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Energy R&D Investments and Emissions Abatement Policy

Di Yin and Youngho Chang

Year: 2020
Volume: Volume 41
Number: Number 6
DOI: 10.5547/01956574.41.6.dyin
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Abstract:
The study examines the interactions of the energy R&D investments and the CO2 abatement policy using an endogenous energy R&D climate-economy model. Energy R&D investments affect the carbon emissions directly through efficiency improvements and indirectly by changing the comparative advantages of resources. This study considers the R&D investments in energy efficiency and low-carbon technology and explores how energy R&D investments accelerate the energy transition from fossil fuels to low-carbon technology. Three policies of carbon abatements are considered, namely, the optimal policy, the 2 �C policy, and the 1.5 �C policy. From the perspectives of benefits and costs, the optimal policy leads to the least abatement costs compared to the other two abatement policies. This study indicates that the more restrictive the abatement policy is, the more severe economic damage is caused in the short run, but more economic welfare is gained in the long run. Keywords: Energy R&D investments, Emissions abatement policy, Energy efficiency, Backstop technology, Energy substitution, Cost-benefit analysis, Climate change



Energy Transition in Oil-Dependent Economies: Public Discount Rates for Investment Project Evaluation

Fatih Karanfil and Axel Pierru

Year: 2024
Volume: Volume 45
Number: Special Issue
DOI:
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Abstract:
Selecting welfare-enhancing projects necessitates determining the present value of cash flows from a public policy perspective. For an oil-exporting economy, the domestic energy transition often implies displacing oil from domestic consumption. Economic dependence on oil affects the public discount rate for oil price-related cash flows in two opposite ways: On the one hand, it renders the economy more volatile, which lowers the risk-free discount rate; on the other hand, it increases the correlation between consumption and the oil price, which results in a higher risk premium. To study these opposite forces, we first derive the public discount rate for an oil price-related investment project. Our framework considers economic uncertainty, an oil price-related risk premium, and allows for valuing oil at its opportunity cost. We illustrate our methodology using data from a panel of 26 oil-exporting countries. The results indicate that a risk-free discount rate of 3.1% is appropriate for our panel. However, to discount oil price-related cash flows, a risk premium of 1.4% needs to be added to the risk-free rate, which yields a risk-adjusted real discount rate of 4.5%. We find significant disparities between country-specific public discount rates. Additionally, for each country, we assess the present value of reducing domestic oil consumption by a barrel per day from 2023 to 2040, breaking down the different effects. Oil-exporting countries can use our estimates for making investment or policy decisions.





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