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Climate Policy‐induced Investments in Developing Countries: The Implications of Investment Risks

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  • Christoph Böhringer
  • Andreas Löschel

Abstract

1075 (Christoph Böhringer and Andreas Löschel) International climate policy has assigned the leading role in emissions abatement to the industrialised countries while developing countries remain uncommitted to binding emission reduction targets. However, cooperation between the industrialised and the developing world through joint implementation of emission abatement promises substantial economic gains to both parties. In this context, the policy debate on joint implementation has addressed the question of how investment risks to project‐based emission crediting between industrialised countries and developing countries affect the magnitude and distribution of such gains. In our quantitative analysis, we find that the incorporation of country‐specific investment risks induces rather small changes vis‐à‐vis a situation where investment risks are neglected. Only if investors go for high safety of returns is there a noticeable decline in the overall volume of emission crediting and the associated total economic benefits. While the welfare effects of risk incorporation for industrialised countries are unequivocally negative, the implications across developing countries are ambiguous. Whereas low‐risk developing countries attract higher project volumes and benefit from higher effective prices per emission credit compared to a reference scenario without risk, the opposite applies to high‐risk countries. The – politically undesired – shift in comparative advantage of emission abatement against high‐risk, typically least‐developed, countries may become larger if risk‐averse investors perceive large differences in project‐based risks across countries. In this case, only very cheap mitigation projects in high‐risk countries will be realised, driving down the respective country's benefits from emission crediting to the advantage of low‐risk developing countries.

Suggested Citation

  • Christoph Böhringer & Andreas Löschel, 2008. "Climate Policy‐induced Investments in Developing Countries: The Implications of Investment Risks," The World Economy, Wiley Blackwell, vol. 31(3), pages 367-392, March.
  • Handle: RePEc:bla:worlde:v:31:y:2008:i:3:p:367-392
    DOI: 10.1111/j.1467-9701.2007.01075.x
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    References listed on IDEAS

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    Cited by:

    1. Christoph Böhringer & Thomas Rutherford & Marco Springmann, 2015. "Clean-Development Investments: An Incentive-Compatible CGE Modelling Framework," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 60(4), pages 633-651, April.
    2. repec:zbw:hohpro:354 is not listed on IDEAS
    3. repec:old:wpaper:354 is not listed on IDEAS

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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