemented, income inequality was relatively low, with a Gini of 20.8. If we extrapolate, the results presented in Figure 1 indicate that the tax incidence in 1991 was proportional to slightly progressive. Since the early 1990s, however, Sweden has experienced a rise in inequality. Today, the Gini is around 28 and the carbon tax incidence is rather regressive. This can be a potential concern if people start to perceive the distribution of the tax burden as unfair and call for reductions in the tax rate.

Empirical Evidence Across High-Income Countries

Figure 2 presents the results of our analysis of previous studies of gasoline tax incidence across high-income countries. Again, we find a strong correlation with inequality; the higher the level of inequality, the more regressive are gasoline taxes.  In the bottom-right corner, we locate the results from studies on gasoline tax incidence that have used US data. The level of inequality in the US has been persistently high, and the widespread assumption that gasoline and carbon taxation is regressive is thus based to a large part on studies of one highly unequal country. Looking across Europe we find that the tax incidence is more varied, with close to a proportional outcome in the (relatively equal) Nordic countries of Denmark and Sweden.

Figure 2. Gasoline tax incidence and income inequality in OECD countries

Sources: Andersson and Atkinson (2020). Gini coefficients are from the SWIID database (Solt, 2019).

Conclusion

A carbon tax is economists’ preferred instrument to tackle climate change, but its distributional effect may undermine the political acceptability of the tax. This brief shows that to understand the likely distributional effects of carbon taxation we need to take into account the type of goods that are taxed – necessities or luxuries – and the level and direction of income inequality. Carbon taxation will be closer to proportional in European countries with low levels of inequality, whereas in countries with relatively high levels of inequality the carbon tax incidence will be regressive on necessities and progressive for luxury goods.

This insight may explain why we first saw the introduction of carbon taxes in the Nordic countries. Finland, Sweden, Denmark, and Norway all implemented carbon taxes between 1990-1992, and income inequality was relatively, and historically, low in this region at the time. Policymakers in the Nordic countries thus didn’t need to worry about possibly regressive effects. Looking across Europe today, many of the countries that have relatively low levels of inequality have either already implemented carbon taxes or, due to the size of their economies, have a low share of global emissions. In countries that are responsible for a larger share of global emissions – such as, the UK, Germany, and France – inequality is relatively high, and they may find it to be politically more difficult to implement carbon pricing as the equity argument becomes more salient and provides opportunities for opponents to attack the tax.

To increase the political acceptability and perceived fairness of carbon pricing, policymakers in Europe should consider a policy design that offsets regressive effects by returning the revenue back to households, either by lump-sum transfers or by reducing tax rates on labor income.   

References

  • Andersson, Julius and Giles Atkinson. 2020. “The Distributional Effects of a Carbon Tax: The Role of Income Inequality.” Grantham Research Institute on Climate Change and the Environment Working Paper 349. London School of Economics.  
  • Brännlund, Runar and Lars Persson. 2012. “To tax, or not to tax: preferences for climate policy attributes.” Climate Policy 12 (6): 704-721.
  • Dahl, Carol A. 2012. “Measuring global gasoline and diesel price and income elasticities.” Energy Policy 41: 2-13.
  • Feindt, Simon, et al. 2020. “Understanding Regressivity: Challenges and Opportunities of European Carbon Pricing.” SSRN 3703833.
  • Gallet, Craig A. 2010. “The income elasticity of meat: a meta-analysis.” Australian Journal of Agricultural and Resource Economics 54(4): 477-490.
  • Grainger, Corbett A and Charles D Kolstad. 2010. “Who pays a price on carbon?” Environmental and Resource Economics 46(3): 359-376.  
  • Hassett, Kevin A, Aparna Mathur, and Gilbert E Metcalf. 2009. “The consumer burden of a carbon tax on gasoline.” American Enterprise Institute, Working Paper.
  • Sager, Lutz. 2019. “The global consumer incidence of carbon pricing: evidence from trade.” Grantham Research Institute on Climate Change and the Environment Working Paper 320. London School of Economics.  
  • Thomas, Sterner. 2012. Fuel taxes and the poor: the distributional effects of gasoline taxation and their implications for climate policy. Routledge.
  • Suits, Daniel B. 1977. “Measurement of tax progressivity.” American Economic Review 67(4): 747-752.

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